10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q / A

(Amendment No. 1)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

Optimal Group Inc.
(Exact Name of Registrant as Specified in its Charter)

Canada
(State or Other Jurisdiction of Incorporation)

0-28572	98-0160833
(Commission File Number)	(IRS Employer Identification No.)

3400 de Maisonneuve Blvd. W., Suite 1240, Montreal, Quebec, Canada H3Z 3B8
(Address of Principal Executive Offices, Including Zip Code)

(514) 738-8885
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes __x___ No _____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes __x___ No _____

At November 3, 2004, the registrant had 22,216,592 Class “A” shares (without nominal or par value) outstanding.

1

OPTIMAL GROUP INC.
Explanatory Note

This Amendment No. 1 to the Form 10-Q quarterly report of Optimal Group Inc. (the "Registrant") amends and restates in its entirety the Form 10-Q quarterly report of the Registrant for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 4, 2004. This Amendment No. 1 is being filed to correct an inadvertent error contained in Note 13(a) of the notes to our interim consolidated financial statements for the quarterly period ended September 30, 2004. In Note 13(a) of the notes to our interim consolidated financial statements, under the heading "Three months ended September 30, 2004", our earnings from continuing operations before income taxes for our payments segment is changed from $3,924,963 to $2,405,403, and our loss from continuing operations before income taxes for our hardware maintenance and repair outsourcing services segment is changed from $(3,256,437) to $(1,736,877); and, correspondingly, our earnings from continuing operations for our payments segment is changed from $3,168,784 to $1,649,224, and our loss from continuing operations for our hardware maintenance and repair outsourcing services segment is changed from $(3,036,902) to $(1,517,342). In Note 13(a) of the notes to our interim consolidated financial statements, under the heading "Nine months ended September 30, 2004", our earnings from continuing operations before income taxes for our payments segment is changed from $4,960,550 to $2,082,287, and our loss from continuing operations before income taxes for our hardware maintenance and repair outsourcing services segment is changed from $(15,184,963) to $(12,306,700); and, correspondingly, our earnings from continuing operations for our payments segment is changed from $3,896,088 to $1,017,825, and our loss from continuing operations for our hardware maintenance and repair outsourcing services segment is changed from $(14,637,428) to $(11,759,165). No other revisions have been made.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Financial Statements of
 (Unaudited)


  OPTIMAL GROUP INC. (formerly Optimal Robotics Corp.)



 Three and nine-month periods ended September 30, 2004 and 2003
 (expressed in US dollars)

2

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Consolidated Financial Statements
(Unaudited)

Three and nine-month periods ended September 30, 2004 and 2003
(expressed in US dollars)

Financial Statements

     Consolidated Balance Sheets

     Consolidated Statements of Operations

     Consolidated Statements of Deficit

     Consolidated Statements of Cash Flows

     Notes to Consolidated Financial Statements
  

4

5

     6

    7

     8

3

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Consolidated Balance Sheets
(Unaudited)

September 30, 2004 and December 31, 2003
(expressed in US dollars)

		September 30,			December 31,
		2004			2003
Assets
Current assets:
Cash and cash equivalents	$	75,135,915		$	4,211,964
Short-term investments		81,389,738			74,301,582
Cash and short-term investments - held as reserves (note 4)		20,911,686			-
Accounts receivable, net of allowance for doubtful accounts
of $96,336 ($134,977 at December 31, 2003)		7,912,629			4,793,435
Service parts inventory		2,712,235			4,215,694
Income taxes receivable and refundable investment tax credits		654,900			922,130
Future income taxes		169,111			331,829
Prepaid expenses and deposits		1,949,241			795,931
Current assets related to discontinued operations (note 3 (c))		-			25,291,718
		190,835,455			114,864,283
Note receivable		1,629,167			-
Other receivable (note 5)		3,122,613			-
Property and equipment		4,364,219			1,931,331
Goodwill and other intangible assets (note 6)		73,178,367			10,517,416
Deferred compensation cost (note 3 (b))		2,084,754			-
Non-refundable investment tax credits		3,633,692			-
Future income taxes		3,699,920			2,278,016
Long-term assets related to discontinued operations (note 3 (c))		-			5,951,279
	$	282,548,187		$	135,542,325
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 7)	$	11,023,697		$	10,726,076
Customer reserves and security deposits (note 4)		66,337,068			-
Accounts payable and accrued liabilities		19,854,546			5,569,250
Deferred revenue		3,516,653			1,302,146
Balance of sale on acquisition of NPS, including transaction costs of $114,368
(note 3 (f))		3,114,368			-
Current portion of obligations under capital leases		295,540			-
Future income taxes		133,806			133,806
Current liabilities related to discontinued operations (note 3 (c))		-			4,388,826
		104,275,678			22,120,104
Future income taxes		3,426,460			129,583
Deferred revenue		318,136			-
Obligations under capital leases		234,970			-
Shareholders' equity:
Share capital (note 8(a))		183,747,864			122,102,244
Additional paid-in capital (note 8 (c))		9,067,489			5,282
Deficit		(17,037,939	)		(7,330,417	)
Cumulative translation adjustment		(1,484,471	)		(1,484,471	)
		174,292,943			113,292,638
	$	282,548,187		$	135,542,325

See accompanying notes to unaudited consolidated financial statements.

4

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Consolidated Statements of Operations
(Unaudited)

Three and nine-month periods ended September 30, 2004 and 2003
(expressed in US dollars)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Revenues	$	31,218,722		$	2,212,246		$	65,540,808		$	6,409,025
Expenses:
Transaction processing and
service costs		17,698,006			1,564,152			39,070,416			4,368,157
Selling, general and administrative		8,351,190			2,377,579			22,682,310			6,983,706
Operating leases		1,128,515			200,314			2,982,819			521,238
Research and development		644,047			-			1,102,284			-
		27,821,758			4,142,045			65,837,829			11,873,101
Investment income		512,058			205,082			1,072,530			716,244
Earnings (loss) before undernoted items		3,909,022			(1,724,717	)		775,509			(4,747,832	)
Restructuring costs (note 10 (a))		-			-			1,324,648			108,900
Inventory write-downs (note 10(a))		-			-			2,930,536			-
Stock-based compensation
(notes 3 (b) and 10 (b))		1,898,163			-			3,831,876			-
Amortization of intangibles		953,284			39,321			1,794,778			117,962
Amortization of property and equipment		451,873			117,364			1,242,458			339,554
Foreign exchange		(62,824	)		22,337			(124,374	)		195,469
		3,240,496			179,022			10,999,922			761,885
Earnings (loss) from continuing operations
before income taxes		668,526			(1,903,739	)		(10,224,413	)		(5,509,717	)
(Provision for) recovery of
income taxes (note 11)		(536,644	)		-			(516,927	)		2,879,000
Earnings (loss) from continuing operations		131,882			(1,903,739	)		(10,741,340	)		(2,630,717	)
Loss from discontinued operations
(note 3 (c))		-			(205,894	)		(3,130,527	)		(677,147	)
Gain on disposal of net assets from
discontinued operations, net of
income taxes of $2,342,000 (note 3 (c))		-			-			4,164,345			-
Net earnings (loss)	$	131,882		$	(2,109,633	)	$	(9,707,522	)	$	(3,307,864	)
Weighted average number of shares:
Basic		22,199,002			14,936,235			19,639,118			14,936,235
Plus impact of stock options		-			831			337			419
Diluted		22,199,002			14,937,066			19,639,455			14,936,654
Earnings (loss) per share :
Continuing operations:
Basic	$	0.01		$	(0.13	)	$	(0.55	)	$	(0.18	)
Diluted		0.01			(0.13	)		(0.55	)		(0.18	)
Discontinued operations:
Basic		-			(0.01	)		0.05			(0.04	)
Diluted		-			(0.01	)		0.05			(0.04	)
Total:
Basic		0.01			(0.14	)		(0.50	)		(0.22	)
Diluted		0.01			(0.14	)		(0.50	)		(0.22	)

See accompanying notes to unaudited consolidated financial statements.

5

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Consolidated Statements of Deficit
(Unaudited)

Three and nine-month periods ended September 30, 2004 and 2003
(expressed in US dollars)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Deficit, beginning of period	$	(17,169,821	)	$	(2,360,256	)	$	(7,330,417	)	$	(1,162,025	)
Net earnings (loss)		131,882			(2,109,633	)		(9,707,522	)		(3,307,864	)
Deficit, end of period	$	(17,037,939	)	$	(4,469,889	)	$	(17,037,939	)	$	(4,469,889	)

See accompanying notes to unaudited consolidated financial statements.

6

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Consolidated Statements of Cash Flows
(Unaudited)

Three and nine-month periods ended September 30, 2004 and 2003
(expressed in US dollars)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Cash flows from operating activities:
Earnings (loss) from continuing
operations	$	131,882		$	(1,903,739	)	$	(10,741,340	)	$	(2,630,717	)
Adjustments for:
Amortization		1,405,157			156,685			3,037,236			457,516
Stock-based compensation		1,898,163			-			3,831,876			-
Inventory write-downs		-			-			2,930,536			-
Future income taxes		451,591			-			405,874			(1,699,000	)
Changes in operating assets and liabilities:
Accounts receivable		(1,505,200	)		45,762			(404,363	)		668,628
Service parts inventory		(612,324	)		(105,999	)		(639,791	)		(237,125	)
Income taxes and credits receivable		596,501			3,807,804			552,478			2,210,385
Prepaid expenses and deposits		(288,359	)		200,130			(601,818	)		(342,180	)
Accounts payable and accrued
liabilities		1,976,023			32,173			2,141,091			(318,137	)
Customer reserves and
security deposits		3,044,723			-			(6,921,842	)		-
Deferred revenue		(323,009	)		(1,579,827	)		(392,693	)		(1,477,459	)
		6,775,148			652,989			(6,802,756	)		(3,368,089	)
Cash flows from investing activities:
Additions to property and equipment		(508,083	)		(15,765	)		(2,058,522	)		(264,340	)
Note and other receivable		(78,992	)		-			68,473			-
Decrease in short-term investments		22,769,106			7,706,377			18,708,391			9,615,193
Proceeds from sale of business		(4,806,240	)		-			30,193,760			-
Proceeds from disposal of EBS (note 3 (d))		-			-			3,974,495			-
Cash acquired on acquisition of
Terra (note 3 (b))		-			-			43,426,504			-
Acquisition of NPS, net of cash
acquired of $125,788 (note 3 (f))		(11,891,747	)		-			(11,891,747	)		-
Acquisition of RBA (note 3 (e))		-			(5,882,268	)		-			(5,882,268	)
Acquisition of Systech (note 3 (a))		-			-			(3,464,556	)		-
Acquisition costs (note 3 (b))		(10,828	)		-			(1,388,656	)		-
		5,473,216			1,808,344			77,568,142			3,468,585
Cash flows from financing activities:
Bank indebtedness		667,255			5,882,308			297,621			5,882,308
Proceeds from issuance of share capital		143,205			-			175,205			-
Repayment of obligations under
capital leases		(98,071	)		630,839			(201,553	)		630,839
		712,389			6,513,147			271,273			6,513,147
Increase in cash and cash equivalents,
during the period		12,960,753			8,974,480			71,036,659			6,613,643
Net (decrease) increase in cash from
discontinued operations		-			(3,347,595	)		106,441			(6,242,714	)
Effect of foreign exchange		(100,979	)		-			(219,149	)		-
Cash and cash equivalents, beginning of
period		62,276,141			4,359,392			4,211,964			9,615,348
Cash and cash equivalents, end of period	$	75,135,915		$	9,986,277		$	75,135,915		$	9,986,277

Supplemental cash flow disclosure (note 12)

See accompanying notes to unaudited consolidated financial statements.

7

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Notes to Consolidated Financial Statements
(Unaudited)

Three and nine-month periods ended September 30, 2004 and 2003
(expressed in US dollars)

     1.      Interim financial information:

These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (“GAAP”). The unaudited balance sheet as at September 30, 2004 and the unaudited statements of operations, deficit and cash flows for the three and nine-month periods ended September  30, 2004 and 2003 reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods presented. The results of operations and cash flows for any quarter are not necessarily indicative of the results or cash flows for an entire year. These interim consolidated financial statements follow the same accounting policies and methods of their application as described in note 2 of the annual audited consolidated financial statements for the year ended December 31, 2003, except as described in note 2 below. The interim consolidated financial statements do not include all disclosures required for annual financial statements and should be read in conjunction with the most recent annual audited consolidated financial statements of Optimal Group Inc. (formerly Optimal Robotics Corp.) (the “Company”) as at and for the year ended December 31, 2003.

All amounts in the attached notes are unaudited unless specifically identified.

    2.      Significant accounting policies and new accounting standards:

    (a)     Discontinued operations:

As a result of the sale of the U-Scan® self-checkout business referred to in note 3 (c), the results of discontinued operations are included in the net loss but recorded separately for current and prior periods. The balance sheet presents the current and long-term assets and liabilities related to the discontinued operations for the current and prior periods.

    (b)     Revenue recognition:

As a result of the business acquisitions and disposals referred to in note 3, the Company is engaged in payment services, and, in addition, provides hardware maintenance and repair outsourcing services throughout North America.

Revenues from payment services are recognized at the time services are rendered. Revenue from merchants is recorded gross of the fees paid to the acquiring processing suppliers. Revenues for set-up fees are deferred and recognized over the expected term of the customer relationship.

Revenues from repair services are recognized at the time the services are rendered. Revenues from maintenance contracts are deferred and amortized ratably over the term of the contract.

8

2.     Significant accounting policies and new accounting standards (continued):

    (c)    Amortization:

Intangibles are being amortized using the straight-line method over the following periods:

Customer contracts and customer relationships
Acquired technology
Supplier contract
Customer list
Deferred compensation cost              42 - 84 months
                  60 months
                  84 months
                  44 months
 Vesting period for periods
     ranging up to 36 months

Amortization of property and equipment is provided for over the estimated useful lives of the assets using the straight-line method at the following annual rates:

Computer equipment and software
Equipment
Leasehold improvements   33 - 50%
 10 - 20 %
Lease term

  (d)      Stock-based compensation:

Effective January 1, 2003, the Company adopted the fair value-based method to account for stock-based compensation and other stock-based payments. Under the fair value-based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period.

9

    2.            Significant accounting policies and new accounting standards (continued):

    (d)     Stock-based compensation (continued):

 In accordance with the standard, the following disclosure is required to report the pro forma net earnings (loss) and earnings (loss) per share as if the fair value-based method had been used to account for employee stock options granted during fiscal 2002:

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
Net earnings (loss), as reported	$	131,882	$	(2,109,633	)	$	(9,707,522	)	$	(3,307,864	)
Add:
Total stock-based employee
compensation expense
determined under fair
value-based method for all
awards granted in fiscal 2002,
net of related taxes of nil		-		(690,667)			-			(1,423,340	)
Pro forma net earnings (loss)	$	131,882	$	(2,800,300	)	$	(9,707,522	)	$	(4,731,204	)

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Earnings (loss)per share:
Basic:
As reported	$	0	.01	$	(0	.14)	$	(0	.50)	$	(0	.22)
Pro forma		0	.01		(0	.19)		(0	.50)		(0	.32)
Diluted:
As reported		0	.01		(0	.14)		(0	.50)		(0	.22)
Pro forma		0	.01		(0	.19)		(0	.50)		(0	.32)

There were no stock options granted in the three and nine-month periods ended September 30, 2003. The pro forma adjustment for fiscal 2003 relates to the amortization of the remaining balance of compensation cost for stock options granted during fiscal 2002 due to the cancellation of all options outstanding in July 2003.

10

2. Significant accounting policies and new accounting standards (continued):

    (e)     Asset retirement obligations:

On January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants relating to asset retirement obligations. This standard was established for the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated retirement cost. The standard applies to legal obligations associated with the retirement of a tangible long-lived asset that results from acquisition, development or normal operations. The standard requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and when a reasonable estimate of fair value can be made. An entity is subsequently required to allocate the asset retirement cost to expense using a systematic and rational method over its estimated life. The adoption of this standard did not have an impact on the Company’s financial statements.

    3.            Business acquisitions and disposals:

    (a)     Systech Retail Systems:

On February 27, 2004, the Company acquired the hardware service division of Systech Retail Systems (“Systech”). The Company believes that the combination of this division with Optimal’s existing service organization will contribute positively to the Company’s financial results in 2004.

The net assets acquired for cash were approximately $3.5 million. The acquisition is accounted for by the Company using the purchase method and the results of Systech are consolidated with those of the Company from the date of acquisition.

11

    3.            Business acquisitions and disposals (continued):

    (a)     Systech Retail Systems (continued):

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of finalizing its valuation of the net assets acquired, including goodwill and other intangible assets; thus, the allocation of the purchase price is subject to refinement.

Assets acquired:
Accounts receivable	$	1,428,411
Inventories		750,286
Property and equipment		273,706
Prepaid expenses and deposits		64,536
Customer contracts and customer rela		612,332
Goodwill		4,257,648
		7,386,919
Liabilities assumed:
Accounts payable and accrued liabili		1,440,964
Deferred revenue		2,481,399
		3,922,363
Net assets acquired for cash	$	3,464,556

During the quarter ended June 30, 2004, the Company adjusted the fair value of inventories acquired at the date of acquisition to $745,728 from $3,620,125 for service parts that could not be used by the Company, increased accrued liabilities assumed by $475,078 for accrued vacation due to Systech employees at the date of acquisition and recorded a value of $612,332 as the estimated fair value of the customer contracts and customer relationships. During the quarter ended September 30, 2004, the Company made the following additional adjustments to the purchase price equation at date of acquisition: increased the value of inventories by $4,558, decreased accrued liabilities by $92,607 and deferred revenue by $9,598.

    (b)     Terra Payments Inc.:

Effective April 6, 2004, the Company completed a Combination Agreement with Terra Payments Inc. (“Terra”), a publicly-traded company that offers proprietary technology and services to businesses to accept credit card, electronic check and direct debit payments. Terra processes credit card payments for non-face-to-face transactions, including mail-order/telephone order, licensed online gaming and other online merchants, as well as for retail point-of-sale merchants. Terra also processes checks and direct debits online and by telephone. The Company believes that this transaction will provide a platform for enhanced growth and profitability.

12

    3.            Business acquisitions and disposals (continued):

    (b)     Terra Payments Inc. (continued):

The agreement provided for a stock-for-stock merger in which 0.4532 of the Company’s common shares were exchanged for each share of Terra. The total purchase price of $66,004,647 was paid through the issuance of 7,242,168 Class A shares by the Company, the acquisition of outstanding options and warrants issued by Terra and estimated transaction costs of the Company.

The acquisition is accounted for by the Company using the purchase method. The following table presents the estimated fair value of the assets and liabilities of Terra on April 6, 2004. The Company is in the process of finalizing its valuation of the net assets acquired, including goodwill and other intangible assets; thus, the allocation of the purchase price is subject to refinement.

Assets acquired:
Cash and cash equivalents	$	43,426,504
Short-term investments		23,153,205
Cash and short-term investments - held as		23,555,028
Accounts receivable		1,282,900
Refundable investment tax credits receiva		588,597
Prepaid expenses and deposits		474,873
Property and equipment		1,466,194
Investment in ebs Electronic Billing Syst		3,974,495
Note receivable		1,697,640
Other assets		3,122,490
Non-refundable investment tax credits		3,330,343
Future income taxes		4,483,147
Customer contracts and customer relations		5,456,000
Acquired technology		4,520,000
Non-deductible goodwill		34,527,233
		155,058,649
Liabilities assumed:
Accounts payable and accrued liabilities		10,697,312
Deferred revenue		443,937
Customer reserves and security deposits		73,258,910
Future income taxes		3,921,780
Obligations under capital leases		732,063
		89,054,002
Net assets acquired	$	66,004,647

13

3. Business acquisitions and disposals (continued):

(b)       Terra Payments Inc. (continued):

Consideration:
7,242,168 common shares	$ 61,413,585
Transaction costs	1,388,656
Options and warrants	5,877,330
Less: options and warrants considered deferred com	(2,674,923	)
Total purchase price	$ 66,004,647

During the three-month period ended September 30, 2004, the Company adjusted the fair value of the future income tax asset to $4,483,147 from $6,750,092 to account for certain loss carryforwards in Terra that will not be available to the Company as a result of the acquisition. In addition, cash and cash equivalents in the amount of $43,426,504 that were previously presented as short-term investments were reclassified as a separate line item in the purchase price equation.

The per share value of the shares issued as consideration for the business acquisition was $8.48, which was determined using the Company’s average closing share price on NASDAQ over a reasonable period before and after the date the terms of the business combination were agreed to and announced.

The Company assumed 1,587,058 stock options and warrants having a fair value of $5,877,330, or a weighted average of $3.70 per share, relating to the Terra outstanding stock options and warrants. This also represents 0.4532 stock option or warrant of the Company for each stock option or warrant of Terra. The fair value of the vested stock options and warrants of $3,202,407 is included in the purchase consideration. The remaining $2,674,923 representing the fair value of the unvested stock options, is recorded as deferred compensation cost and is being amortized over the vesting periods. For the three and nine months ended September 30, 2004, $289,732 and $590,169, respectively, were amortized as stock-based compensation in the consolidated statements of operations.

The fair values were determined using the Black-Scholes option pricing model using the following weighted average assumptions:

 Expected volatility
 Expected life
 Risk-free interest rate
 Dividend rate          70%
   2.9 years
     2%
       0%

14

3. Business acquisitions and disposals (continued):

(c)       Sale of U-Scan® self-checkout business:

Effective April 8, 2004, the Company sold its U-Scan® self-checkout business to Fujitsu Transaction Solutions Inc. (“Fujitsu”), including all related tangible assets, intellectual property rights, and obligations, for $35,000,000 in cash plus the assumption of liabilities. Fujitsu funded the payment of a termination fee owed by the Company to NCR Corporation as a result of the termination of their offer to purchase the self-checkout business. In the three-month period ended September 30, 2004, the Company paid an amount of $4,806,240 to Fujitsu due to purchase price adjustments mainly attributed to there being less net assets sold to Fujitsu as the Company collected a large portion of the accounts receivable and realized the cash thereon in advance of the sale. Thus, the net proceeds realized on the sale to Fujitsu were $30,193,760.

The sale of the U-Scan® self-checkout business is consistent with the Company’s strategy to reposition the business as a payments and services leader. As a result of weak capital spending environment for retail technology and a significantly more competitive landscape in the self-checkout business, which negatively impacted sales, gross margins and overall financial results, the Company decided to exit this business and focus on building a payments and services business.

15

3. Business acquisitions and disposals (continued):

(c)        Sale of U-Scan® self-checkout business (continued):

The following table summarizes the book value of the assets and liabilities at April 8, 2004 and December 31, 2003 relating to the business sold by the Company:

	April 8, 2004	December 31, 2003
Current assets:
Accounts receivable	$  8,193,454	$  6,289,527
Inventories	17,915,397	18,722,431
Prepaid expenses and deposits	169,347	279,760
	26,278,198	25,291,718
Long-term assets:
Property and equipment	3,936,821	4,358,857
Intangible assets	3,500,444	1,592,422
	7,437,265	5,951,279
Current liabilities:
Accounts payable and accrued liabilities	2,896,110	2,830,850
Deferred revenue	7,131,938	1,557,976
	10,028,048	4,388,826
Net assets relating to U-Scan(R)self-checkout business	23,687,415	26,854,171
Proceeds from sale	30,193,760	N/A
Gain on sale of net assets of U-Scan(R)self-checkout business
before income taxes	6,506,345	N/A
Income taxes	2,342,000	N/A
Net gain on sale of net assets of U-Scan(R)self-checkout
business	$  4,164,345	$           N/A

16

    3.            Business acquisitions and disposals (continued):

    (c)    Sale of U-Scan® self-checkout business (continued):

The  results of operations of this business for the three and nine-month periods ended September 30, 2004 and 2003 were as follows:

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
Systems and hardware service
revenue	$	-	$	13,173,053		$	10,870,032		$	41,855,986
Cost of sales		-		8,942,996			6,929,014			28,488,476
		-		4,230,057			3,941,018			13,367,510
Expenses:
Selling, general and
administrative		-		3,247,045			5,968,133			10,974,397
Amortization		-		555,469			664,195			1,586,461
Operating leases		-		238,554			237,363			742,564
Research and development		-		268,053			201,854			790,805
Restructuring costs		-		501,830			-			640,430
		-		4,810,951			7,071,545			14,734,657
Loss before income taxes		-		(580,894	)		(3,130,527	)		(1,367,147	)
Income taxes recovery		-		(375,000	)		-			(690,000	)
Net loss from discontinued
operations	$	-	$	(205,894	)	$	(3,130,527	)	$	(677,147	)

The results of operations include management assumptions and adjustments related to cost allocations which are inherently subjective.

    (d)     Disposition of ebs Electronic Billing Systems AG:

 In   May 2004, the Company sold its investment in ebs Electronic Billing Systems AG (“EBS”) to EBS’ majority shareholder for a net cash consideration of $3,974,495, which was the fair value of the investment recorded by the Company upon the acquisition of Terra at April 6, 2004. Accordingly, there was no gain or loss on this transaction.

17

    3.            Business acquisitions and disposals (continued):

                (e)     RBA Inc.:

On September 30, 2003, the Company acquired substantially all of the assets and the ongoing business of RBA Inc. (“RBA”), a company that provides hardware maintenance outsourcing services, including debit/credit card system maintenance and computer maintenance services, across Canada.

The   net assets acquired for cash are approximately $6.0 million (CA$8.1 million), subject to the determination of certain post-closing adjustments, if any. The acquisition is accounted for by the Company using the purchase method and the results of RBA are consolidated with those of the Company from the date of acquisition.

In fiscal 2004, an adjustment of $139,327 was made to increase goodwill attributable to the acquisition of the ongoing business of RBA Inc. for liabilities estimated at time of the acquisition. As at September 30, 2004, the Company is still in the process of finalizing its valuation of the net assets acquired, including the determination of post-closing adjustments and the allocation to goodwill and to other intangible assets; thus, the allocation of the purchase price is subject to final modifications.

    (f)      Acquisition of National Processing Services LLC (“NPS”):

On July 1, 2004, the Company acquired NPS, a registered VISA® and Mastercard® independent sales organization, for a total consideration of approximately $15 million. The purchase price is subject to certain post-closing adjustments. The Company believes that this acquisition will diversify its payment services portfolio and contribute positively to the Company’s financial results.

The  acquisition was accounted for by the Company using the purchase method and the results of NPS were consolidated with those of the Company from the date of acquisition.

18

    3.            Business acquisitions and disposals (continued):

    (f)      Acquisition of National Processing Services LLC (“NPS”) (continued):

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at date of acquisition. The Company is in the process of finalizing its valuation of the net assets acquired, including goodwill and other intangible assets; thus, the allocation of the purchase price is subject to refinement.

Assets acquired:
Cash	$	125,788
Accounts receivable		3,520
Inventories		37,000
Property and equipment		21,306
Prepaid expenses and deposits		12,083
Customer relationships		3,523,000
Supplier contract		597,000
Goodwill		10,818,134
		15,137,831
Liabilities assumed:
Accounts payable and accrued liabilities		5,928
Net assets acquired	$	15,131,903
Consideration:
Cash on closing	$	12,000,000
Transaction costs		131,903
Balance of sale		3,000,000
	$	15,131,903

The  balance of sale is due in equal instalments on January 1, 2005 and July 1, 2005.

        4.      Cash and short-term investments held as reserves, and customer reserves and security deposits:

Cash and short-term investments held as reserves:

        The Company has agreements with various financial institutions for the settlement of payment transactions. Under the terms of these agreements, the Company is required to maintain certain amounts as reserves, which may be applied against any amounts for which the financial institutions would be entitled to reimbursement. Any amounts charged by the financial institutions are charged to the Company’s customers.

19

    4.      Cash and short-term investments held as reserves, and customer reserves and security deposits (continued):

Customer reserves and security deposits:

Customer reserves and security deposits are required from the customers to allow the Company to recover any amounts charged by the financial institutions under the arrangements described above. Customer reserves relate to the short-term portion of collateral and outstanding payments due to customers. Security deposits are held by the Company over the term of the customer relationship, which has generally been of a long-term nature.

    5.     Other receivable:

During Terra’s fiscal year ended March 31, 2002, Terra was assessed a charge of $6.8 million by one of its credit card suppliers of services. This amount was withdrawn by the supplier from Terra’s bank account. The Company believes this charge is largely unsubstantiated and is pursuing the claim through legal recourse. A provision of $3.7 million has been made against the amount receivable.

     6.     Goodwill and other intangible assets:

					September 30, 2004
	Gross carrying amount		Accumulated amortization		Net book value
Goodwill	$	56,697,597	$	141,750	$	56,555,847
Customer contracts and customer
relationships		12,991,052		1,340,097		11,650,955
Acquired technology		4,520,000		452,000		4,068,000
Customer list		786,414		458,528		327,886
Supplier contract		597,000		21,321		575,679
	$	75,592,063	$	2,413,696	$	73,178,367

20

6.     Goodwill and other intangible assets (continued):

December 31, 2003
	Gross carrying amount		Accumulated amortization		Net book value
Goodwill	$	6,955,251	$	141,750	$	6,813,501
Customer contracts and customer
relationships		3,399,720		141,655		3,258,065
Customer list		786,414		340,564		445,850
	$	11,141,385	$	623,969	$	10,517,416

7.     Bank indebtedness:

The Company has credit facilities in the amount of approximately CA$15 million, which can be utilized in the form of loans or bankers’ acceptances in Canadian dollars. At September 30, 2004, the Company utilized CA$13,907,496 (US$11,023,697) of the facilities. The borrowings are due on demand and bear interest either at the bank’s prime rate or the market rate for bankers’ acceptances plus an acceptance fee of 0.75% per annum, depending on the form of the facility utilized. The facilities are secured by a first ranking moveable hypothec on short-term investments.

8.     Share capital and additional paid-in capital:

        (a)        Issued and outstanding share capital were as follows:

	September 30, 2004				December 31, 2003
	Number		Book value		Number		Book value
Common shares		22,202,996	$	183,747,864		14,936,364	$	122,102,244

21

  8.     Share capital and additional paid-in capital (continued):

        (a)        Issued and outstanding share capital were as follows (continued):

        Changes in the issued and outstanding share capital were as follows:

	Number		Book value
Balance, December 31, 2003		14,936,364	$	122,102,244
Shares issued on acquisition of Terra (note 3 (b))		7,242,168		61,413,585
Exercise of stock options		6,336		42,644
Exercise of warrants		18,128		189,391
Balance, September 30, 2004		22,202,996	$	183,747,864

The book value of the amounts credited to share capital from the exercise of stock options and warrants includes a cash consideration of $175,205, as well as an ascribed value from additional paid-in capital of $56,830.

        (b)        Stock options and warrants:

        Details of the outstanding stock options are as follows:

	Number			Weighted-average exercise price per share
Balance, December 31, 2003		5,000		$	6.40
Granted		4,636,926			7.10
Expired/cancelled		(50,000	)		7.10
Exercised		(5,000	)		6.40
Balance, September 30, 2004		4,586,926		$	7.10

During the period ended September 30, 2004, the Company granted 4,636,926 stock options having a weighted average exercise price of $7.10 per share. Included in the stock option grants are 3,484,417 stock options that have certain performance vesting triggers tied to the market price of the Company’s shares.

22

      8.     Share capital and additional paid-in capital (continued):

        (b)        Stock options and warrants (continued):

Under the terms of the Combination Agreement with Terra, the Company assumed Terra’s stock option plan, as such, stock options governed by this plan will be exercisable for the Company’s common shares. The exercise price and number of options outstanding on April 6, 2004, the effective date of the acquisition of Terra, were adjusted based on the exchange ratio of 0.4532 of the Company’s common shares for each share of Terra.

Details of the outstanding stock options under this plan are as follows:

	US dollar exercise price				Canadian dollar exercise price
	Number		Weighted-average exercise price per share		Number			Weighted-average exercise price per share
Balance, April 6, 2004		217,451	$	7.43		611,541		$	16.24
Expired/cancelled		-		-		(10,721	)		6.64
Exercised		-		-		(1,336	)		5.52
Balance, September 30,
2004		217,451	$	7.43		599,484		$	16.43

As at April 6, 2004 and September 30, 2004, there were 758,066 and 739,938 warrants outstanding, respectively, with a weighted average exercise price of CA$9.43 and expiring on December 19, 2005.

There are 6,143,799 options and warrants that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the period ended September 30, 2004.

    (c)        Additional paid-in capital:

Changes in additional paid-in capital were as follows:

Balance, December 31, 2003	$        5,282
Options and warrants assumed on the Terra acquisition (note 3(b))	5,877,330
Stock-based compensation (note 10(b))	3,241,707
Ascribed value credited to share capital from exercise of stock
options and warrants (note (8(b))	(56,830	)
Balance, September 30, 2004	$ 9,067,489

23

        9.     Contingencies:

        (a) The Company received a legal letter from a claimant in 1999, and again in February 2001, alleging infringement of a patent related to the U-Scan® self-checkout business, which the Company sold to Fujitsu on April 8, 2004. In March 2003, this claimant also sent a third demand letter alleging infringement of additional patents. The Company believes these claims to be without merit and intends to vigorously defend its position should this claimant initiate a civil action. No amounts have been specified in these claims. It is not possible at this time to make an estimate of the amount of damages, if any, that may result and, accordingly, no provision has been made in these financial statements with respect to such claims.

        (b) In connection with the sale of the U-Scan® self-checkout business on April 8, 2004 to Fujitsu, orders were obtained from the Superior Court of Quebec permitting the Company to submit the sale to Fujitsu to the Company’s shareholders for approval in lieu of the originally proposed sale to NCR Corporation (“NCR”). NCR is seeking to appeal these decisions. The Company believes that these appeals will not prevail. NCR has also delivered a notice of dispute under its now terminated purchase agreement alleging a breach of the non-solicitation provisions of that agreement. The Company believes that such allegations are without merit and intends to vigorously defend itself in any arbitration proceedings that may ensue. Accordingly, no provision has been made in these financial statements with respect to such claims.

        (c) The Company is contractually bound to indemnify Fujitsu for any losses, claims, liabilities or other damages resulting from the U-Scan® self-checkout business arising on or before April 8, 2004. A reasonable estimate of the maximum potential amount the Company could be required to pay to Fujitsu cannot be made given the nature of the indemnification.

        (d) The Company is party to litigation arising in the normal course of operations. The Company does not expect the resolution of such matters to have a materially adverse effect on the financial position or results of operations of the Company.

        10.     Other charges:

(a)     Restructuring and inventory write-downs:

Restructuring costs of $1.3 million were recorded in the three-month period ended June 30, 2004 as a result of efficiency initiatives undertaken that relate principally to the services operating segment. The restructuring costs relate primarily to workforce reduction of approximately $0.9 million and facility closure costs of $0.4 million.

Inventory write-downs of $2.9 million were recorded in the six-month period ended June 30, 2004 for service parts inventory that were deemed to be no longer of use to the Company in light of the realignment of its services business.

24

        10.     Other charges (continued):

        (b)        Stock-based compensation:

The fair value of stock options granted during the three and nine-month periods ended September 30, 2004, discussed in note 8(b), was determined at the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:

	Three months ended September 30, 2004	Nine months ended September 30, 2004
Volatility	68.3%	69.4%
Expected life	5 years	5 years
Risk-free interest rate	3.64%	3.39%
Dividend rate	0%	0%

        The weighted-average fair value of stock options granted was as follows:

	Number of stock options	Weighted average fair value per share
Exercise price per share equal to market price per share:
Nine-month period ended September 30, 2004	4,636,926	$     4.26
Three-month period ended September 30, 2004	30,000	4.49
The stock-based compensation related to stock options granted in fiscal 2004 is being amortized over the vesting periods.  For the three and nine months ended September 30, 2004, $1,608,431 and $3,241,707, respectively, were amortized as stock-based compensation in the consolidated statements of operations.

25

        11.     Income taxes:

The income tax provision differs from the amount computed by applying the combined Canadian federal and Quebec provincial tax rates to earnings before income taxes. The reasons for the difference and the related tax effects are as follows:

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Earnings (loss) from continuing
operations before income taxes	$	668,526		$	(1,903,739	)	$	(10,224,413	)	$	(5,509,717	)
Combined Canadian federal and
Quebec provincial income taxes
at 31% (2003 - 33%)	$	205,198		$	(628,234	)	$	(3,171,613	)	$	(1,818,207	)
Foreign exchange (1)		(363,939	)		(77,542	)		(342,503	)		(1,496,524	)
Benefits of losses not recorded		714,349			535,751			3,413,572			535,751
Stock-based compensation		493,035			-			1,005,035			-
Permanent differences and other		(511,999	)		170,025			(387,564	)		(100,020	)
Income tax provision (recovery)	$	536,644			-		$	516,927		$	(2,879,000	)

⁽¹⁾For purposes of calculating the income tax provision of the Company, a tax liability is recognized on the foreign exchange gains which arise on the conversion into Canadian dollars of the net monetary assets denominated in U.S. dollars which is required for Canadian tax purposes. As these financial statements are presented in U.S. dollars, these foreign exchange gains do not impact earnings (losses) before income taxes even though the income tax provision would include a tax liability for these gains. Future fluctuations in the foreign exchange rate between the Canadian and U.S. dollar will change the amount of the foreign exchange gains and thus, the provision for or recovery of income taxes thereon.

26

        11.     Income taxes (continued):

        The provision for (recovery) of income taxes is composed of the following:

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004		2003
Current income taxes	$	85,053	$	-	$	111,053	$	(1,180,000	)
Future income taxes		451,591		-		405,874		(1,699,000	)
	$	536,644	$	-	$	516,927	$	(2,879,000	)

        12.     Supplemental cash flow disclosure:

	Three months ended September 30,				Nine months ended September 30,
	2004		2003		2004		2003
Non-cash transactions:
Issue of shares on acquisition
of Terra	$	-	$	-	$	61,413,585	$	-
Assumption of stock options
and warrants of Terra		-		-		5,877,330		-
Ascribed value credited to share
capital from additional paid-in
capital from exercise of stock
options and warrants		56,830		-		56,830		-

   13.     Segmented information:

As a result of the business acquisitions and disposals referred to in note 3, the Company now operates in two segments, namely payments, and hardware maintenance and repair outsourcing services. Management measures the results of operations based on segment income before income taxes adjusted for certain non-cash and non-recurring items provided by each business segment.

Previously, the Company also developed and sold automated transaction products designed for use in the retail sector and provided related hardware and software maintenance. As a result of the sale of the U-Scan® self-checkout business, this segment has been reclassified as discontinued operations.

27

        13.     Segmented information (continued):

        (a)        Information on the operating segments is as follows:

	Payment services		Hardware maintenance and repair services			Consolidated
Three months ended September 30, 2004:
Revenues	$	18,406,734	$	12,811,988		$	31,218,722
Transaction processing/service costs		8,775,693		8,922,313			17,698,006
Amortization		1,013,386		391,771			1,405,157
Investment income		252,169		259,889			512,058
Stock-based compensation		1,519,560		378,603			1,898,163
Earnings (loss) from continuing operations before
income taxes		2,405,403		(1,736,877	)		668,526
Provision for (recovery of) income taxes		756,179		(219,535	)		536,644
Earnings (loss) from continuing operations		1,649,224		(1,517,342	)		131,882
Three months ended September 30, 2003:
Revenues	$	-	$	2,212,246		$	2,212,246
Transaction processing/service costs		-		1,564,152			1,564,152
Amortization		-		156,685			156,685
Investment income		-		205,082			205,082
Loss from continuing operations before income taxes		-		(1,903,739	)		(1,903,739	)
Loss from continuing operations		-		(1,903,739	)		(1,903,739	)
Nine months ended September 30, 2004:
Revenues	$	30,302,298	$	35,238,510		$	65,540,808
Transaction processing/service costs		13,619,752		25,450,664			39,070,416
Amortization		1,867,862		1,169,374			3,037,236
Investment income		438,950		633,580			1,072,530
Stock-based compensation		2,878,263		953,613			3,831,876
Restructuring costs		76,310		1,248,338			1,324,648
Inventory write-downs		-		2,930,536			2,930,536
Earnings (loss) from continuing operations before
income taxes		2,082,287		(12,306,700	)		(10,224,413	)
Provision for (recovery of) income taxes		1,064,462		(547,535	)		516,927
Loss from continuing operations		1,017,825		(11,759,165	)		(10,741,340	)
Nine months ended September 30, 2003:
Revenues	$	-	$	6,409,025		$	6,409,025
Transaction processing/service costs		-		4,368,157			4,368,157
Amortization		-		457,516			457,516
Investment income		-		716,244			716,244
Loss from continuing operations before income taxes		-		(5,509,717	)		(5,509,717	)
Recovery of income taxes		-		(2,879,000	)		(2,879,000	)
Loss from continuing operations		-		(2,630,717	)		(2,630,717	)

28

13.     Segmented information (continued):

    (a)        Information on the operating segments is as follows (continued):

	Payment services		Hardware maintenance and repair services			Consolidated
September 30, 2004:
Total assets	$	170,764,814	$	111,783,373		$	282,548,187
Total additions to property and equipment
and intangibles for the nine months ended
September 30, 2004:
- through business acquisitions	$	59,441,362	$	5,243,686		$	64,585,053
- thereafter		806,820		1,251,702			2,058,522
December 31, 2003:
Total assets	$	-	$	104,299,328	(1)	$	104,299,328	(1)
Total additions to property and equipment
and intangibles for the year ended
December 31, 2003		-	$	7,564,947		$	7,564,947

                 ⁽¹⁾        Excluding $31,242,997 of total assets related to discontinued operations.

 (b)        Geographic information is as follows:

	Revenues								Property and equipment, goodwill and intangibles
	Three months ended September 30,				Nine months ended September 30,				September 30,		December 31,
	2004		2003		2004		2003		2004		2003
Canada	$	8,391,053	$	-	$	22,731,606	$	-	$	54,559,218	$	8,196,857
United States		14,356,858		2,212,246		26,788,943		6,409,025		-		4,251,890
Other		8,470,811		-		16,020,259		-		22,983,368		-
	$	31,218,722	$	2,212,246	$	65,540,808	$	6,409,025	$	77,542,586	$	12,448,747

        
               Revenues are attributed to countries based on location of customer.

29

        14.     Canada/U.S. reporting differences:

The consolidated financial statements of the Company are prepared in accordance with Canadian GAAP, which conform, in all material respects, with those generally accepted in the United States except as described below:

        (a)        Consolidated statement of operations:

        The reconciliation of net earnings (loss) reported in accordance with Canadian GAAP with U.S. GAAP is as follows:

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
Net earnings (loss) in accordance
with Canadian GAAP	$	131,882	$	(2,109,633	)	$	(9,707,522	)	$	(3,307,864	)
Stock-based compensation costs (i)		-		-			-			-
Net loss in accordance
with U.S. GAAP	$	131,882	$	(2,109,633	)	$	(9,707,522	)	$	(3,307,864	)
Earnings (loss) per share under
U.S. GAAP:
Basic	$	0.01	$	(0.14)		$	(0.50)			(0.22)
Diluted		0.01	$	(0.14)			(0.50)			(0.22)

The weighted average number of common shares outstanding for purposes of determining basic and diluted earnings (loss) per share are the same amounts disclosed for Canadian GAAP purposes.

(i)        Stock-based compensation:

Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement 123, Accounting for Stock-based Compensation, prospectively to all employee awards granted, modified or settled after January 1, 2003. Consequently, for periods after January 1, 2003, there are no differences between Canadian GAAP and US GAAP. However, for awards granted prior to January 1, 2003, and because awards under the Company’s plan vest over a period of three years, the cost related to stock-based compensation included in the determination of net earnings is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123.

30

        14.     Canadian/U.S. reporting differences (continued):

        (a)        Consolidated statement of operations (continued):

        (i)        Stock-based compensation (continued):

The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
Reported net earnings (loss) in
accordance with US GAAP	$	131,882	$	(2,109,633	)	$	(9,707,522	)	$	(3,307,864	)
Add: Stock-based employee
compensation expense
determined under the
intrinsic value method
included in reported net
earnings, net of related
taxes of nil		-		-			-			-
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related taxes of nil		-		(878,182)			-			(10,134,477	)
Pro forma net earnings (loss)	$	131,882	$	(2,987,815	)	$	(9,707,522	)	$	(13,442,311	)

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        14.     Canadian/U.S. reporting differences (continued):

        (a)        Consolidated statement of operations (continued):

        (i)        Stock-based compensation (continued):

	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Earnings (loss) per share:
Basic:
As reported	$	0	.01	$	(0	.14)	$	(0	.50)	$	(0	.22)
Pro forma		0	.01		(0	.20)		(0	.50)		(0	.90)
Diluted:
As reported		0	.01		(0	.14)		(0	.50)		(0	.22)
Pro forma		0	.01		(0	.20)		(0	.50)		(0	.90)

        (b)        Consolidated balance sheets:

	September 30, 2004						December 31, 2003
	Canadian GAAP			US GAAP			Canadian GAAP			US GAAP
Shareholders' equity:
Share capital	$	183,747,684		$	226,204,427		$	122,102,244		$	164,558,807
Additional paid-in
capital		9,067,489			38,924,216			5,282			29,862,009
Deficit		(17,037,939	)		(87,817,467	)		(7,330,417	)		(78,109,945	)
Cumulative translation
adjustment		(1,484,471	)		-			(1,484,471	)		-
Accumulated other
comprehensive loss		-			(3,018,233	)		-			(3,018,233	)
	$	174,292,943		$	174,292,943		$	113,292,638		$	113,292,638

        (c)        Supplementary information:

Under US GAAP, stock-based compensation would be presented as part of “selling, general and administrative” expenses on the statement of operations instead of as a separate line item.

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14.     Canadian/U.S. reporting differences (continued):

                      (c)        Supplementary information (continued):

The following unaudited pro forma financial information reflects the consolidated results of operations as if the acquisitions of Terra and RBA had taken place January 1, 2003. The pro forma financial information is not necessarily indicative of the results of operations as it would have been had the transactions been reflected on the assumed date.

	Three months ended September 30,					Nine months ended September 30,
	2004		2003			2004			2003
Revenues	$	31,218,722	$	21,496,124		$	78,682,438		$	60,723,655
Net earnings (loss)		131,882		(737,529	)		(10,058,449	)		(138,978	)
Diluted earnings (loss) per share	$	0.01	$	(0.03	)	$	(0.45	)	$	(0.01	)

        15.     Comparative figures:

        Certain of the comparative figures have been reclassified in order to conform with the current period’s presentation.

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Item 2. Management’s Discussion and Analysis of Financial Condition andResults
of Operations

        The following discussion of the financial condition and results of operations of our company should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2003, and the factors set forth below under “Forward-Looking Statements”. All dollar amounts are expressed in U.S. dollars and, other than those expressed in millions of dollars, have been rounded to the nearest thousand. Our accounting policies are in accordance with Canadian generally accepted accounting principals (“GAAP”). These differ in some respects from GAAP in the United States (“US GAAP”). Our results are reconciled to US GAAP; see note 14 to our interim consolidated financial statements.

Overview

        In the first half of this fiscal year, we completed a number of business acquisitions and disposals in pursuit of our strategy to reposition our business activities with the goal of enhancing long-term financial results. We believe the completion of these transactions has realigned our company into a strong payments and services company with a more balanced and stable business mix. We plan to continue to grow our core businesses on a strategic basis, both organically and through acquisition. Furthermore, by leveraging our strong balance sheet, we intend to take advantage of strategic and transactional opportunities that may arise, with a focused approach on potential acquisitions.

        We currently operate in two segments; payments, through Optimal Payments, and hardware maintenance and repair outsourcing services, through Optimal Services Group.

        For additional information relating to our company, readers may review the documentation filed with the U.S. Securities and Exchange Commission (including our Annual Report on Form 10-K) available at www.sec.gov and with the securities regulatory authorities of British Columbia, Alberta, Ontario and Quebec available at www.sedar.com. 

 Optimal Payments

        Optimal Payments is a growing presence in the payments processing industry and provides technology and services that businesses require to accept credit card, electronic check and direct debit payments. Optimal Payments processes credit card payments for card-not-present and card-present (or, “swipe”) transactions, including Internet businesses, mail-order/telephone-order (“MOTO”) merchants, and retail point-of-sale merchants. Optimal Payments also processes checks and direct debits online and by telephone. Optimal Payments has approximately 135 employees and is headquartered in Montreal with operations throughout North America and in the United Kingdom. Optimal Payments currently has approximately 7,500 customers (merchants) using its credit card and electronic check products.

    Optimal Payments generates revenues primarily from fees charged to merchants for processing services, as well as from fees charged to consumers who utilize our FirePay® Personal Account stored-value offering. Fees charged to merchants typically include a discount rate, based upon a percentage of the dollar amounts processed, and a variety of fixed transaction or service fees. Merchant fees charged are based upon the merchant’s volume and risk profile. Fees charged to consumers are based on fixed transaction amounts. Revenue is recognized primarily at the time the transaction or service is performed and is recorded gross of amounts paid to the acquiring processing supplier. See note 2(b) to our interim consolidated financial statements.

    We retain a portion of amounts owed to certain merchants based on processing dollar volume for a period of six months to cover potential merchant credit losses, which can arise as a result of, among other things, disputes between consumers and merchants or association fines related to chargeback activity. The aggregate amount withheld is referred to as “reserves” and our liability to refund our customers is included in the line item “Customer reserves and security deposits” in the balance sheet contained in the consolidated financial statements included in this report. If disputes are not resolved in the merchant’s favour, the transaction is charged back to us and the purchase price is refunded to the merchant’s customer. If we are unable to collect from the merchant, we bear the credit risk for the full amount of the transaction. As a result, our acquiring processing suppliers require us to maintain certain amounts with them as reserves. Amounts withheld by our acquiring processing suppliers as reserves are included in cash and short-term investments on our balance sheet as “held as reserve”. For merchants who continue to use our services, we withhold and refund reserves on a rolling basis so that as new transactions are processed, we withhold a portion as the reserve, while at the same time refunding the reserves for which the six-month period has expired.

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  Optimal Services Group

     Optimal Services Group (“OSG”) offers its customers a single-source solution for many of their computer maintenance and technology support requirements, including hardware maintenance services, software support, end-user/help desk services, network support and other technology support services. OSG also provides multi-vendor parts repair, refurbishment and inventory management services as part of its logistics services portfolio. OSG delivers services through an extensive service organization located throughout the United States and Canada. OSG has approximately 755 employees located throughout the United States and Canada.

     OSG’s primary source of revenue is contracted computer maintenance and technology support services. These contracts typically have a stipulated monthly fee over a fixed initial term, and continue thereafter unless canceled by either party. In addition, we enter into per-incident contracts with customers. Per-incident contracts can cover a range of services for computer maintenance or support services or can be for a specific service. Another form of per-incident service revenues is time and material billings for services provided on an as needed basis, principally for maintenance and repair.

     We also derive revenue from the repair of hardware and components at our logistics services and depot repair facilities. Pricing of these services is based on various factors, including equipment failure rates and costs of parts and labor. We customize our contracts to the customer, in general, based upon the nature of the customer’s requirements, the term of the contract and the services which are provided. Revenue is recognized upon the completion of services performed on a per-incident basis and ratably for contracts under which we charge a monthly fee.

Recent developments

        On September 30, 2004, we announced the appointment of Mark Dunn to the position of General Manager, U.S. Sales for Optimal Payments. Mr. Dunn has been involved in the payments industry for over 15 years and will focus on sales development including growing our sales agent/ISO network.

        On September 27, 2004, we announced that we anticipated revenue for the second half of 2004 will be in the range of $62 million to $64 million and operating earnings will be in the range of $7.5 million to $8.0 million. Our original guidance for the second half of 2004, announced on August 9, 2004, was for revenue to be in excess of $52 million and for operating earnings to be in excess of $3.0 million. We have defined “operating earnings” to mean earnings before stock-based compensation, amortization, foreign exchange and income taxes. The increase in guidance reflected:

• Increased financial performance and synergies resulting from the completion from our recent transactions.
• Greater transaction volume and price flexibility in our payments business. In particular, better than expected performance across all sectors of the payment business and increased demand for certain of our products, including our FirePay® stored-value gaming product. 
• Cost savings and greater efficiencies in our services business.

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   On July 1, 2004, Optimal Payments completed the acquisition of National Processing Services LLC (“NPS”), a Detroit, Michigan-based registered Visa® and MasterCard® independent sales organization for $15 million, of which $12 million was paid on closing with the balance to be paid in two tranches within a year of closing. The portfolios acquired in this transaction include approximately 4,500 merchants, processing in excess of $1 billion in annual credit and debit card volume. As a result of this acquisition, we anticipate that Optimal Payments’ customers will process approximately $2 billion in annual electronic check and credit card volume. The acquisition is accounted for using the purchase method of accounting and the financial results have been consolidated from the date of the acquisition. See note 3(f) to our interim consolidated financial statements for details of the transaction.

    On May 6, 2004, we disposed of Optimal Payments’ investment in ebs Electronic Billing Systems AG (“ebs Billing”). The shares in ebs Billing were sold to ebs Billing’s majority shareholder EBS Holding AG for a net cash consideration of $4.0 million. The investment in ebs Billing was no longer considered strategic to Optimal Payments; however Optimal Payments has continued its business relations with ebs Billing for the mutual providing of payment processing services.

    On April 8, 2004, we completed the sale of our U-Scan® self-checkout business to Fujitsu Transaction Solutions, Inc. (“Fujitsu”) for $35.0 million plus the assumption of certain liabilities. In the period ended September 30, 2004, we paid an amount of $4.8 million owing to Fujitsu as we collected a large portion of the accounts receivable and realized the cash thereon in advance of the sale. Thus, the net proceeds realized on the sale to Fujitsu was $30.2 million. The U-Scan® self-checkout business has been accounted for as discontinued operations commencing in the second quarter of 2004 and comparative figures have been reclassified accordingly. See note 3(c) to our interim consolidated financial statements.

    On April 6, 2004, the corporation’s name was changed from Optimal Robotics Corp. to Optimal Group Inc.

   On April 6, 2004, we completed the amalgamation of a wholly-owned subsidiary with Terra Payments Inc. (“Terra Payments”). The amalgamated company is a wholly-owned subsidiary of Optimal Group Inc. and has continued its business under the name of Optimal Payments Inc. We believe that this acquisition will provide us with a superior platform for enhanced growth and financial results. The acquisition is accounted for using the purchase method and the financial results have been consolidated from the date of the acquisition. See note 3(b) to our interim consolidated financial statements.

    On February 27, 2004, we acquired the hardware service division of Systech Retail Systems (“Systech”) at a net cost of approximately $3.5 million. We believe that the combination of the Systech hardware service division with our existing service organization will contribute positively to our financial results in 2004. The acquisition is accounted for using the purchase method and the financial results have been consolidated from the date of the acquisition. See note 3(a) to our interim consolidated financial statements.

Critical accounting policies and estimates

The accompanying interim consolidated financial statements have been prepared in accordance with Canadian GAAP. In the preparation of financial statements we are required to make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting our reported results of operations and financial position. Our significant accounting policies are more fully described in note 2 of our annual audited consolidated financial statements included in our Form 10-K Annual Report for the year ended December 31, 2003. The critical accounting policies described here are those that are most important to the depiction of our financial condition and results of operations and their application requires our most subjective judgment in making estimates about the effect of matters that are inherently uncertain.

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Stock-based Compensation

Effective January 1, 2003, we adopted the fair value-based method to account for stock-based compensation and other stock-based payments. Under the fair value-based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period. The fair value of stock options granted is determined at the date of grant using the Black-Scholes option pricing model. The total stock-based compensation amortized for the nine-month and three-month periods ended September 30, 2004 was $3.8 million and $1.9 million, respectively and is a non-cash expense.

Service Parts Inventory

Periodic revisions to obsolescence provisions are required, based upon the evaluation of several factors, including changes in usage levels and technology changes. Changes in these estimates are reflected immediately in income.

Merchant Losses

When a consumer pays a merchant for goods or services using a credit card and the consumer disputes the charge, the amount of the disputed item gets charged back to us and the credit card associations may levy fees against us. In addition, if our chargeback rate becomes excessive, credit card associations can also require us to pay fines. In turn, we attempt to recover from the merchant the amount charged back and the amount of such fines. However, we may not always be successful in doing so, for reasons which could include merchant insolvency. We evaluate the risk associated with each merchant and estimate our potential loss for chargebacks based primarily on historical experience and other relevant factors.

Goodwill and Other Intangibles

Goodwill and other intangible assets with indefinite lives are not amortized but rather evaluated under an impairment approach. Other intangible assets with finite lives continue to be amortized over their estimated useful lives. The amounts recorded as intangible assets at the date of acquisition represent the estimated fair value of these assets based on estimated future cash flows discounted at appropriate discount rates. In addition, in our assessment of impairment, we are required to determine the fair value of the businesses acquired from which the goodwill and intangibles originated. For intangibles with finite lives, we make estimates of future cash flows to be generated from the related assets.

Other Receivable

During Terra Payments’ fiscal year ended March 31, 2002, Terra Payments was assessed a charge of $6.8 million from one of its credit card suppliers of services. We believe this charge is largely unsubstantiated and are pursuing a claim through legal recourse. We have recorded a provision of $3.7 million against the amount receivable.

Income Taxes

We provide for income taxes using the asset and liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities using substantively enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. We establish a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized.

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New accounting policy

Asset Retirement Obligations

        This standard was established for the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated retirement cost. The standard applies to legal obligations associated with the retirement of tangible long-lived assets that result from acquisition, development or normal operations. The standard requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and when a reasonable estimate of fair value can be made. The entity is subsequently required to allocate the asset retirement cost to expense using a systematic and rational method over the estimated life of the asset. The standard is effective for fiscal years beginning on or after January 1, 2004. The adoption of this standard did not have an impact on our financial statements.

Financial Condition

        As at September 30, 2004, cash, cash equivalents and short-term investments totaled $177.4 million (including $20.9 million held as reserves), compared to $78.5 million as at December 31, 2003. The increase in cash and short-term investments is primarily due to the acquisition of Terra Payments, which resulted in the consolidation of its cash balance with the Optimal Group cash balance, and proceeds received on the disposals of the U-Scan self-checkout business and the investment in ebs Billing, offset by cash used for operations and for the acquisitions of Systech and NPS. As already described, a significant portion of cash and short-term investments have a corresponding liability as these amounts are derived from reserves and security deposits which are due to merchants (see Overview – Optimal Payments). As at September 30, 2004, our cash position, net of bank indebtedness and customer reserves and security deposits, was as follows:

	$000s
Cash and cash equivalents	75,136
Short-term investments	81,390
Cash and short-term investments - held as reserves	20,912
	177,438
Less:
Bank indebtedness	(11,024	)
Customer reserves and security deposits	(66,337	)
Net	100,077

        Our portfolio of liquid and investment grade short-term investments consists of U.S. and Canadian dollar denominated discounted notes and bonds.

      Working capital as at September 30, 2004 was $86.6 million (December 31, 2003 — $92.7 million).

     Service parts inventory decreased by $1.5 million or 36% from $4.2 million as at December 31, 2003 to $2.7 million at September 30, 2004. This decrease is mainly attributable to inventory write-downs recorded in the second quarter. These write-downs were recorded for service parts inventory which were deemed to be no longer of use to us in light of the realignment of our services business. Service parts inventory as at September 30, 2004 pertain exclusively to the hardware maintenance and repair outsourcing services business segment and are comprised primarily of items to be consumed in the servicing of customers’ hardware.

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    Goodwill and other intangible assets increased by $62.7, from $10.5 million as at December 31, 2003 to $73.2 million as at September 30, 2004. This increase resulted primarily from the acquisitions of Terra Payments, Systech and NPS (see note 3 to our interim consolidated financial statements).

        Bank indebtedness increased by $0.3 million or 3% from $10.7 million as at December 31, 2003 to $11.0 million as at September 30, 2004. The bank indebtedness was incurred on September 30, 2003 in connection with the acquisition of substantially all of the assets of RBA Inc. (“RBA”), a company that provides hardware maintenance outsourcing services. Due to the low-interest rate environment, we made a determination that it would be advantageous for us to utilize a portion of our bank operating credit facility to finance the RBA acquisition. The increase is due to foreign exchange fluctuations, as the indebtedness is denominated in Canadian dollars, as well as the accrual of interest for the period.

       Customer reserves and security deposits as at September 30, 2004 were $66.3 million compared to nil as at December 31, 2003. Customer reserves and security deposits pertain exclusively to the payments business segment, acquired in April 2004.

        We have no long-term debt. Shareholders’ equity as at September 30, 2004 was $174.3 million as compared to $113.3 million as at December 31, 2003. The increase is attributable primarily to the issuance of share capital resulting from the Terra Payments acquisition (see note 3(b) to our interim consolidated financial statements).

Results of Operations

(Current and comparative figures have been reclassified to reflect the disposition of the U-Scan® self-checkout business which has been accounted for as discontinued operations.)

Nine-month period ended September 30, 2004 compared to the nine-month period ended September 30, 2003

Revenues from continuing operations increased by $59.1 million, from $6.4 million in the nine-month period ended September 30, 2003 to $65.5 million in the nine-month period ended September 30, 2004. The increase in revenues is due primarily to the following business acquisitions which were completed on or subsequent to September 30, 2003:

• On September 30, 2003, we acquired substantially all the assets of RBA;
• On February 27, 2004, we acquired the hardware service division of Systech Retail Systems;
• On April 6, 2004, Terra Payments amalgamated with a wholly-owned subsidiary of ours; and
• On July 1, 2004, we acquired NPS.

Revenues for the nine-month period ended September 30, 2004 include revenues from the payments business segment from the transaction date of April 6, 2004 amounting to $30.3 million or approximately 46% of total revenues and revenues from the hardware maintenance and repair outsourcing services business segment of $35.2 million or approximately 54% of total revenues. For the nine-month period ended September 30, 2003, $6.4 million or 100% of total revenues was attributed to the hardware maintenance and repair outsourcing services business segment.

Transaction processing and service costs increased by $34.7 million, from $4.4 million in the nine-month period ended September 30, 2003 to $39.1 million in the nine-month period ended September 30, 2004. The increase in transaction processing and service costs is due primarily to the business acquisitions as described above. Transaction processing costs attributable to the payments business segment were $13.6 million or 35% of total transaction processing and service costs. Service costs attributable to the hardware maintenance and repair outsourcing services business segment accounted for $25.5 million or 65% of total transaction processing and service costs. Transaction processing and service costs include direct costs of providing the respective services such as interchange for the payments business segment and direct labour, freight charges, consumables and fleet costs for the hardware maintenance and repair outsourcing services business segment.

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       Selling, general and administrative expenses increased by $15.7 million, from $7.0 million in the nine-month period ended September 30, 2003 to $22.7 million in the nine-month period ended September 30, 2004. The increase in selling, general and administrative expenses is due primarily to the business acquisitions as described above.

        Research and development expenses increased by $1.1 million from nil in the nine-month period ended September 30, 2003. Research and development expenses pertain exclusively to the payments business segment and are comprised primarily of personnel-related expenditures associated with the development of new solutions and the enhancement of existing offerings.

        Operating lease expenses increased by $2.5 million, from $0.5 million in the nine-month period ended September 30, 2003 to $3.0 million in the nine-month period ended September 30, 2004. The increase in operating lease expenses is due primarily to the business acquisitions as described above.

        Operating earnings were $0.8 million for the nine-month period ended September 30, 2004 compared to a loss of $4.7 million for the nine-month period ended September 30, 2003. Operating earnings (loss) is defined as earnings (loss) before restructuring costs, inventory write-downs, stock-based compensation, amortization of intangibles and property and equipment, foreign exchange, income taxes, discontinued operations and disposals of net assets,. Operating earnings (loss) is presented on the face of the Consolidated Statements of Operations as “Earnings (loss) before undernoted items”. Management believes operating earnings (loss) is a relevant measure of our performance. Operating earnings (loss) is not a measure of performance under Canadian GAAP or U.S. GAAP and should not be considered in isolation or as a substitute for net earnings prepared in accordance with Canadian GAAP or U.S. GAAP and therefore may not be comparable to similar measures presented by other companies.

        Restructuring costs of $1.3 million were recorded in our second quarter ended June 30, 2004 as a result of efficiency initiatives undertaken relating exclusively to the hardware maintenance and repair outsourcing services business segment. The restructuring costs related primarily to workforce reduction costs of $0.9 million and facility closure costs of $0.4 million.

        Inventory write-downs of $2.9 million were recorded in the six-month period ended June 30, 2004. These write-downs were recorded for service parts inventory that was deemed to be no longer of use to us in light of the realignment of our services business.

        Stock-based compensation is attributable to the accounting for the fair value of stock options granted in fiscal 2004. Total stock-based compensation related to stock options granted in 2004 was $19.7 million of which $3.2 million was amortized in the nine-month period ended September 30, 2004. Furthermore, as a result of the Terra Payments acquisition, deferred compensation of $2.7 million was recorded on the balance sheet as deferred compensation relating to the unvested Terra Payments stock options that we assumed (see note 3(b) to our interim consolidated financial statements), of which $0.6 million was amortized in the nine-month period ended September 30, 2004. The total stock-based compensation amortized for the nine-month period ended September 30, 2004 was $3.8 million and is a non-cash expense.

        Amortization of intangibles increased by $1.7 million, from $0.1 million in the nine-month period ended September 30, 2003 to $1.8 million in the nine-month period ended September 30, 2004. The increase in amortization is due primarily to the intangible assets acquired from the various business acquisitions as described above.

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Amortization of property and equipment increased by $0.9 million, from $0.3 million in the nine-month period ended September 30, 2003 to $1.2 million in the nine-month period ended September 30, 2004. The increase in amortization is due primarily to the business acquisitions as described above.

        The provision for income taxes was $0.5 million for the nine-month period ended September 30, 2004 compared to a recovery of $2.9 million for the nine-month period ended September 30, 2003. The variance was due to the non-recognition of income tax benefits incurred in fiscal 2004 and non-deductible stock-based compensation (see note 11 to our interim consolidated financial statements).

        Loss from discontinued operations of $3.1 million relates exclusively to the operations of the U-Scan® self-checkout business as described above (see Recent developments above and note 3(c) to our interim consolidated financial statements).

        The gain on disposal of net assets from discontinued operations of $4.2 million, net of income taxes of $2.3 million, relates to the sale of the U-Scan® self-checkout business in April 2004 as described above (see Recent developments above and note 3(c) to our interim consolidated financial statements).

        Our net loss was $9.7 million for the nine-month period ended September 30, 2004 compared to a net loss of $3.3 million in the nine-month period ended September 30, 2003. On a per share basis, including discontinued operations, we lost $0.50 for the nine-month period ended September 30, 2004 compared to a loss of $0.22 for the comparable period in fiscal 2003.

Three–month period ended September 30, 2004 compared to the three-month period ended September 30, 2003

        Revenues from continuing operations increased by $29.0 million, from $2.2 million in the three-month period ended September 30, 2003 to $31.2 million in the three-month period ended September 30, 2004. The increase in revenues is due primarily to the following business acquisitions which were completed on or subsequent to September 30, 2003:

• On September 30, 2003, we acquired substantially all the assets of RBA;
• On February 27, 2004, we acquired the hardware service division of Systech Retail Systems;
• On April 6, 2004, Terra Payments amalgamated with a wholly-owned subsidiary of ours; and
• On July 1, 2004, we acquired NPS.

        Revenues for the three-month period ended September 30, 2004 include revenues from the payments business segment from the transaction date of April 6, 2004 amounting to $18.4 million or 59% of total revenues and revenues from the hardware maintenance and repair outsourcing services business segment of $12.8 million or 41% of total revenues. For the three-month period ended September 30, 2003, $2.2 million or 100% of total revenues was attributed to the hardware maintenance and repair outsourcing services business segment.

        Transaction processing and service costs increased by $16.1 million, from $1.6 million in the three-month period ended September 30, 2003 to $17.7 million in the three-month period ended September 30, 2004. The increase in transaction processing and service costs is due primarily to the business acquisitions as described above. Transaction processing costs attributable to the payments business segment were $8.8 million or 50% of total transaction processing and service costs. Service costs attributable to the hardware maintenance and repair outsourcing services business segment accounted for $8.9 million or 50% of total transaction processing and service costs. Transaction processing and service costs include the direct costs of providing such services, including interchange for the payments business segment and direct labour, freight charges, consumables and fleet costs for the hardware maintenance and repair outsourcing services business segment.

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      Selling, general and administrative expenses increased by $6.0 million, from $2.4 million in the three-month period ended September 30, 2003 to $8.4 million in the three-month period ended September 30, 2004. The increase in selling, general and administrative expenses is due primarily to the business acquisitions as described above.

        Research and development expenses increased by $0.6 million in the period from nil in the three-month period ended September 30, 2003. Research and development expenses pertain exclusively to the payments business segment and are comprised primarily of personnel-related expenditures associated with the development of new solutions and the enhancement of existing offerings.

        Operating lease expenses increased by $0.9 million, from $0.2 million in the three-month period ended September 30, 2003 to $1.1 million in the three-month period ended September 30, 2004. The increase in operating lease expenses is due primarily to the business acquisitions as described above.

        Operating earnings were $3.9 million for the three-month period ended September 30, 2004 compared to a loss of $1.7 million for the three-month period ended September 30, 2003. Operating earnings (loss) is defined as earnings (loss) before restructuring costs, inventory write-downs, stock-based compensation, amortization of intangibles and property and equipment, foreign exchange, income taxes, discontinued operations and disposals of net assets. Operating earnings (loss) is presented on the face of the Consolidated Statement of Operations as “Earnings (loss) before undernoted items”. Management believes operating earnings (loss) is a relevant measure of our performance. Operating earnings (loss) is not a measure of performance under Canadian GAAP or U.S. GAAP and should not be considered in isolation or as a substitute for net earnings prepared in accordance with Canadian GAAP or U.S. GAAP and therefore may not be comparable to similar measures presented by other companies.

        Stock-based compensation is attributable to the accounting for the fair value of stock options granted in fiscal 2004, while no stock options were granted in fiscal 2003. Total stock-based compensation related to stock options granted in 2004 was $19.7 million of which $1.6 million was amortized in the three-month period ended September 30, 2004. Furthermore, as a result of the Terra Payments acquisition, deferred compensation of $2.7 million was recorded on the balance sheet as deferred compensation relating to the unvested Terra Payments stock options that we assumed (see note 3(b) to our interim consolidated financial statements), of which $0.3 million was amortized in the three-month period ended September 30, 2004. The total stock-based compensation amortized for the three-month period ended September 30, 2004 was $1.9 million and is a non-cash expense.

        Amortization of intangibles increased by $1.0 million, from nil in the three-month period ended September 30, 2003. The increase in amortization is due primarily to the intangible assets acquired from the various business acquisitions as described above.

        Amortization of property and equipment increased by $0.4 million, from $0.1 million in the three-month period ended September 30, 2003 to $0.5 million in the three-month period ended September 30, 2004. The increase in amortization is due primarily to the business acquisitions as described above.

        Provision for income taxes was $0.5 million for the three-month period ended September 30, 2004 compared to nil for the three-month period ended September 30, 2003. The variance was due primarily to the non-recognition of income tax benefits incurred in the period and non-deductible stock-based compensation (see note 11 to our interim consolidated financial statements).

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  Our net earnings was $0.1 million in the quarter compared to a net loss of $2.1 million in the third quarter of fiscal 2003. On a per share basis we earned $0.01 in the third quarter of fiscal 2004 compared to a loss of $0.14 in the third quarter of fiscal 2003.

Liquidity and Capital Resources

        As at September 30, 2004, we had cash, cash equivalents and short-term investments of $177.4 million (including $20.9 million held as reserves) (December 31, 2003 — $78.5 million), and working capital of $86.6 million (December 31, 2003 — $92.7 million). As described above, a significant portion of cash, cash equivalents and short-term investments have a corresponding liability as these amounts are derived from reserves and security deposits which are due to merchants (see Overview – Optimal Payments). As at September 30, 2004, our cash position net of bank indebtedness and customer reserves and security deposits was $100.1 million (see Financial Condition above).

        Operating activities used $6.8 million of cash and cash equivalents in the nine-month period ended September 30, 2004, compared to the use of cash of $3.4 million during the nine–month period ended September 30, 2003. The increase in the use of cash was due primarily to working capital requirements.

        For the three-month period ended September 30, 2004, operating activities generated $6.8 million of cash as compared to $0.7 million of cash generated in the three-month period ended September 30, 2003. The increase in cash generated from operating activities was due primarily to increases in accounts payable and customer reserves and security deposits.

        In the nine–month period ended September 30, 2004, $77.6 million was generated from investing activities compared to $3.5 million generated in the nine-month period ended September 30, 2003. The increase in cash generated from investing activities of $74.1 million is due primarily to $43.4 million of cash acquired on the acquisition of Terra, net proceeds of $30.2 million from the sale of our U-Scan® self-checkout business, proceeds of $4.0 million on the disposal of our investment in EBS, an increase of $9.1 million generated from short-term investments offset by an increase in cash used for acquisitions of $10.9 million and an increase in cash used for additions of property and equipment of $1.8 million.

        In the three–month period ended September 30, 2004, $5.5 million was generated from investing activities compared to $1.8 million generated in the nine-month period ended September 30, 2003. The increase in cash generated from investing activities of $3.7 million is due primarily to an increase of $15.1 million generated from short-term investments offset by an increase in cash used for acquisitions of $6.0 million, a purchase price adjustment pertaining to the sale of our U-Scan® self-checkout business of $4.8 million and an increase in cash used for additions of property and equipment of $0.5 million.

        For the nine-month period ended September 30, 2004, cash generated from financing activities was $0.3 million compared to $6.5 million generated in the nine-month period ended September 30, 2003. The decrease of $6.2 million is due primarily to a reduction in cash from bank indebtedness of $5.6 million.

        For the three-month period ended September 30, 2004, cash generated from financing activities was $0.8 million compared to $6.5 million generated in the nine-month period ended September 30, 2003. The decrease of $5.7 million is due primarily to a reduction in cash from bank indebtedness of $5.2 million.

        We believe that our cash and short-term investments will be adequate to meet our needs for at least the next 12 months.

Forward-Looking Statements

        This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Words such as “expects”, “intends”, “anticipates”, “plans”, “believes”, “seeks”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation of our company or any other person that the objectives and plans of our company will be achieved.

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     The following factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, may be significant, presently or in the future, and the factors discussed below may affect us to a greater extent than indicated. These risks factors are discussed in the context of the business as it exists at the date of this Form 10-Q. Except to the extent set forth below, risk factors related to the self-checkout business, which we no longer operate have ceased to be relevant to us. Risks related to our operations, including both the service and payments businesses are presented below under “RISKS RELATED TO OUR OPERATIONS”. Risks related specifically to our service business are presented below under “RISKS RELATED TO OUR SERVICE BUSINESS” and risks related specifically to the payments business are presented below under “RISKS RELATED TO OUR PAYMENT BUSINESS”. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

RISKS RELATED TO OUR OPERATIONS

        OUR ABILITY TO RETAIN KEY PERSONNEL IS IMPORTANT TO OUR GROWTH AND PROSPECTS. Our ability to complete the integration of acquisitions and to grow our business is particularly dependent upon the services of a few key personnel, the loss of any of whom could adversely affect our business and overall results of operations. The loss of key personnel or damage to their reputations could adversely affect our relationships with our strategic service providers, which would adversely affect our business.

        WE MAY BE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES AND MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE BUSINESSES THAT MAY BE ACQUIRED INTO OUR OPERATIONS. As part of our recent history and future growth strategy, we have acquired, and intend to continue to acquire, other businesses. In the future, we may continue to seek acquisition candidates and, from time to time, engage in exploratory discussions with suitable candidates. There can be no assurance, however, that we will be able to identify and acquire targeted businesses or, to the extent required, obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into our operations may involve unforeseen difficulties and may require a disproportionate amount of resources and management attention. In connection with future acquisitions, we may incur significant charges to earnings. Acquisitions involve a number of special risks, including the time and expense associated with identifying and evaluating acquisitions, the diversion of management’s attention from day-to-day operations, the difficulty in integrating widely dispersed operations with distinct corporate cultures, the potential loss of key employees of the acquired company, the difficulty of incorporating acquired technologies successfully, the potential impairment of relationships with employees, clients and strategic partners and the inability to maintain uniform standards, controls, procedures and policies. In addition, customer satisfaction or performance problems at a single acquired firm could have a material adverse effect on our reputation. Future acquisitions may be financed through the issuance of common shares, which may dilute the ownership of our shareholders, or through the incurrence of indebtedness. Furthermore, there can be no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable.

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RISKS RELATED TO OUR SERVICES BUSINESS

        The services business is subject to a number of risks, which, should they materialize, can have a material adverse effect on our business, revenues, operating results and financial condition, including those set forth below:

        OUR CONTRACTS FOR SERVICES MAY NOT BE RENEWED OR MAY BE REDUCED. As is customary in the hardware services industry, we can experience reductions in our contract-based revenue, as customers may eliminate certain equipment or services from coverage under their contracts. We believe that the principal reasons for the loss of contract-based revenue are the replacement of the equipment being serviced with new equipment covered under a manufacturer’s warranty, the discontinuance of the use of equipment being serviced for a customer due to obsolescence or a customer’s determination (based on cost, quality and scope of services) to utilize a competitor’s services or to move technical support services in house. There can be no assurance that we will be able to offset the reduction of contract-based revenue and maintain revenue growth through new contracts in the future. Any failure to enter into new contracts, add additional services and equipment to existing contracts or consummate acquisitions could have a material adverse effect on our results.

        WE RELY UPON CERTAIN CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR SERVICES REVENUES. Two customers accounted for approximately 22% and 10% of our year to date revenues from our services business, respectively. Any reduction in volume from any of these customers could have a material adverse effect on our services results.

        OUR BUSINESS IS AFFECTED BY COMPUTER INDUSTRY TRENDS. Our future success is dependent upon (i) the continuation of a number of trends in the computer industry, including the migration by information technology end-users to multi-vendor and multi-system computing environments, the overall increase in the sophistication and interdependency of computing technology, and a focus by information technology managers on cost efficient management and (ii) our ability to diversify our services to meet the needs of clients with respect to these trends. We believe that these trends have resulted in a movement by both end-users and original equipment manufacturers (each, an “OEM”) towards outsourcing and an increased demand for support service providers that have the ability to provide a broad range of multi-vendor support services. There can be no assurance that these trends will continue in the future

        WE OPERATE IN A MARKET SUBJECT TO RAPID TECHNOLOGICAL CHANGE. Rapid technological change and compressed product life cycles are prevalent in the computer industry, which may lead to the development of improved or lower cost technologies, higher quality hardware with significantly reduced failure rates and maintenance needs, or customer decisions to replace rather than continue to repair and maintain aging hardware, which could result in a reduced need for our services in the future. Moreover, such rapid technological changes could adversely affect our ability to predict equipment failure rates and, therefore, to establish prices that provide adequate financial results. Similarly, new computer systems could be built based upon proprietary, as opposed to open, systems that cannot be serviced by us.

        THE FAILURE OF OUR SYSTEMS COULD NEGATIVELY IMPACT OUR BUSINESS AND OUR REPUTATION. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins, security breaches and similar events could damage our systems. Computer viruses, disgruntled or rogue employees, electronic break-ins or other similar disruptive problems, including those beyond our control, could also adversely affect our systems. Our business and reputation could be adversely affected if such systems were affected by any of these occurrences. Our existing or future insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. In order to prepare for certain types of system problems, we are developing a formal disaster recovery plan, however, there is no assurance that any disaster recovery plan which we might implement will protect us from all possible systems failures. Any system failure, including network, software or hardware failure, that causes a delay or interruption in our services could result in reduced revenue and harm to our reputation, brand and relations with our customers.

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        OUR PER INCIDENT REVENUES ARE VARIABLE. Per incident revenues, which consist primarily of revenues from services performed for customers on an as requested basis (e.g., projects, help desk services, parts repair, installations and moves, installation and de-installation of computer equipment), are subject to monthly variation due to the nature of per incident revenue transactions. It is difficult for us to estimate the impact or amount of future per incident revenues because per incident revenues are dependent on customer demand, which fluctuates based upon various factors such as competition and customers’ use of internal employees. We may not be able to generate significant amounts of per incident revenue in the future.

        WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT OR FUTURE COMPETITORS. Competition among hardware support service providers, both OEM’s and independent service organizations, is intense. We believe that a significant portion of industry hardware maintenance services is currently serviced by OEM service organizations. The remainder of the technology support services market is serviced by a small number of larger, independent companies, such as ourselves, offering a broader range of service capabilities, as well as numerous small companies focusing on narrower areas of expertise or serving limited geographic areas.

        In many instances, OEM service organizations have greater resources than us, and, because of their access to the OEM’s engineering data, may be able to respond more quickly to servicing equipment that incorporates new or emerging technologies. Moreover, some OEM’s do not make available to end-users or independent service organizations the technical information, repairable parts, diagnostics, information that relates to engineering changes and other support items required to service their products, and design and sell their products in a manner so as to make it virtually impossible for a third party to perform maintenance services without potentially infringing upon certain proprietary rights of the OEM. In addition, OEM’s are sometimes able to develop proprietary remote diagnostic or monitoring systems, which we may not be able to offer. Therefore, OEM service organizations sometimes have a cost and timing advantage over us because we must first develop or acquire from another party the required support items before we can provide services for that equipment. An OEM’s cost advantage, the unavailability of required support items or various proprietary rights of the OEM may preclude us from servicing certain products. Furthermore, OEM’s usually provide warranty coverage for new equipment for specified periods, during which it is not economically feasible for us to compete for the provision of maintenance services. To the extent that OEM’s choose, for marketing reasons or otherwise, to expand their warranty periods or terms, our business may be adversely affected.

        WE RELY ON SINGLE SUPPLIERS FOR SOME OF OUR INVENTORY. Spare parts purchases are made from OEM’s and other vendors. We, from time to time, will have only a single supplier for a particular part, which, in some cases, may be the OEM for such spare part. Should a supplier be unwilling or unable to supply any part or component in a timely manner, our business could be adversely affected.

        WE MAY NOT BE ABLE TO ACCURATELY PREDICT OUR INVENTORY REQUIREMENTS. In order to service our customers, we are required to maintain a high level of spare parts for extended periods of time. Any decrease in the demand for our maintenance services could result in a substantial portion of our spare parts becoming excess, obsolete or otherwise unusable. In addition, rapid changes in technology could render significant portions of our spare parts obsolete, thereby giving rise to write-offs and a reduction in financial results. Our inability to manage our spare parts or the need to write them off in the future could have a material adverse effect on our business, financial results and results of operations.

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        WE MAY BE SUBJECT TO UNFORESEEN DIFFICULTIES IN MANAGING CUSTOMERS’ EQUIPMENT. In some instances, we manage equipment on behalf of our customers. In these cases, we are required to adhere to specific service level agreements. Any negative variation from the contractual service level agreement could result in us having to reimburse the customer for the variance. As well, we could have to provide discounts to the customer for a negative variation in the specified service level.

        WE MAY FAIL TO PRICE FIXED FEE CONTRACTS ACCURATELY. Under some of our contracts, the customer pays a fixed fee for customized bundled services that are priced by us based on our best estimates of various factors, including estimated future equipment failure rates, cost of spare parts and labor expenses. There can be no assurance that we will be able to estimate these factors with sufficient accuracy in order to price these fixed fee contracts on terms favorable to us. Our failure to price these fixed fee contracts accurately could have a material adverse effect on our financial results.

RISKS RELATED TO OUR PAYMENTS BUSINESS

        The payments business is subject to a number of risks, which, should they materialize, can have a material adverse effect on our business, revenues, operating results and financial condition, including those set forth below:

        OUR PAYMENTS BUSINESS IS AT RISK OF LOSS DUE TO FRAUD AND DISPUTES. We face risks of loss due to fraud and disputes between consumers and merchants, including the unauthorized use of credit card and bank account information and identity theft, merchant fraud, disputes over the quality of goods and services, breaches of system security, employee fraud and use of our system for illegal or improper purposes.

        When a consumer pays a merchant for goods or services using a credit card and the cardholder disputes the charge, the amount of the disputed item gets charged back to us and the credit card associations may levy fees against us. Chargebacks may arise from the unauthorized use of a cardholder’s card number or from a cardholder’s claim that a merchant failed to perform. Chargebacks may also arise when a consumer pays a merchant for goods or services using a check and the financial institution returns the check. In addition, if our chargeback rate becomes excessive, credit card associations can also require us to pay fines and have done so in the past. There is no assurance that we will not be required to pay fines in the future and the amount of such fines may be material.

        In turn, we attempt to recover from the merchant the amount charged back and the amount of such fines, however, we may not always be successful in doing so, for reasons which could include merchant insolvency. We have taken measures to detect and reduce the risk of fraud, but cannot be assured of their total effectiveness.

        WE MAY NOT BE ABLE TO SAFEGUARD AGAINST SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS. Any inability on our part to protect the security and privacy of our electronic transactions could have a material adverse effect on our profitability. A security or privacy breach could:

• expose us to additional liability and to potentially costly litigation;
• increase expenses relating to resolution of these breaches;
• deter customers from using our products; and
• decrease market acceptance of electronic commerce transactions generally.

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        We cannot assure that the use of applications designed for data security and integrity will address changing technologies or the security and privacy concerns of existing and potential customers.

        OUR PAYMENT SYSTEM MIGHT BE USED FOR ILLEGAL OR IMPROPER PURPOSES. Despite measures that have been taken to detect and prevent identity theft, unauthorized uses of credit cards and similar misconduct, our payment systems remain susceptible to potentially illegal or improper uses. These may include illegal online gaming, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures that we have taken to detect and lessen the risk of this kind of conduct, we cannot be assured that these measures will succeed.

        WE MUST COMPLY WITH CREDIT CARD AND CHECK CLEARING ASSOCIATION RULES AND PRACTICES WHICH COULD IMPOSE ADDITIONAL COSTS AND BURDENS ON OUR PAYMENTS BUSINESS. As a registered party, we must comply with the operating rules of the Visa® and MasterCard® credit card associations and the National Automated Clearing House Association for checks. The associations’ members set these rules. The associations could adopt operating rules with which we might find it difficult or even impossible to comply.

        Furthermore, in cases of fraud or disputes between consumers and merchants, we face chargebacks when credit card holders dispute items for which they have been billed. If our chargebacks become excessive, our processing suppliers could fine us or terminate our ability to accept credit cards for payments. The termination of our relationship with credit card associations or acquiring banks would limit our ability to provide transaction-processing services.

        WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS THAT ARE ACCEPTED BY OUR CUSTOMERS. The success of our electronic payments operations depends upon acceptance of our technology. There can be no assurance that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and enhancements, or that our new products and enhancements will be introduced in a timely fashion or will adequately meet the requirements of the marketplace and achieve market acceptance.

        THE FAILURE OF OUR SYSTEMS, THE SYSTEMS OF THIRD PARTIES OR THE INTERNET COULD NEGATIVELY IMPACT OUR BUSINESS SYSTEMS AND OUR REPUTATION. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins, security breaches and similar events could damage our systems. Computer viruses, disgruntled or rogue employees, electronic break-ins or other similar disruptive problems, including those beyond our control, could also adversely affect our systems. Our business and reputation could be adversely affected if such systems were affected by any of these occurrences. Our existing or future insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

        In particular, depending on volume growth, we may need to expand and upgrade our technology, transaction-processing systems and network infrastructure. We could experience periodic temporary capacity constraints, which may cause unanticipated system disruptions, slower response times and lower levels of customer service. We may be unable to accurately project the rate or timing of increases, if any, in the use of our services or to expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner.

        Our success in our online business will depend, in large part, on other companies maintaining the Internet infrastructure. In particular, we will rely on the ability of Internet service providers (“ISPs”), telecommunication and other companies to maintain a reliable network backbone that provides adequate speed, data capacity and the infrastructure or complementary products and services necessary to establish and maintain the Internet as a viable commercial medium.

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        Users of electronic payment services are highly concerned about the security of transmissions over public networks. Individuals could possibly circumvent the measures that we take to protect customer transaction data. To the extent that our activities involve the storage and transmission of proprietary information, such as credit card or bank account numbers, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability.

        THE LEGAL STATUS OF INTERNET GAMING IS UNCERTAIN AND FUTURE REGULATION MAY MAKE IT COSTLY OR IMPOSSIBLE TO CONTINUE PROCESSING FOR GAMING MERCHANTS. As electronic commerce in general and most of the products and services that we offer are relatively new, the manner in which existing provincial, federal and foreign government regulations may be applied is uncertain and difficult to predict. Due to the relatively recent development of Internet gaming, there are few laws or regulations that deal directly with the payment processing of this application and there is uncertainty as to the legal status of Internet gaming. While some jurisdictions have taken the position that Internet gaming is legal and have adopted or are in the process of reviewing legislation to regulate Internet gaming in such jurisdictions, other jurisdictions have taken the opposite view and enacted legislation to attempt to restrict or prohibit Internet gaming. For example, in the United States for the past several years there have been conflicting efforts to clarify the status of Internet gaming. The impact of those efforts cannot be predicted. To date, no legislation on the subject has successfully passed the U.S. Congress and become law. Moreover, the impact of enactment of Internet gaming legislation would not necessarily be immediately apparent, as any new law addressing the funding of Internet gaming likely would require implementing regulations in order to take full effect. Those regulations may require some time to formulate and adopt. Should the United States government decide to enact legislation making the funding of Internet gaming activities by U.S. residents unlawful, it would have a significant negative impact on us. As a result, we have taken the initiative and continue to invest in the diversification of our revenue base towards the continued diminishing of our reliance on Internet gaming payments emanating from U.S. residents. Since we derive a substantial portion of our revenue from processing transactions for licensed Internet gaming, we may be exposed to governmental investigations and/or lawsuits initiated by the public in jurisdictions where Internet gaming is restricted or prohibited. Any adverse findings or rulings rendered against us in such jurisdictions could have a material adverse effect on our business, revenues, operating results and financial condition. This uncertainty could affect us indirectly through the effect experienced by our clients and on their revenues and directly in the event that we are restricted from conducting our activities, such as if the banks through which we settle our clients’ transactions terminate their agreements with us or significantly increase the costs to us for their services, or certain credit card issuing banks continue to reject Internet gaming transactions.

        WE FACE UNCERTAINTIES WITH REGARD TO LAWSUITS, REGULATIONS AND SIMILAR MATTERS. There is a risk that criminal and civil proceedings, including class actions brought by or on behalf of public entities or private individuals, could be initiated against us, ISPs, credit card processors and others involved in the Internet gaming industry. Any future legal proceedings against us relating to Internet gaming could involve substantial litigation expense, penalties, fines, injunctions or other prohibitions being invoked against us or our licensees or others and the diversion of the attention of key executives. The outcome of any litigation cannot be predicted.

        INCREASING GOVERNMENT REGULATION OF INTERNET COMMERCE COULD MAKE IT MORE COSTLY OR DIFFICULT TO CONTINUE OUR BUSINESS. As electronic commerce over the Internet develops, it may be the subject of increasing government regulation and there is a risk that well-established financial institutions and credit card companies will be able to influence the development of regulations in a manner which prioritizes their interests to our detriment. In addition, much of the current legislation relating to commercial transactions pre-dates and may be incompatible with Internet electronic commerce. There can be no assurance that regulators will not choose to enact or enforce legislation in a manner that would restrict our operations and other aspects of the electronic commerce market. Moreover, it may take years to determine the extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal privacy are applicable to the Internet.

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        Existing legislation in Canada, the United States and abroad regulates communications or commerce specifically; however, the application of such laws in the context of the Internet and electronic commerce is uncertain. Laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation and the characteristics and quality of online products and services are under consideration by federal, provincial, state, local and foreign governments and agencies.

        In Canada, the Personal Information Protection and Electronic Documents Act was passed into law by the federal government effective January 1, 2001. Currently, this law regulates the inter-provincial collection, use and disclosure of personal information. This law is in addition to several provincial laws covering the same subject matter within a province currently in force or being considered.

        In the United States, several telecommunication companies have petitioned the Federal Communications Commission to regulate ISPs and online service providers. The Federal Trade Commission and government agencies in certain states of the United States have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if any new regulations regarding the use of personal information are introduced affecting the way in which we do business or if these agencies choose to investigate our privacy practices.

        Any new laws or regulations relating to the Internet, or particular applications or interpretations of existing laws, could decrease the growth in the use of the Internet, decrease the demand for our electronic commerce services, or increase the costs associated with providing such services or transmitting data over the Internet and generally stunt the development of the Internet and our growth.

        WE RELY ON STRATEGIC RELATIONSHIPS AND SUPPLIERS. We have established and will continue to establish relationships with strategic partners and suppliers to help supply, promote and distribute our products and services. We are dependent upon maintaining as well as creating these relationships with strategic partners and suppliers, especially strategic banking relationships. The credit card companies and financial institutions on whom we rely in order to process our electronic transactions have adopted guidelines for the processing of transactions, including gaming transactions. We believe that our operations comply in all material respects with these guidelines. However, credit card companies and financial institutions could nonetheless decide in the future to refuse to process transactions for us or to process online gaming transactions generally. Any such decision, when made by a particular credit card company or financial institution, could be implemented with little or no advance notice to us. Should we not be able to conclude alternative arrangements with other credit card companies or financial institutions within the delays imposed by any such termination, or at all, our ability to carry out payment transactions would be impaired and we may not then be able to continue to carry on our business.

        IT MAY BE COSTLY AND/OR TIME-CONSUMING TO ENFORCE OUR RIGHTS WITH RESPECT TO ASSETS HELD IN FOREIGN JURISDICTIONS. Certain of our suppliers’ processing agreements require us to maintain cash reserves with such supplier. In some instances, these suppliers are located in overseas jurisdictions including the Caribbean and Europe. Should such a processing supplier not release our reserves in accordance with contractual requirements, we would be required to take legal action within that foreign jurisdiction. Any delay or inability in obtaining the funds held as reserve and the diversion of resources required to pursue the funds could negatively impact our financial condition and results of operations.

        OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS KEY TO OUR FUTURE GROWTH. We rely primarily upon a combination of copyright, trademark and trade secret laws, non-disclosure and release of interest in intellectual property agreements and license agreements to establish and protect proprietary rights in our products and technology. The source codes for our products and technology are protected both as trade secrets and as unpublished, unregistered copyrighted works; however, we currently have no patents for our products and technology.

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        Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently. Policing unauthorized use of our products and services is and will continue to be difficult, particularly in the global environment in which we operate, and the laws of other jurisdictions may afford us little or no effective protection of our intellectual property. The global nature of the Internet will make it difficult to control the ultimate destinations of our products or services. We rely in part on “on-screen” licenses, which are not manually signed by end-users and, therefore, may be unenforceable under some laws. There is no assurance that any steps taken by us will prevent others from misappropriating our technology. We may engage in litigation related to our intellectual property; however, such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.

        In addition, there is no assurance that our products and services are not within the scope of intellectual property rights held by others, either now or in the future. If any claims are asserted, we may seek to obtain a license under a third party’s intellectual property rights. There can be no assurance that such a license would be available on reasonable terms or at all. We may also decide to defend against a claim of infringement; but litigation, even if successful, is costly and may have a material adverse effect on us regardless of the eventual outcome.

        WE OPERATE IN A COMPETITIVE MARKET FOR OUR PRODUCTS AND SERVICES. Potential competitors to our electronic commerce solutions include credit card companies, banks, payment processors and other entities, any of which may have greater financial resources, an entrenched position in the market or greater brand recognition. These potential competitors may be able to require that their own technology, rather than the technology of others, including our own, be used in connection with their payment mechanisms. Furthermore, the barriers to entry into most Internet markets, including the electronic commerce segments, are relatively low, making them accessible to a wide number of entities. Therefore, competition is likely to intensify as our market develops and matures, which could result in price reductions, reduced margins or loss of market share.

        Furthermore, there can be no assurance that we will be able to identify, develop, manufacture, market or support new products or offer new services successfully, that such new products or services will gain market acceptance, or that we will be able to respond effectively to technological changes or product announcements by competitors. Any failure by us to anticipate or respond adequately to technological developments and customer requirements or any significant delays in product developments or introductions could result in a loss of market share or revenues.

        There can be no assurance that our competitors will not develop technologies and products that are as or more effective and efficient than our products or that our technologies and products will not be rendered obsolete by such developments. As well, there can be no assurance that other companies with greater financial and technological resources will not develop electronic commerce technologies for the Internet with similar or better capabilities than our products or that we will be able to compete successfully against existing competitors or future entrants into the market. Products developed by competitors may achieve greater market acceptance than our products.

        WE RELY UPON INDEPENDENT SALES AGENTS TO RETAIN AND ACQUIRE OUR CUSTOMERS. In addition to our internal sales and marketing efforts, we rely upon independent sales agents to retain and acquire customers. Our arrangements with these independent sales agents are non-exclusive. Any failure by us to maintain our relationships with our independent sales agents could negatively impact our results of operations.

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       OUR BUSINESS SYSTEMS ARE BASED ON SOPHISTICATED TECHNOLOGY WHICH MAY BE NEGATIVELY AFFECTED BY TECHNOLOGICAL DEFECTS AND PRODUCT DEVELOPMENT DELAYS. Products and services based on sophisticated technology and computing systems often encounter development delays, and the underlying technology may contain undetected errors or failures when introduced or when the volume of services provided increases. We may experience delays in the development of our products, or the technology and computing systems underlying our services, such as our transaction processing services. In addition, despite testing, it is possible that our technology may nevertheless contain errors, and this could delay product launches and innovations and damage customer relations.

        WE RELY UPON ENCRYPTION TECHNOLOGY TO CONDUCT SECURE ELECTRONIC COMMERCE TRANSACTIONS. A significant barrier to electronic commerce and communication is the secure transmission of confidential information over public networks. Our electronic commerce software uses encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. Despite the fact that we strive to make use of proven applications for premium data security and integrity to process electronic transactions, there can be no assurance that use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential clients. A security or privacy breach may cause our clients to lose confidence in our services, deter clients from using our services, harm our reputation, expose us to liability, increase our expenses from potential remediation costs and decrease market acceptance and growth of our product offerings.

        OUR ABILITY TO PROCESS ELECTRONIC TRANSACTIONS DEPENDS ON BANK PROCESSING AND CREDIT CARD SYSTEMS. These systems and operations are vulnerable to damage or interruption from human error, natural disasters, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. In order to prepare for certain types of system problems, we have developed and are testing a formal disaster recovery plan, however, there is no assurance that any disaster recovery plan which we might implement will protect us from all possible systems failures. Any system failure, including network, software or hardware failure, that causes a delay or interruption in our electronic payment services could result in reduced use, reduced revenue and harm to our reputation, brand and relations with merchants and end-users.

        Delayed response times and interruptions in service associated with our electronic transaction processing, including delays or interruptions relating to high volumes of traffic or technological problems, may result in a loss of merchants and end-users using our electronic payment software for transaction processing.

        WE ARE SUBJECT TO EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. AND CANADIAN DOLLARS. The majority of our revenues are generated in U.S. dollars and a significant portion of our expenses is incurred in Canadian dollars. Any fluctuation in the value of the Canadian dollar relative to the U.S. dollar may result in variations in our revenues and earnings. We have not implemented a currency hedging program.

        WE MAY BE SUBJECT TO LIABILITY OR BUSINESS INTERRUPTION AS A RESULT OF UNAUTHORIZED DISCLOSURE OF MERCHANT AND CARDHOLDER DATA THAT WE STORE. We collect and store sensitive data about merchants and cardholders, including names, addresses, social security numbers, drivers’ license numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, we maintain a database of cardholder data relating to specific transactions, including payment card numbers and cardholder addresses, in order to process the transactions and for fraud prevention and other internal processes. If a person penetrates our network security or otherwise misappropriates sensitive merchant or cardholder data, we could be subject to liability or business interruption.

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       Although we require that our agreements with service providers who have access to merchant and customer data include confidentiality obligations that restrict these parties from using or disclosing any customer or merchant data except as necessary to perform their services under the applicable agreements, there can be no assurance that these contractual measures will prevent the unauthorized disclosure of merchant or customer data. In addition, our agreements with financial institutions require us to take certain protective measures to ensure the confidentiality of merchant and consumer data. Any failure to adequately take these protective measures could result in protracted or costly litigation.

        OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IN GENERAL BUSINESS CONDITIONS. General economic conditions have caused some of the merchants we serve to experience difficulty in supporting their current operations and implementing their business plans. If these merchants make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenues.

        In addition, in a recessionary environment, the merchants we serve could be subject to a higher rate of insolvency, which could adversely affect us financially. We bear credit risk for chargebacks related to billing disputes between credit card holders and bankrupt merchants. If a merchant seeks relief under bankruptcy laws or is otherwise unable or unwilling to pay, we may be liable for the full transaction amount of a chargeback.

RISKS RELATED TO OUR OPERATION OF THE U-SCAN(R)SELF-CHECKOUT BUSINESS

        WE MAY BE SUBJECT TO ADDITIONAL LITIGATION STEMMING FROM OUR OPERATION OF THE U-SCAN® SELF-CHECKOUT BUSINESS. We recently settled an action alleging that the U-Scan® self-checkout systems that we marketed infringed upon the claimant’s patent. A second party has sent demand letters to us alleging a different patent infringement (see Part II — Other Information; Item 1 – Legal Proceedings). We may in the future be subject to other litigation, which relates to our having carried on the self-checkout business. Litigation may be time consuming, expensive and distracting from the conduct of our current businesses, and the outcome of litigation is difficult to predict. The adverse resolution of any specific lawsuit could have a material adverse effect on our business, results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        There have been no material changes to the disclosures of market risk, as contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

        As of September 30, 2004 (the “Evaluation Date”), under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

        Additionally, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control during our most recent fiscal quarter.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        We received a demand letter in 1999, and again in February 2001 from the same party, alleging a patent infringement related to the U-Scan® self-checkout business that we were operating at that time. In March 2003, this party sent a third demand letter to us alleging infringement of additional patents. Although, after consultation with counsel, we believe that this claimant should not prevail if a lawsuit is brought to assert its claims and that the assertion of these claims will not have a material adverse effect on our business or prospects, no assurance can be given that a court will not find that the U-Scan® self-checkout system infringes upon such claimant’s rights. We sold our self-checkout business on April 8, 2004, and no longer market or sell the U-Scan® self-checkout system.

        In connection with the sale of our U-Scan® self-checkout business on April 8, 2004 to Fujitsu Transaction Solutions Inc., orders were obtained from the Superior Court of Quebec permitting us to submit the sale to Fujitsu to our shareholders for approval in lieu of the originally proposed sale to NCR Corporation. NCR is seeking to appeal these decisions. Although we believe that these appeals should not prevail, no assurance can be given that the Court of Appeal of Quebec will not overturn the Superior Court’s decisions. Should NCR succeed in its appeal, it could result in a material adverse consequence to us. NCR has also delivered a notice of dispute under its now terminated purchase agreement alleging a breach by us of the non-solicitation provisions of that agreement. We believe that such allegations are without merit and intend to vigorously defend ourselves in any arbitration proceedings that may ensue. We believe that, even if NCR were successful in any such arbitration proceedings, it would not result in any material adverse consequence to us.

        We are also party to litigation arising in the normal course of operations. We do not expect the resolution of such matters to have a materially adverse effect on our financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

        On July 16, 2004, we issued 18,128 common shares as a result of the exercise of a warrant. The proceeds of approximately $0.1 million will be used for general corporate purposes. The holder of the warrant was not located in the United States and was not a “U.S. Person” within the meaning of Regulation S, and, accordingly, the issuance of common shares pursuant to the exercise of the warrant was not subject to the registration requirements of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

        The registrant has nothing to report under this item.

Item 4. Submission of Matters to a Vote of Security Holders

        The registrant has nothing to report under this item.

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Item 5. Other Information

Reporting Status

        We were a foreign private issuer under the rules and regulations of the Commission as of September 30, 2004. As in the past, we intend to voluntarily file annual reports on Form 10-K and quarterly reports on Form 10-Q.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number

Exhibit

10.22          31.1   31.2   32.1          32.2

Asset Purchase Agreement among Optimal Payments Corp. and NPS Holdings LLC, NPS Manager, Inc. and The Members of NPS Holdings LLC* (a) Certification relating to the originally filed third quarter 2004 Form 10-Q of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* (b)  Certification relating to the originally filed third quarter 2004 Form 10-Q for the period ended September 30, 2004, as amended by Form 10-Q/A (Amendment No. 1) of the Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (a) Certification relating to the originally filed third quarter 2004 Form 10-Q of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* (b) Certification relating to the originally filed third quarter 2004 Form 10-Q for the period ended September 30, 2004, as amended by Form 10-Q/A (Amendment No. 1) of the Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (a) Certification  relating to the originally filed third quarter 2004 Form 10-Q of the Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* (b) Certification  relating to the originally filed third quarter 2004 Form 10-Q for the period ended September 30, 2004, as amended by Form 10-Q/A (Amendment No. 1) of the Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (a) Certification  relating to the originally filed third quarter 2004 Form 10-Q of the Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* ">  (b) Certification  relating to the originally filed third quarter 2004 Form 10-Q for the period ended September 30, 2004, as amended by Form 10-Q/A (Amendment No. 1) of the Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed for the three-month period ended September 30, 2004.

1.
2.
3.
4. Form 8-K furnished to the Commission on July 2, 2004 (Item 9)*
Form 8-K furnished to the Commission on August 2, 2004 (Item 9)*
Form 8-K furnished to the Commission on September 27, 2004 (Item 7.01)*
Form 8-K furnished to the Commission on September 30, 2004 (Item 7.01)*  

* Filed with Originally Filed First Quarter 2004 10-Q

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 5, 2004

         OPTIMAL GROUP INC.



By: /s/ Holden L. Ostrin
      -------------------------------------------------
            Holden L. Ostrin
            Co-Chairman


By: /s/ Gary S. Wechsler
      -------------------------------------------------
            Gary S. Wechsler
            Treasurer and Chief Financial
            Officer

EX-10

EXHIBIT 10.22

align=right>Confidential
EXECUTION COPY

PURCHASE AGREEMENT

by and among

OPTIMAL PAYMENTS CORP.

and

NPS HOLDINGS LLC,

NPS MANAGER, INC., and

THE MEMBERS OF NPS HOLDINGS LLC,

dated as of

June 18, 2004

TABLE OF CONTENTS

		Page
SECTION 1.          1.1.          1.2.          1.3.          1.4.          1.5.          1.6.          1.7.          1.8. SECTION 2.          2.1.          2.2.          2.3.          2.4.          2.5.          2.6.          2.7.          2.8.          2.9.          2.10.          2.11.          2.12.          2.13.          2.14.          2.15.          2.16.          2.17.          2.18.          2.19.          2.20.          2.21.          2.22.          2.23.          2.24.          2.25.          2.26.          2.27.          2.28. SECTION 3.          3.1.          3.2.          3.3.          3.4.          3.5.          3.6. SECTION 4.          4.1.          4.2.          4.3.          4.4.          4.5.          4.6.          4.7.          4.8.          4.9.          4.10. SECTION 5.          5.1.          5.2.          5.3.          5.4.          5.5.          5.6.          5.7.          5.8.          5.9.          5.10.          5.11. SECTION 6.          6.1.          6.2. SECTION 7.          7.1.          7.2.          7.3.          7.4.          7.5.          7.6.          7.7.          7.8. SECTION 8.          8.1.          8.2.          8.3. SECTION 9.          9.1.          9.2. SECTION 10.          10.1.          10.2.          10.3.          10.4.          10.5.          10.6.          10.7.          10.8.          10.9.          10.10.          10.11.          10.12.          10.13.          10.14.          10.15. SECTION 11.	Sale and Transfer of Membership Interests; Closing Membership Interests Purchase Price Closing Actions and Deliveries at the Closing Adjustment Amount Adjustment Procedure Revenue Adjustment Holdback Amount     Representations and Warranties of Sellers Organization and Good Standing; Qualifications Power and Authority; Authorization of the Transaction Documents No Conflicts; Consents Capitalization Subsidiaries Minute Books Disclosure; Financial Statements Absence of Undisclosed Liabilities; Off-Balance Sheet Arrangements Absence of Changes Litigation Compliance with Laws; Governmental Permits Agreements Notes and Accounts Receivable Acquisitions and Dispositions Suitability Related Party Transactions Powers of Attorney Intellectual Property Matters Personal Property; Real Property Environmental Protections Employee Benefit Plans Labor Relations; Employees Taxes Insurance Suppliers and Customers Brokers Guaranties Disclosure     Representations and Warranties of Buyer Organization, Authorization No Conflicts Investment; Securities Laws Accredited Investor No Consents Brokers; Commissions     Pre-Closing Covenants General Notices and Consents Operation of Business Maintain Books Full Access Notice of Developments Exclusivity Compliance with Laws; Notification Taxes Insurance     Post-Closing Covenants General Litigation Support Transition iPayment Confidentiality Agreement Name Change Amendments Confidentiality Agreements Confidentiality Non-Competition and Non-Solicitation Reasonableness of Restrictions; Severability Injunctive Relief Equitable Tolling     Conditions to Obligation to Close Conditions to Obligation of Buyer Conditions to Obligation of Sellers     Survival; Indemnification Survival Indemnification Indemnification Principles Remedies Minimization of Losses Representative Consent Release     Tax Matters Tax Periods Ending on or Before the Closing Date Tax Periods Beginning Before and Ending after the Closing Date Cooperation on Tax Matters..     Termination Termination of Agreement Effect of Termination     Miscellaneous Expenses Certain Taxes Disclosures; Press Releases Further Assurances Successors and Assigns Entire Agreement Notices Limitations of Representations and Warranties; Disclosure Amendments Incorporation of Exhibits and Schedules Headings, Titles and Subtitles; Rules of Construction Governing Law Specific Performance Severability Counterparts     Certain Definitions	2 2 2 2 2 5 5 6 6 7 7 7 7 8 8 9 9 9 10 11 12 12 13 13 13 14 14 14 15 16 17 18 18 20 20 20 20 20 20 20 21 21 21 21 21 21 21 21 22 22 22 22 22 23 23 23 23 23 23 23 24 24 24 24 26 27 27 27 27 27 28 29 29 29 31 32 32 32 33 33 34 34 34 34 35 35 35 36 36 36 36 36 36 37 37 38 38 38 39 39 39 39 39 40

INDEX OF DEFINED TERMS

Term	Section
Accountants	1.6
ACM	11
Acquisitions	2.14(a)
Adjustment Amount	1.5
Affiliate	11
Agreement	Preamble
Ammori	Preamble
Assignment	1.4(a)(i)
Base Revenue	1.7
Benefit Plan	11
Business	5.8(a)
Buyer	Preamble
Cap	7.2(g)
Chase	1.4(a)(ix)
Claims	7.8
Claim Notice	7.2(f)
Closing	1.3
Closing Actions and Deliveries	1.4
Closing Date	1.3
Closing Financial Statements	1.6
Closing Purchase Price	1.4(b)(i)
Code	2.21(b)
Company	Preamble
Company Intellectual Property	11
Confidentiality Agreements	5.6
Confidential Information	5.7(b)
Contract	2.12(a)
Current Activities	5.8(e)
Customer	11
Dispositions	2.14(b)
Earned Residuals	1.2
Employee	11
Employment Agreement	11
Encumbrances	11
Environmental Laws	11
Environmental Matter	11
Environmental Permits	2.20(a)
ERISA	11
ERISA Affiliate	11
Event	11
Exchange Act	2.16
Excluded Claims	1.4(a)(vii)
Expression of Interest	Recitals
Financial Statements	2.7(b)
GAAP	2.7(b)
Governmental Authority	2.11
Governmental Permit	2.11
Hazardous Substances	11
HMO	2.21(e)
Holdback Amount	1.4(b)(i)
Holdings	Preamble
HSR Act	11
Indebtedness	1.4(a)(ii)
indemnified party	7.2(f)
indemnifying party	7.2(f)
Intellectual Property Rights	11
Interest	11
Interim Financial Statements	2.7(b)
iPayment Confidentiality Agreement	1.4(a)(viii)
Largest Suppliers and Customers	2.25
Law	2.3
Leased Real Property	2.19(b)
Litigation	2.10
Losses	7.3
Manager	Preamble
Material Adverse Effect	2.9(a)
Material Contracts	2.12(b)
Merger	Recitals
MSUSA	Recitals
Membership Interest	Recitals
Minimum Revenue	1.7
Nafso	Preamble
Net Current Assets	1.5
Net Revenues	11
NPS Entities	11
Other Members	Preamble
off-balance sheet arrangements	11
Order	2.3
PCBs	11
Permitted Encumbrances	2.19(a)
Person	11
Post-Closing Liabilities	7.2(d)
PPS	5.8(e)
Pre-Closing Liabilities	7.2(c)
Principals	Preamble
Proprietary Information	5.7(c)
Purchase Price	1.2
Referral Agreements	1.4(a)(iii)
Releasee(s)	7.8
Representative	7.6
Restrictive Period	5.8(a)
Revenue Adjustment	1.7
Securities Act	11
Seller(s)	Preamble
Senior Credit Facility	1.4(a)(ii)
Subsidiary	11
Target Period	1.7
Target Revenue	1.7
Tax	2.23(e)
Tax Return	2.23(e)
Taxes	2.23(e)
Territory	5.8(a)
Threshold	7.2(g)
Trade Secrets	5.7(a)
Transaction Documents	2.2
to the knowledge of Sellers	11
Unaudited Financial Statements	2.7(b)
USCCP	Recitals
Yaldoo	Preamble
Yaldoo Employment Agreement	1.4(a)(iv)

PURCHASE AGREEMENT

        THIS PURCHASE AGREEMENT (this “Agreement”), dated as of June 18, 2004, by and among OPTIMAL PAYMENTS CORP., a Delaware corporation (“Buyer”), NPS HOLDINGS LLC, a Michigan limited liability company (“Holdings”), NPS MANAGER, INC., a Michigan corporation (“Manager”), LAITH YALDOO (“Yaldoo”), AJ NAFSO (“Nafso”) and SABER AMMORI (“Ammori”, and collectively with Yaldoo and Nafso, the “Principals”) and the other members of Holdings specified on Schedule 2.4(b) (collectively, the “Other Members”) relating to the sale of 100 percent of the outstanding limited liability company membership interests of NATIONAL PROCESSING SERVICES LLC, a Michigan limited liability company (the “Company”). Holdings, Manager, the Principals and the Other Members are sometimes referred to herein individually as a “Seller” and collectively as “Sellers.” An index of defined terms appears in the Table of Contents hereto.

W I T N E S S E T H:

        WHEREAS, Holdings is the record and beneficial owner of all of the issued and outstanding limited liability company membership interests of the Company (the “Membership Interests”);

        WHEREAS, the Principals are the founding and controlling members of Holdings;

        WHEREAS, Merchant Services USA LLC, a Michigan limited liability company (“MSUSA”), and US Credit Card Processing LLC, a Michigan limited liability company (“USCCP”), are wholly owned by Holdings;

        WHEREAS, Manager is controlled and majority owned by the Principals and is the manager of Holdings, the Company, MSUSA and USCCP;

        WHEREAS, Sellers and Buyer entered into that certain letter agreement dated April 19, 2004 (the “Expression of Interest”) regarding the proposed purchase by Buyer of 100% of the equity interests of the Company, MSUSA and USCCP;

        WHEREAS, upon the terms and conditions hereinafter set forth, Sellers desire to sell, and Buyer desires to purchase, all of the Membership Interests; and

        WHEREAS, prior to the consummation of the sale and transfer of the Membership Interests to Buyer pursuant to this Agreement, Sellers will merge MSUSA and USCCP into the Company (the “Merger”);

        NOW, THEREFORE, in reliance upon the representations and warranties made herein and in consideration of the foregoing and the mutual premises and agreements herein contained, the parties hereto, intending to be bound hereby, agree as follows:

SECTION 1.        Sale and Transfer of Membership Interests; Closing.

1.1.     Membership Interests. Subject to the terms and conditions of this Agreement, at the Closing, Holdings will sell and transfer the Membership Interests, free and clear of all Encumbrances, to Buyer, and Buyer will purchase the Membership Interests from Holdings.

1.2.     Purchase Price. The purchase price (the “Purchase Price”) for the Membership Interests will be US$15,000,000 plus the Adjustment Amount. The Purchase Price shall be allocated among the assets of the Company in the manner set forth on Schedule 1.2. In addition, Buyer will pay to Holdings all Earned Residuals (as defined below) as soon as practicable after receipt thereof. For purposes hereof, the term “Earned Residuals” means all gross residuals or commissions received or earned by the Company after the Closing Date as a result of, or relating to, credit card processing, debit card processing or electronic check processing transactions occurring prior to the Closing (including any post-Closing adjustment by a third-party resulting from an incorrect underpayment made to the Company prior to the Closing); provided, however, Holdings shall be solely responsible for the payment of all commissions payable by the Company to employees and agents on such Earned Residuals even if the payment of such commissions is due prior to the receipt of the Earned Residuals by Holdings.

1.3.     Closing. The purchase and sale (the “Closing”) provided for in this Agreement will take place at the offices of Buyer’s counsel at 75 East 55th Street, New York, New York 10022, 10:00 a.m. (local time) on the later of (a) July 1, 2004 or (b) at such other time and place as the parties may agree (the date on which the Closing occurs being referred to herein as the “Closing Date”). Subject to the provisions of Section 9, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 1.3 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement.

1.4.     Actions and Deliveries at the Closing. Simultaneously with, or prior to, the Closing, the following actions and deliveries shall have occurred (the “Closing Actions and Deliveries”):

(a)     Sellers’ Closing Actions and Deliveries. Sellers shall take the following actions and deliver to Buyer:

(i)     Assignment of Membership Interests. An assignment of the Membership Interests to Buyer substantially in the form attached hereto as Exhibit A, duly executed by Holdings (the “Assignment”).

(ii)     Indebtedness. Payoff of all indebtedness for borrowed money of the NPS Entities (collectively, the “Indebtedness”), including the senior credit facility from The Huntington National Bank (the “Senior Credit Facility”), and any prepayment penalties or other fees and expenses associated with such payoffs, and delivery of evidence of payoff of all Indebtedness and release of all Encumbrances related to such Indebtedness in form and substance reasonably satisfactory to Buyer. In the event that all Indebtedness it is not fully paid and discharged before the Closing Date, such Indebtedness, together with all associated costs, will be paid out of the Purchase Price on the Closing Date.

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(iii)     Referral Agreements. Payoff of any required buyout of commissions under the marketing/referral agreements set forth on Schedule 2.12(a) (the “Referral Agreements”) and delivery of evidence of such payoffs in form and substance reasonably satisfactory to Buyer.

(iv)     Yaldoo Employment Agreement. An employment agreement substantially in the form attached hereto as Exhibit B, duly executed by Laith Yaldoo (the “Yaldoo Employment Agreement”).

(v)     Merger. Consummation of the Merger, as evidenced by the delivery to Buyer of a certified copy of the Certificate of Merger filed with the Michigan Department of Consumer and Industry Services.

(vi)     Resignation of Manager. Resignation of Manager as the manager of the Company, MSUSA and USCCP, as evidenced by the delivery to Buyer of a duly executed notice of resignation, effective on the Closing Date, from Manager to each of the Company, MSUSA and USCCP in form and substance reasonably satisfactory to Buyer.

(vii)     Assignment and Assumption Agreement. An assignment and assumption agreement substantially in the form attached hereto as Exhibit C, duly executed by the Company and Holdings with respect to certain excluded accounts receivable and claims of the Company set forth on Schedule 1.4(a)(vii) attached hereto (collectively, the “Excluded Claims”).

(viii)     iPayment Confidentiality Agreement. An assignment to Buyer (to the extent assignable) of all of Holdings’ rights under the Confidentiality Agreement dated as of September 8, 2003 by and between Holdings and iPayment, Inc. (the “iPayment Confidentiality Agreement”) in form and substance reasonably satisfactory to Buyer.

(ix)     Chase Comfort Letter. A letter from Chase Merchant Services LLC (“Chase”) substantially in the form attached hereto as Exhibit D.

(x)     Consents and Governmental Permits. All consents, authorizations, approvals and Governmental Permits required to be obtained by Sellers in order to consummate the transactions contemplated by the Transaction Documents, including those set forth on Schedule 2.3 and those to be obtained pursuant to Section 4.2.

(xi)     Good Standing Certificates. Each of the NPS Entities shall have delivered to Buyer a long form certificate of good standing dated as of the most recent practicable date prior to the Closing from the Michigan Department of Consumer and Industry Services and from the Secretary of State of each state where each is registered as a foreign entity to the effect that each is legally existing and in good standing.

(xii)     Manager’s Certificates. Manager shall have delivered to Buyer a certificate for each of Holdings and the Company, substantially in the form attached hereto as Exhibit E-1 and Exhibit E-2, respectively, duly executed by Manager dated as of the Closing Date, certifying the following matters: (A) Articles of Organization, (B) Operating Agreement, (C) resolutions of Manager and resolutions or approvals of the members of Holding and the Company authorizing the execution, delivery and performance by Holdings and the Company of each of the Transaction Documents to which each is a party, (D) good standing certificates, and (E) list of members, managers and officers.

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(xiii)     Officer’s Certificate. Manager shall have delivered to Buyer a certificate, substantially in the form attached hereto as Exhibit F, duly executed by the Secretary of Manager dated as of the Closing Date, certifying the following matters: (A) Articles of Incorporation, (B) Bylaws, (C) resolutions of the board of directors and resolutions or approvals of the shareholders authorizing the execution, delivery and performance by Manager of each of the Transaction Documents to which it is a party, (D) good standing certificates, and (E) list of shareholders, directors and officers.

(xiv)     Closing Certificate. A certificate substantially in the form attached hereto as Exhibit G, duly executed by the Principals representing and warranting to Buyer that each of Sellers’ representations and warranties in this Agreement was accurate in all respects as of the date of this Agreement and is accurate in all material respects as of the Closing Date as if made on the Closing Date (giving effect to any supplements to the disclosure Schedules that were delivered to Buyer prior to the Closing in accordance with Section 4.6) and that Sellers have performed and complied with all of the terms, provisions and conditions to be performed and complied with by Sellers at or before the Closing.

(xv)     Opinion of Counsel. Buyer shall have received opinions, addressed to Buyer, dated as of the Closing Date, reasonably satisfactory in form and substance to Buyer from Jaffe, Raitt, Heuer & Weiss, P.C., counsel for Sellers and the Company, substantially in the form attached hereto as Exhibit H.

(xvi)     Joinder Agreement. Each of the Other Members shall have executed an appropriate joinder agreement, in form and substance reasonably satisfactory to the Principals and Buyer, agreeing to be bound by all of the terms of this Agreement.

(b)     Buyer’s Closing Actions and Deliveries. Buyer shall take the following actions and deliver to Sellers:

(i)     Closing Purchase Price. The Purchase Price minus US$3,000,000 (the “Holdback Amount”) by bank cashier’s or certified check payable to the order of Holdings, or by wire transfer of immediately available funds to an account specified by Holdings (the “Closing Purchase Price”).

(ii)     Consents and Governmental Permits. All consents, authorizations, approvals and Governmental Permits required to obtained by Buyer in order to consummate the transactions contemplated by the Transaction Documents;

(iii)     Secretary’s Certificate. Buyer shall have delivered to Holdings a certificate, substantially in the form attached hereto as Exhibit I, duly executed by its corporate secretary dated as of the Closing Date, certifying the following matters: (A) Certificate of Incorporation, (B) Bylaws, (C) resolutions of the board of directors of Buyer authorizing the execution, delivery and performance by Buyer of each of the Transaction Documents to which it is a party, and (D) good standing certificate.

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(iv)     Closing Certificate. A certificate substantially in the form attached hereto as Exhibit J, duly executed by Buyer to the effect that each of Buyer’s representations and warranties in this Agreement was accurate in all respects as of the date of this Agreement and is accurate in all respects as of the Closing Date as if made on the Closing Date and that Buyer has performed and complied with all of the terms, provisions and conditions to be performed and complied with by Buyer at or before the Closing.

(v)     Yaldoo Employment Agreement. The Yaldoo Employment Agreement, duly executed by Buyer and Yaldoo.

1.5.     Adjustment Amount. The Adjustment Amount (which may be a positive or negative number) will be equal to (a) the Net Current Assets of the Company (after taking into effect the Merger) as of the Closing Date determined in accordance with this Agreement, minus (b) US$118,378.00 (the “Adjustment Amount”). As used in this Agreement, “Net Current Assets” means: (i) current assets, which shall include only cash, cash equivalents, bona fide prepaid expenses, and accounts receivable aged under ninety (90) days, but excluding the Earned Residuals; less (ii) current liabilities, including all accrued liabilities, accounts payable, commissions and salary payable (other than those payable by Holdings pursuant to Section 1.2 in connection with the Earned Residuals), but excluding the current portion of any long term Indebtedness.

1.6.     Adjustment Procedure. Sellers will prepare financial statements (“Closing Financial Statements”) of the Company in accordance with GAAP (as defined in Section 2.7(b)) as of the Closing Date and for the period from April 30, 2004 through the Closing Date, including a computation of Net Current Assets of the Company as of the Closing Date. Sellers will deliver the Closing Financial Statements to Buyer within seventy-five (75) days after the Closing Date. If within thirty (30) days following delivery of the Closing Financial Statements, Buyer has not given Sellers notice of its objection to the Closing Financial Statements (such notice must contain a reasonably detailed statement of the basis of Buyer’s objection), then the Net Current Assets reflected in the Closing Financial Statements will be used in computing the Adjustment Amount. If Buyer gives such notice of objection, then the issues in dispute will be submitted to independent certified public accountants not currently engaged by Holdings, Buyer or their respective Affiliates (the “Accountants”) for resolution. If issues in dispute are submitted to the Accountants for resolution, (a) each party will furnish to the Accountants such workpapers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), and will be afforded the opportunity to present to the Accountants any material relating to the determination and to discuss the determination with the Accountants; (b) the determination by the Accountants, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties; and (c) Buyer and Holdings will each bear 50% of the fees of the Accountants for such determination. On the tenth business day following the final determination of the Adjustment Amount, if the Purchase Price is greater than US$15,000,000, Buyer will pay the difference to Holdings, and if the Purchase Price is less than such amount, Holdings will pay the difference to Buyer. All payments of the Adjustment Amount will be made together with Interest beginning on the Closing Date and ending on the date of payment. Payments must be made in immediately available funds. Payments to Holdings must be made in the manner set forth in Section 1.4(b)(i). Payments to Buyer must be made by wire transfer to such bank account as Buyer will specify. The recipient of the Interest shall pay any income Taxes on such amount.

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1.7.     Revenue Adjustment. In addition to the Adjustment Amount, if any, the Purchase Price shall be adjusted (the “Revenue Adjustment”) as follows: (a) if the aggregate average monthly Net Revenues earned by the Company, USCCP and MSUSA (the “Target Revenue”) for the months of May, June, July and August of 2004 (the “Target Period”) is at least 90% of the aggregate Net Revenues earned by the Company, USCCP and MSUSA for the month of April 2004 (the “Base Revenue”), then there shall be no adjustment to the Purchase Price, (b) if the Target Revenue for the Target Period is equal to or less than US$222,659.72 (the “Minimum Revenue”), then the Purchase Price shall be reduced by US$2,500,0000, or (c) if the Target Revenue for the Target Period is greater than the Minimum Revenue but less than 90% of the Base Revenue, then the Purchase Price shall be reduced by the product of (i) US$2,500,000 multiplied by (ii) the Target Revenue for the Target Period minus the Minimum Revenue divided by (iii) the Base Revenue minus the Minimum Revenue. The Company’s independent accountants will prepare a computation of Target Revenue and deliver such computation to Buyer and Seller by November 1, 2004. If within thirty (30) days following delivery of such computation of Target Revenue, neither Buyer nor Sellers have given the other party notice of their objection to such computation (such notice must contain a reasonably detailed statement of the basis of such objection), then the Target Revenue for the Target Period reflected in such computation will be used in computing the Revenue Adjustment. If either party gives such notice of objection, then the issues in dispute will be submitted to the Accountants for resolution. If issues in dispute are submitted to the Accountants for resolution, (A) each party will furnish to the Accountants such workpapers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), and will be afforded the opportunity to present to the Accountants any material relating to the determination and to discuss the determination with the Accountants; (B) the determination by the Accountants, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties; and (C) Buyer and Holdings will each bear 50% of the fees of the Accountants for such determination. Any reduction of the Purchase Price due to a Revenue Adjustment shall be made from the Holdback Amount.

1.8.     Holdback Amount. The Holdback Amount shall be retained by Buyer to cover any Revenue Adjustment and any Losses incurred by Buyer which are indemnifiable by Sellers pursuant to Section 7.2. The Holdback Amount shall be released to Holdings in two (2) installments as follows: (a) one half of the Holdback Amount less any deductions for Losses incurred to date and reasonable accruals for pending Claim Notices and any Revenue Adjustment, shall be released to Holdings six (6) months after the Closing Date, and (b) one half of the Holdback Amount less any deductions for Losses incurred to date and reasonable accruals for pending Claim Notices and any Revenue Adjustment shall be released to Holdings twelve (12) months after the Closing Date. Any Holdback Amount remaining after settlement of pending Claim Notices shall be distributed to Holdings as soon as reasonable practicable after final resolution of such Claim Notices. All payments of the Holdback Amount will be made together with Interest beginning on the Closing Date and ending on the date of payment. Payments must be made in immediately available funds. Payments to Holdings must be made in the manner set forth in Section 1.4(b)(i). The recipient of the Interest shall pay any income Taxes on such amount.

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SECTION 2.              Representations and Warranties of Sellers. Sellers, jointly and severally, hereby represent and warrant to Buyer, as of the date hereof, as follows:

2.1.     Organization and Good Standing; Qualifications. Each of the NPS Entities (a) is a limited liability company or corporation, as the case may be, duly organized, validly existing and in good standing under the laws of the State of Michigan, (b) has all requisite corporate or limited liability company power and authority, as the case may be, to own, lease and operate its properties and to carry on its business as presently conducted, and (c) is duly qualified to transact business as a foreign entity in, and is in good standing under the laws of, those jurisdictions where the character of the property owned or leased or the nature of the activities conducted by it makes such qualification necessary, except for such qualifications the failure of which to achieve, individually or in the aggregate, has not had and will not reasonably be expected to have a Material Adverse Effect. Sellers have delivered to Buyer correct and complete copies of the articles of incorporation or articles of organization, bylaws or limited liability company agreement, as the case may be, and minute books of each NPS Entity.

2.2.     Power and Authority; Authorization of the Transaction Documents. Each of the NPS Entities has all requisite corporate or limited liability company power and authority, as the case may be, (a) to execute and deliver this Agreement and any other agreement, certificate or document executed and delivered by it in connection with each of the Closing Actions and Deliveries (collectively with this Agreement, the “Transaction Documents”) and (b) to carry out and perform its obligations in the manner contemplated by the Transaction Documents to which each is a party. The execution, delivery and performance of each of the Transaction Documents to which each NPS Entity is a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate or limited liability company action, as the case may be, on the part of each NPS Entity (including any requisite action or approval by such entities’ board, manager, members or shareholders, as the case may be, and the Majority Interest and Majority Investor Interest of Holdings, as such terms are defined in the limited liability company agreement of Holdings) and that no other board, manager, member, shareholder or similar action is required for such authorizations. Each of the Transaction Documents to which any NPS Entity or Principal is a party constitutes a legal, valid and binding obligation of such NPS Entity or Principal, enforceable against such NPS Entity or Principal in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors’ rights generally.

2.3.     No Conflicts; Consents. The execution, delivery and performance by the NPS Entities and the Principals of the Transaction Documents and the consummation by the NPS Entities and the Principals of the transactions contemplated hereby and thereby, do not (a) violate any provision of any federal, state, local or foreign law, statute, rule, regulation, ordinance or code (“Law”) or any consent, authorization, registration, decree, directive, judgment, order, ruling, writ or injunction of any Government Authority (“Order”) applicable to the NPS Entities or the Principals, or any of their respective properties or assets, except where such violation has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect, (b) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default (or give rise to any right of termination, cancellation or acceleration) under, or result in the creation of any Encumbrance upon any of the properties or assets of the NPS Entities or any Principal under, any Contract required to be set forth on Schedule 2.12(a) hereto, except where such conflict, breach, default, or creation of a Encumbrance has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect, and except as set forth on Schedule 2.3, (c) violate the articles of incorporation or articles of organization or bylaws or limited liability company agreement, as the case may be, of any of the NPS Entities or (d) require any permit, authorization, consent or approval of or by, or any notification of or filing with any Person except for any such permits, authorizations, consents, approvals notifications or filings obtained prior to the Closing and listed on Schedule 2.3 and except where the failure to obtain such permit, authorization, consent or approval has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect.

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2.4.     Capitalization.

(a)     Holdings is the sole member and owner of all of the limited liability company membership interests of the Company, MSUSA and USCCP. All of the Membership Interests of the Company and the limited liability company membership interests of MSUSA and USCCP have been duly authorized and are validly issued, fully paid and, except as set forth on Schedule 2.4(b), not subject to assessment for additional capital contributions.

(b)     Set forth on Schedule 2.4(b) is a true and complete list, effective as of the Closing, of (i) all of the members of Holdings, including the number of Common Units and Series A Units held by each member of Holdings and (ii) all of the shareholders of Manager. All of the issued and outstanding Common Units and Series A Units of Holdings and all of the issued and outstanding shares of common stock of Manager have been duly authorized and are validly issued, fully paid and, except as set forth on Schedule 2.4(b), not subject to assessment for additional capital contributions.

(c)     Except as set forth on Schedule 2.4(c), there are no outstanding warrants, options, agreements, convertible securities or other commitments pursuant to which any of the NPS Entities is obligated, now or in the future, to issue any stock, limited liability company membership interests or other securities. There are, and immediately after the Closing, there will be, no rights, including preemptive or similar rights, to purchase or otherwise acquire interests or securities or sell or otherwise transfer interests or securities in any of the NPS Entities pursuant to any agreement to which any of the NPS Entities is a party; and NPS Entities are not a parties to, and there are, and immediately after the Closing, there will be, no agreement, restriction or Encumbrance (such as a right of first refusal, right of first offer, proxy, voting agreement, voting trust, registration rights agreement, equityholders’ agreement, etc., whether or not any of the NPS Entities is a party thereto) with respect to the purchase, sale or voting of any security or interest of any NPS Entity (whether outstanding or issuable upon conversion or exercise of outstanding securities). Except as set forth on Schedule 2.4(c), neither the NPS Entities nor the Principals are a party to any agreement granting to any Person the right to nominate or elect one or more managers or directors of any of the NPS Entities.

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2.5.     Subsidiaries. Except for Holdings, none of the NPS Entities owns, directly or indirectly, any interest in any other Person or Subsidiary. Except for the Company, MSUSA and USCCP, Holdings does not own, directly or indirectly, any interest in any other Person or Subsidiary.

2.6.     Minute Books. The corporate and limited liability company records of the NPS Entities provided to Buyer are true and complete in all material respects and accurately reflect all meetings and resolutions of, and all written consents and other actions by, the members or stockholders or manager or board of directors (or committee thereof), as the case may be, since the day of formation or corporate organization, as the case may be.

2.7.     Disclosure; Financial Statements.

(a)     No representation or warranty of any Seller or NPS Entity contained in any Transaction Document contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. There are no facts known to Sellers (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in the other Transaction Documents.

(b)     Sellers have delivered to Buyer a true and complete copy of the reviewed consolidated and consolidating financial statements for the years ended December 31, 2003 and 2002, with footnotes, of the NPS Entities (the “Unaudited Financial Statements”), the unaudited interim consolidated and consolidating financial statements for the four (4) month period ended April 30, 2004, with unaudited footnotes, of the NPS Entities (the “Interim Financial Statements” and, together with the Unaudited Financial Statements, the “Financial Statements”). The Financial Statements (i) are in accord with the books and records of the NPS Entity to which they relate, (ii) for the year ended December 31, 2003 and the four-month period ended April 30, 2004 have been prepared in accordance with generally accepted accounting principles (“GAAP”) consistently applied, subject, in the case of Financial Statements for interim periods, to normal, recurring year-end adjustments and the lack of all required footnotes, and (iii)  fairly present in all material respects the financial condition, changes in stockholder equity, results of operations and cash flows on a consolidated basis of the NPS Entity to which they relate as of the respective dates and for the respective periods indicated therein. Each NPS Entity maintains accounting methods, practices and procedures and accounting systems and controls that permit financial statements to be prepared in accordance with GAAP. The books and records of each NPS Entity are in all material respects correct and complete, are maintained in accordance with good business practice and all applicable Law, and accurately present and reflect in all material respects all of the transactions that are or should be therein described.

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2.8.     Absence of Undisclosed Liabilities; Off-Balance Sheet Arrangements.

(a)     Except as set forth on Schedule 2.8(a), no NPS Entity has any liabilities or obligations (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and whether or not the subject of any other representations or warranties hereunder) other than (i) liabilities or obligations reserved against or otherwise disclosed in the Financial Statements, or (ii) liabilities or obligations arising since December 31, 2003 which were incurred in the ordinary course of business consistent (in amount and kind) with past practice and which do not, individually or in the aggregate, exceed $50,000.

(b)     Except as set forth on Schedule 2.8(b), or as expressly disclosed in the Financial Statements, neither the Company nor any other NPS Entity has any off-balance sheet arrangements (as defined in Section 11).

2.9.     Absence of Changes. Except as set forth on Schedule 2.9 and except for the execution and delivery of the Transaction Documents and the transactions contemplated hereby and thereby, or referred to herein or therein, since December 31, 2003 each NPS Entity has conducted its businesses in the ordinary course, consistent with past practice, and there has not been:

(a)     any change having, or any event or condition which has had, or would, individually or in the aggregate, reasonably be expected to have, a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of the NPS Entities, taken as a whole (a “Material Adverse Effect”);

(b)     any waiver of any material right of any NPS Entity, the cancellation of any material right of any NPS Entity, or the cancellation of any material debt or claim held by any NPS Entity;

(c)     any payment or declaration of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities or interests of any NPS Entity, except if fully paid prior to the Closing and properly reflected in the Closing Financial Statements;

(d)     any issuance of any interests, stock, bonds or other securities of any NPS Entity or grant of any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of their interests or capital stock;

(e)     any capital expenditure (or series of related capital expenditures) either involving more than $50,000 or outside the ordinary course of business;

(f)     made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans and acquisitions) either involving more than $50,000 or outside the ordinary course of business;

(g)     delayed or postponed the payment of accounts payable and other liabilities outside the ordinary course of business;

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(h)     change made or authorized in the articles of incorporation, articles of organization, by-laws or limited liability company agreement of any of the NPS Entities;

(i)     any discontinuance of any material insurance policy;

(j)     any accelerations, modifications or terminations of any Contract except in the ordinary course;

(k)     any transfer, grant, or amendment or termination of, or failure to prosecute or protect, any of the NPS Entities’ material Intellectual Property Rights;

(l)     (i) any increase in the rate or terms of compensation payable or to become payable by any NPS Entity to, or any increase in the rate or terms of any bonus, pension or other employee benefit plan covering, any director, officer or key employee of any NPS Entity, (ii) the adoption of any new Benefit Plan or the increase of benefits under any existing Benefit Plan or (iii) the entering into of any Employment Agreement;

(m)     any sale, assignment or transfer of any tangible or intangible assets of any NPS Entity, except (i) in the ordinary course of business or (ii) assets for which the book value does not exceed $50,000 and which are not, individually or in the aggregate, material;

(n)     any loan by any NPS Entity to any officer, director, employee, consultant or shareholder of any NPS Entity (other than advances to such Persons in the ordinary course of business in connection with travel and travel related expenses);

(o)     any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property, financial condition, results of operations or prospects of any NPS Entity;

(p)     any change in the accounting or Tax methods, practices or policies or in any Tax election of any NPS Entity;

(q)     any Encumbrances;

(r)     any guarantees made by any NPS Entity of any obligation or any Indebtedness incurred for borrowed money or capital leases;

(s)     any amendment to or termination of any material agreement to which any NPS Entity is a party (other than amendments to or terminations of agreements pursuant to or contemplated by this Agreement);

(t)     any material adverse change with respect to the regulation of any NPS Entity or its products by any Governmental Authority;

(u)     any material transaction of any NPS Entity except (i) in the ordinary course of business, (ii) as described in the Financial Statements, or (iii) as otherwise contemplated hereby; or

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(v)     any agreement or commitment (contingent or otherwise) to do any of the foregoing.

2.10.     Litigation. Except as set forth on Schedule 2.10, there is no civil, criminal or administrative action, suit, claim, notice, hearing, examination, inquiry, proceeding or investigation at law or in equity or by or before any court, arbitrator or similar panel, governmental instrumentality or other agency (“Litigation”) now in progress or, to the knowledge of Sellers, threatened against any NPS Entity or the assets (including the Intellectual Property Rights) or the business of any NPS Entity. No NPS Entity is subject to any Order of any Government Authority.

2.11.     Compliance with Laws; Governmental Permits. Except as set forth on Schedule 2.11, each NPS Entity (i) has complied in all respects with all Laws and Orders applicable to it and its business, except where such failures to comply has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect and (ii) has obtained, from any nation or government, any state, province or other political subdivision thereof or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government, regulatory body or self-regulatory organization (each a “Governmental Authority”) all licenses, permits, registrations, authorizations and qualifications (each a “Governmental Permit”) necessary to conduct its business as currently conducted and to own and use its assets in the manner in which such assets are currently owned and used other than where the failure to obtain such Governmental Permits has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect. Except as set forth on Schedule 2.11, all of the NPS Entities’ Governmental Permits are in full force and effect, and no violations have been recorded in respect of any such Governmental Permit, and no proceeding is pending or, to the knowledge of Sellers, threatened to revoke or limit any such Governmental Permit.

2.12.     Agreements. (a) Except as set forth on Schedule 2.12(a) hereto, no NPS Entity is a party to any indenture, mortgage, guaranty, lease, license or other contract, agreement or understanding, written or oral (a “Contract”) other than any Contract that (i) pursuant to its terms or pursuant to a valid and final order of a United States Bankruptcy Court, has expired, been terminated or fully performed by the parties, and in each case, under which no NPS Entity has any liability, contingent or otherwise or (ii) involves annual aggregate payments to or from such NPS Entity of $25,000 or less (as opposed to an indemnity agreement or similar contract under which a NPS Entity has any contingent liability), and is not material to the business or financial condition of such NPS Entity.

(b)     Except as set forth on Schedule 2.12(b) hereto, all of the Contracts set forth on Schedule 2.12(a) (the “Material Contracts”) are valid, binding and in full force and effect in all material respects and enforceable by the NPS Entities party thereto in accordance with their respective terms in all material respects except as may be limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors’ rights generally. Except as set forth on Schedule 2.12(b) hereto, no NPS Entity is in default or breach under any of its Material Contracts and, to the knowledge of Sellers, no other party to any of the Material Contracts is in material default or breach thereunder. Except as set forth on Schedule 2.12(b) hereto, no event has occurred that with the passage of time or the giving of notice or both would result in a default or material breach by any NPS Entity or, to the knowledge of Sellers, by any other party to the Material Contracts. Except as set forth on Schedule 2.12(b) hereto, no event has occurred that with the passage of time or the giving of notice or both would give rise to any Encumbrance or right of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration against a NPS Entity under any Material Contract. No waiver has been granted by any of the parties to the Material Contracts and no party to any of such Material Contracts has repudiated any provision thereof. The Company, MSUSA (except as may result from the Litigation involving Certegy Card Services, Inc. initiated by the Company and to be assigned to Holdings at Closing as part of the Excluded Claims) and USCCP are in good standing with Visa U.S.A., Inc., Visa International and MasterCard International Incorporated, and the Company and USCCP are in good standing with Chase.

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2.13.     Notes and Accounts Receivable. All notes and accounts receivable of the NPS Entities are reflected properly on their books and records, are valid receivables arising from sales of products and services by the NPS Entities in the ordinary course of business, subject to no setoffs or counterclaims, are current and collectible, and, provided Buyer uses commercially reasonable efforts to collect such notes and accounts receivable in the ordinary course of business, will be collected in accordance with their terms at their recorded amounts, subject only to the reserve for bad debts set forth on the face of the Interim Financial Statements (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the NPS Entities.

2.14.     Acquisitions and Dispositions.

(a)     Set forth on Schedule 2.14(a) is a true and complete list of every acquisition of assets or business entity consummated, or pursuant to which definitive documents have been executed, by any NPS Entity since February 29, 2000 (the “Acquisitions”). There is no liability or obligation (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due) which gives rise to a claim by or against any NPS Entity under any agreement relating to any Acquisition. None of the NPS Entities has received written notice of a claim, and to the knowledge of Sellers, is not aware of any facts which could give rise to any claim against any NPS Entity under any agreement relating to any Acquisition.

(b)     Set forth on Schedule 2.14(b) is a true and complete list of every disposition of assets or businesses made by any NPS Entity since February 29, 2002 (the “Dispositions”). None of the NPS Entities has received written notice of a claim, and to the knowledge of Sellers, is not aware of any facts which could give rise to any claim against any NPS Entity under any agreement relating to any Disposition.

2.15.     Suitability. None of the NPS Entities, or any of their respective officers or directors, or, to the knowledge of Sellers, any of the Principals or any of their respective officers or directors, (a) has ever been convicted, indicted or, to the knowledge of Sellers, investigated for any matter that, or received a subpoena (other than as a witness) or been found liable, been sued or, to the knowledge of Sellers, investigated in connection with any civil or regulatory proceeding by any Governmental Authority or otherwise that, in any such case, involved fraud, misrepresentation, financial impropriety, securities laws violations or moral turpitude, (b) to the knowledge of Sellers is a named subject of any proceeding or investigation by any Governmental Authority, (c) is subject to any Order barring, suspending or otherwise limiting the right of any NPS Entity or such individual to engage in any activity or (d) has ever been denied any Governmental Permit affecting the ability of any NPS Entity or such individual to conduct any activity currently conducted or currently contemplated to be conducted by the NPS Entities, nor, to the knowledge of Sellers, is there any basis upon which such Governmental Permit may be denied, except for any of the foregoing which has not had, and would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect. To the knowledge of Sellers, there are no facts, activities, practices, incidents, actions, omissions or plans that form the basis of any conviction, indictment, claim, action, suit, proceeding, hearing or investigation of the type described in the preceding sentence. Sellers are aware of the requirements of the USA PATRIOT Act of 2001, the regulations administered by the Department of Treasury’s Office of Foreign Assets Control, and other applicable U.S. federal and state anti-money laundering Laws and, to that effect, represent and warrant that they have reviewed the following lists and that none of the NPS Entities, or any of their respective officers or directors, or, to the knowledge of Sellers, any of the members of the NPS Entities or any of their respective officers or directors, is named or identified on any of them:

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(i)     the list of Specially Designated Nationals and Blocked Persons maintained by the United States Department of Treasury which can be found at http://www.ustreas.gov/ofac/t11sdn.pdf;

(ii)     the list of terrorist organizations maintained by the United States Department of State which can be found at http://www.state.gov/s/ct/rls/fs/2001/6531.htm; and

(iii)     any other list of terrorists, terrorist organizations or narcotics traffickers maintained pursuant to any of the rules and regulations of Office of Foreign Assets Control, U.S. Department of the Treasury, or by any other Governmental Authority.

2.16.     Related Party Transactions. Set forth on Schedule 2.16 is a true and complete list of all obligations and transactions (a) between any of the NPS Entities and any Affiliate of any of the NPS Entities, and (b) between any of the NPS Entities and any of the officers, directors, equity holders or employees (other than in the ordinary course of business in their normal capacity as employees) or any of the affiliates or associates (each term as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of any NPS Entity. Except as set forth on Schedule 2.16, no officer, director, manager, shareholder or member of Holdings or Manager (nor any parent, child or spouse of any of such Persons, or any trust, partnership or corporation in which any of such Persons has or has had an interest), has or has had, directly or indirectly, (i) any interest or involvement in any entity which provided, leased or sold, or provides, leases or sells, services or products which any of the NPS Entities provides, leases or sells, or proposes to provide, lease or sell, (ii) any interest or involvement in any entity which purchases, leases or buys from, or provides, leases or sells to, any of the NPS Entities any goods or services, or (iii) any interest in, or any involvement in, any entity that has an interest in, any property or asset used in the conduct of the business of the NPS Entities; provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation in and of itself shall not be deemed an interest in any entity for purposes of this Section 2.16.

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2.17.     Powers of Attorney. Except as set forth on Schedule 2.17, there are no outstanding powers of attorney executed on behalf of any of the NPS Entities or any officers, managers and directors of the NPS Entities.

2.18.     Intellectual Property Matters. A true and complete list of all Company Intellectual Property owned by, or licensed to, each NPS Entity is set forth on Schedule 2.18. Except as set forth on Schedule 2.18:

(a)     the Company (after giving effect to the Merger) either (i) is the sole and exclusive owner of, with all right, title and interest in and to (free and clear of any Encumbrance, Order, or Contract) all Company Intellectual Property, or (ii) has the right to use in the manner currently used all Company Intellectual Property pursuant to a valid and enforceable license, sublicense or other Contract;

(b)     no claims have been asserted or threatened by any Person, and, to the knowledge of Sellers, there is no basis for any claims, challenging the ownership, legality, use, validity, enforceability or effectiveness of any of the Company Intellectual Property, and all Company Intellectual Property that are registrations, including, but not limited to, all issued patents, trademarks, service marks, copyrights and mask works, are valid and subsisting and in full force and effect;

(c)     to the knowledge of Sellers, no third party is infringing upon, misappropriating, or using without authorization any Company Intellectual Property, and no employee or former employee of any NPS Entity is infringing upon, misappropriating or using without authorization any Company Intellectual Property;

(d)     to the knowledge of Sellers, the NPS Entities have not infringed on or misappropriated, and the continued operation of the business of the Company as currently conducted will not infringe on or misappropriate, any Intellectual Property Right of any other Person, and no such claim, complaint, charge, demand or notice has been asserted or has been threatened by any Person (including any claim that the NPS Entities must license or refrain from using any Intellectual Property Rights of any third party) and Sellers are not aware of any basis for any claims therefor; and

(e)     the Company Intellectual Property is all the Intellectual Property Rights that are necessary for the ownership and unencumbered operation of the properties, assets, and business of the Company (after giving effect to the Merger) as currently conducted and the consummation of the transactions contemplated hereby and thereby will not alter, impair, diminish or result in the loss of any rights or interests of the Company (after giving effect to the Merger) in any Company Intellectual Property.

2.19.     Personal Property; Real Property.

(a)     A true and complete list of all tangible assets and properties with an individual value in excess of $10,000 and owned by, or leased to, Company is set forth on Schedule 2.19(a). Except as set forth on Schedule 2.19(a), the Company (after giving effect to the Merger) has good and to the extent applicable marketable title to all of its assets and properties, free and clear of any Encumbrances except (i) Encumbrances for taxes not yet due and payable; (ii) Encumbrances for taxes and charges and other claims, the validity of which the Company is contesting in good faith in appropriate proceedings, and for which reserves have been recorded, and all of which, in the case of such Encumbrances on the assets and properties of each NPS Entity, are set forth on Schedule 2.19(a); (iii) Encumbrances that arise in the ordinary course of business and do not materially impair the Company’s ownership or use of any such asset or property or the Company’s ability to obtain financing by using such assets or property as collateral; and (iv) Encumbrances arising from or in connection with the Senior Credit Facility which will be released at the Closing (Encumbrances referenced in clauses (i), (ii), (iii) and (iv), collectively referred to as “Permitted Encumbrances”). The assets and properties owned by, or leased to, the Company (after giving effect to the Merger) are sufficient for the conduct of the business and operation of Company (after giving effect to the Merger) as currently conducted.

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(b)     The NPS Entities do not own, and have not at any time in the past owned, any real property. Each NPS Entity presently has good leasehold interests in all of the real property presently leased by such NPS Entity (the “Leased Real Property”) free and clear of all Encumbrances except for Permitted Encumbrances. A true and complete list of all Leased Real Property is set forth on Schedule 2.19(b). The Leased Real Property constitutes all of the real property required by the Company (after giving effect to the Merger) to conduct the businesses and operations of the Company (after giving effect to the Merger) as currently conducted. Each of the leases of the Leased Real Property has been duly authorized and executed by the NPS Entity which is a party to it, and is in full force and effect. None of the NPS Entities is in default under any of said leases, nor has any event occurred which, with notice or the passage of time, or both, could be reasonably expected to give rise to an event of default. No NPS Entity is obligated to purchase any Leased Real Property and no Leased Real Property is required to be accounted for under GAAP as a capitalized lease. Upon consummation of the Merger, the Company shall have good leasehold interests in the Leased Real Property, free and clear of all Encumbrances except for Permitted Encumbrances.

2.20.     Environmental Protections.

(a)     Each NPS Entity is in compliance with all applicable Environmental Laws and has obtained and is in compliance with all permits, licenses, registrations, consents and other authorizations which are required with respect to any of its facilities or operations under any applicable Environmental Law (the “Environmental Permits”), except where such failures to so comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. All of the NPS Entities’ Environmental Permits are in full force and effect, and no violations have been recorded in respect of any such Environmental Permit, and no proceeding is pending or, to the knowledge of Sellers, threatened to revoke or limit any such Environmental Permit. Set forth on Schedule 2.20 is a true and complete list of all Environmental Permits and the expiration dates thereof. Upon consummation of the Merger, the Company shall be the record holder of all such Environmental Permits.

(b)     To the knowledge of Sellers, the Leased Real Property are free of any contamination arising from, relating to, or resulting from any Hazardous Substances. There has been no release of any Hazardous Substances at, on, about, under or within any Leased Real Property during the occupancy by the NPS Entities or, to the knowledge of Sellers, any real property formerly owned, leased, or operated by the NPS Entities or any of their predecessors.

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(c)     There are no claims, notices (including notices that any of the NPS Entities or any of their predecessors is or may be a potentially responsible Person or otherwise liable in connection with any waste disposal site containing Hazardous Substances or other location allegedly used for the disposal of Hazardous Substances), civil, criminal or administrative actions, suits, hearings, investigations, inquiries, proceedings or Encumbrances pending or, to the knowledge Sellers, threatened against any NPS Entity that are related to any Environmental Matters.

(d)     There are no past or present conditions, events, circumstances, facts, activities, practices, incidents, actions, omissions or plans that would: (i) give rise to any liability or obligation of the NPS Entities under any Environmental Laws or (ii) form the basis of any claim, action, suit, proceeding, hearing, investigation or inquiry against the NPS Entities arising out of Environmental Laws or Environmental Matters.

2.21.     Employee Benefit Plans.

(a)     Set forth on Schedule 2.21 is a true and complete list of all Benefit Plans and Employment Agreements. Except as set forth on Schedule 2.21, none of the NPS Entities has any plan or commitment, whether legally binding or not, (i) to establish, modify or terminate any Benefit Plan or (ii) to enter into, modify or terminate any Employment Agreement. (b) None of the Benefit Plans is (i) a “defined benefit plan” (as defined in ERISA Section 3(35)), (ii) a “multiemployer plan” (as defined in ERISA Section 3(37)) or (iii) a Benefit Plan that provides, or has any liability to provide, life insurance, health or other similar employee welfare benefits to any Employee or dependent thereof upon his or her retirement or termination of employment, except as required by Section 4980B of the Internal Revenue Code of 1986, as amended (the “Code”), and no NPS Entity and no current or former ERISA Affiliate of any NPS Entity has incurred any direct or indirect liability with respect to any such plan. No liability under Title IV or Section 302 of ERISA, or Section 412 of the Code, has been or is reasonably expected to be incurred by any NPS Entity or any ERISA Affiliate of a NPS Entity.

(c)     Sellers have provided to Buyer current, accurate and complete copies of all documents embodying or relating to each Benefit Plan and each Employment Agreement, including all amendments thereto, interpretations thereof, trust or funding agreements relating thereto.

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(d)     Each Benefit Plan and Employment Agreement has been established and maintained substantially in accordance with its terms and in compliance in all material respects with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA and the Code, and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified. No NPS Entity is in breach of any provision of an Employment Agreement.

(e)     To the knowledge of Sellers, no “prohibited transaction,” within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Benefit Plan. To the knowledge of Sellers, no Employee has been hired by any of the NPS Entities in violation of any restrictive covenant or any non-compete agreement with any other Person. Each Benefit Plan can be amended, terminated or otherwise discontinued without liability to any NPS Entity. No liability under any Benefit Plan has been funded nor has any such obligation been satisfied with the purchase of a contract from an insurance company as to which any NPS Entity has received notice that such insurance company is insolvent or is in rehabilitation or any similar proceeding. There is no pending litigation, audit, investigation or other similar proceeding relating to any Benefit Plan or Employment Agreement or to the employment, termination of employment, compensation or employee benefits of any Employee, nor, to the knowledge of Sellers, is any such litigation, audit, investigation or other proceeding threatened. With respect to each Benefit Plan which is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA), all claims incurred by any NPS Entity are (i) insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims, (ii) covered under a contract with a health maintenance organization (an “HMO”) pursuant to which the HMO bears the liability for claims or (iii) reflected as a liability or accrued for on the Financial Statements.

(f)     The execution and performance by the NPS Entities of the transactions contemplated by the Transaction Documents to which they are a party will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Benefit Plan or Employment Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee, (ii) result in the triggering or imposition of any restrictions or limitations on the right of any NPS Entity to amend or terminate any Benefit Plan or Employment Agreement in accordance with its terms as in effect on the date hereof or (iii) result in any payment or benefit which will or may be made by any NPS Entity with respect to any Employee being characterized as an “excess parachute payment” within the meaning of Section 280G(b)(1) of the Code. All contributions made pursuant to the Benefit Plans and payments made pursuant to the Employment Agreements are reasonably expected to be deductible by a NPS Entity for federal income tax purposes.

2.22.     Labor Relations; Employees. (a) No NPS Entity is bound by or subject to (and no assets or properties of any NPS Entity are bound by or subject to) any written or oral, express or implied, commitment or arrangement with any labor union, or any collective bargaining agreement, and no labor union has requested or, to the knowledge of Sellers, has sought to represent any Employee, representative or agent of any of the NPS Entities, (b) there is no labor strike, dispute, slowdown or stoppage actually pending, or, to the knowledge of Sellers, threatened against or involving any NPS Entity and (c) to the knowledge of Sellers, no salaried key employee of any NPS Entity has any present plans to terminate his or her employment. Each NPS Entity has properly classified all individuals who provide services to or for it as an employee or independent contractor, as applicable, for all purposes (including for purposes of withholding of taxes and participation in the Benefit Plans).

2.23.     Taxes.

(a)     All of the NPS Entities have timely filed in accordance with all applicable Laws (taking into account valid extensions) all Tax Returns (as hereinafter defined) required to be filed by them, and all such Tax Returns are true, correct and complete in all material respects. All Taxes (as hereinafter defined) which are due and payable by any of the NPS Entities, including any Taxes levied upon any of their properties, assets, income or franchises, have been timely paid. All amounts required to be collected or withheld by any of the NPS Entities have been collected or withheld, and any such amounts that are required to be remitted to any taxing authority have been duly and timely remitted by the appropriate NPS Entity. No examination, claim, assessment, deficiency or other Litigation is pending or, to the knowledge of Sellers, threatened, with regard to any Taxes or Tax Returns of any of the NPS Entities. None of the NPS Entities is (nor have any of them ever been) a party to or bound by any Tax sharing, Tax indemnity or Tax allocation or similar Contract, nor otherwise liable for the Taxes of another Person (including by contract, as a transferee or successor, or under Treasury Regulation Section 1.1502-6 or analogous state, local or foreign law provisions). No taxing authority in a jurisdiction where any of the NPS Entities do not file Tax Returns has made a written claim, or to the knowledge of Sellers asserted that such NPS Entity (or, with respect to their interest in any NPS Entity, the stockholders or interest holders thereof) is or may be subject to taxation by such jurisdiction.

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(b)     None of the NPS Entities has taken any deduction or received any Tax benefit arising from participation in a tax shelter as defined for purposes of Section 6111(c) of the Code, or has participated in a reportable transaction as defined in Treasury Regulation Section 1.6011 — 4(b) and (c)(3) or Treasury Regulation Section 1.6011-4T(a) and (b) (as promulgated in T.D. 8877) or any analogous or similar state, local, or foreign law. None of the NPS Entities is, or has ever been, a United States real property holding company within the meaning of Section 897(c)(2) of the Code. None of the NPS Entities will be required to include any item of income in, or exclude any item of deduction from, any Tax period ending on or after the Closing (as a result of any adjustment under Section 481 of the Code, or any “closing agreement” as described in Section 7121 of the Code, or otherwise). None of the NPS Entities has debt, the interest deduction with respect to which would be subject to disallowance by reason of Section 163(e)(5) of the Code or any analogous provision of state, local or foreign law.

(c)     The Company is taxed as a partnership for U.S. federal and applicable state and local income tax purposes.

(d)     None of the NPS Entities currently is the beneficiary of any extension of time within which to file any Tax Return. There are no Encumbrances on any of the assets of any of the NPS Entities that arose in connection with any failure (or alleged failure) to pay any Tax. None of the NPS Entities has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

(e)     For purposes of this Agreement, “Tax” or “Taxes” means any taxes, assessment, duties, fees, levies, imposts, deductions, or withholdings, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever, imposed by any taxing authority of any government or country or political subdivision of any country, and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon and includes any liability for Taxes of another Person by contract, as a transferee or successor, under Treasury Regulation 1.1502-6 or analogous state, local or foreign law provision or otherwise, and “Tax Return” means any report, return, statement, estimate, declaration, notice, form or other information required to be supplied to a taxing authority in connection with Taxes.

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2.24.     Insurance. All of the assets of the NPS Entities that are of insurable character are covered by insurance against risks of liability, casualty and fire and other losses and liabilities customarily obtained to cover comparable businesses and assets in amounts, scope and coverage which are consistent with prudent industry practice. The NPS Entities are not in default in any material respect under any insurance policy maintained by them. A true and complete list of all insurance policies owned by each NPS Entity is set forth on Schedule 2.24. All such policies and other instruments are in full force and effect and all premiums with respect thereto have been paid. The NPS Entities have not made any claim against any insurance policy to which the insurer is denying coverage or defending the claim under a reservation of rights or similar clause. The NPS Entities have not received notice of any pending or threatened termination of any of insurance policies or any premium increases with respect to any of the NPS Entities insurance policies, and the consummation of the transactions contemplated by the Transaction Documents will not result in any such termination or premium increase. Upon consummation of the Merger the Company shall be the insured party under all such insurance policies.

2.25.     Suppliers and Customers. Set forth on Schedule 2.25 is a true and complete list of (a) the ten largest suppliers and customers of the NPS Entities by dollar amount for the past twelve (12) months (the “Largest Suppliers and Customers”), and (b) the aggregate amount of payments made or received, as the case may be, by the NPS Entities during calendar year 2003 with respect to each of the Largest Suppliers and Customers. To the knowledge of Sellers, except as set forth on Schedule 2.25, none of the Largest Suppliers and Customers has terminated, cancelled or threatened termination or cancellation or limitation of, or any material modification or change in, or expressed material dissatisfaction with its business relationship with any NPS Entity, including with respect to the transactions contemplated by this Agreement and the other Transaction Documents, where the termination of such arrangement would have a Material Adverse Effect.

2.26.     Brokers. Except as set forth on Schedule 2.26, no NPS Entity or any of its respective officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions with Buyer contemplated by this Agreement.

2.27.     Guaranties. None of the NPS Entities is a guarantor or otherwise is liable for any liability or obligation (including Indebtedness) of any other Person.

2.28.     Disclosure. The representations and warranties contained in this Section 2 do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 2 not misleading.

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SECTION 3.         Representations and Warranties of Buyer. Buyer represents and warrants to the Sellers as follows:

3.1.     Organization, Authorization. Buyer is duly organized and validly existing under the laws of the jurisdiction of its organization and has all power and authority to enter into and perform the Transaction Documents. Each of the Transaction Documents has been duly authorized by all necessary corporate action on the part of Buyer. Each of the Transaction Documents constitutes a valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms except to the extent that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors’ rights generally and by equitable principles generally, whether enforced at a court of law or at equity.

3.2.     No Conflicts. The execution, delivery and performance by Buyer of each of the Transaction Documents and the consummation by Buyer of the transactions contemplated thereby will not (a) violate any provision of Law or any Order applicable to Buyer, or any of its properties or assets, (b) violate the articles of incorporation or bylaws of Buyer or (c) require any permit, authorization, consent or approval of or by, or any notification of or filing with any Person.

3.3.     Investment; Securities Laws. Buyer is acquiring the Membership Interests to be purchased under this Agreement for its own account for investment and not with a view to the distribution thereof (within the meaning of the Securities Act) except in compliance with all applicable federal and state securities laws. Buyer understands that (a) the Membership Interests have not been, and will not be, registered under the Securities Act or any state securities laws, and (b) the Membership Interests may not be disposed of unless such disposition is registered under the Securities Act and applicable state securities laws or is exempt from registration thereunder.

3.4.     Accredited Investor. Buyer is an “accredited investor” (as defined in Rule 501(a) under the Securities Act).

3.5.     No Consents. No permit, authorization, consent or approval of or by, or any notification of or filing (including any filing under the HSR Act) with, any Person is required to be obtained or made by Buyer in connection with the execution, delivery and performance by Buyer of the Transaction Documents to which it is a party or any documents relating thereto, or the consummation by Buyer of the transactions contemplated hereby or thereby.

3.6.     Brokers; Commissions. Neither Buyer nor any of its respective officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions with the Company contemplated by this Agreement.

SECTION 4.               Pre-Closing Covenants. The parties agree as follows with respect to the period between the execution of this Agreement and the Closing.

4.1.     General. Each of the parties will use his or its commercially reasonable efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions set forth in Section 5 below).

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4.2.     Notices and Consents. Sellers will cause each of the NPS Entities to give any notices to third parties, and will cause each of the NPS Entities to use its commercially reasonable efforts to obtain any third party consents, that Buyer reasonably may request in connection with the transactions contemplated by this Agreement. Each of the parties will (and Sellers will cause each of the NPS Entities to) give any notices to, make any filings with, and use its commercially reasonable efforts to obtain any Government Permits required in connection with the transactions contemplated by this Agreement.

4.3.     Operation of Business. Sellers shall conduct the business of the NPS Entities in the ordinary course, consistent with past practice. Sellers will not cause or permit any of the NPS Entities to engage in any practice, take any action, or enter into any transaction outside the ordinary course of business. Without limiting the generality of the foregoing, Sellers will not cause or permit any of the NPS Entities to engage in any practice, take any action, or enter into any transaction of the sort described in Section 2.9 above.

4.4.     Maintain Books. Sellers will cause each of the NPS Entities to maintain its books of account and other financial and corporate records in the usual, regular and ordinary manner in accordance with GAAP applied on a basis consistent with past practices and shall make no change in its accounting methods or practices or in its depreciation or amortization policies or rates.

4.5.     Full Access. Each Seller will permit, and Sellers will cause each of the NPS Entities to permit, representatives of Buyer to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the NPS Entities, to all premises, properties, management personnel, books, records (including Tax records), Contracts, and documents of or pertaining to each of the NPS Entities.

4.6.     Notice of Developments. Sellers will give prompt written notice to Buyer of any material adverse development causing a breach of any of the representations and warranties in Section 2 above. Buyer will give prompt written notice to Sellers of any material adverse development causing a breach of any of Buyer’s representations and warranties in Section 3 above. Buyer will give prompt written notice to Sellers of any breach of any representations or warranties of the Sellers in Section 2 above, of which Buyer has actual knowledge (which means the actual knowledge, without any duty to investigate, of Mitch Garber, Michael Liquornik, Leon Garfinkle or Jeffrey Crystal). No disclosure by any party pursuant to this Section 4.6, however, shall be deemed to amend or supplement the disclosure Schedules or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant for purposes of Section 6, provided, however, that the parties may amend or supplement the disclosure Schedules prior to the Closing regarding events occurring after the date hereof and up until the Closing for purposes of Section 7 if the parties agree to consummate the transaction despite such disclosures.

4.7.     Exclusivity. No Sellers will (and Sellers will not cause or permit any of the NPS Entities to) (a) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of the Membership Interests or any interests, capital stock or other voting securities, or any substantial portion of the assets, of any of the NPS Entities (including any acquisition structured as a merger, consolidation, or share exchange) or (b) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. Sellers will not vote their interests in favor of any such acquisition whether structured as an asset purchase, merger, consolidation, or share exchange. Sellers will notify the Buyer immediately if any Person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing.

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4.8.     Compliance with Laws; Notification. The NPS Entities shall comply with all applicable Laws and Orders. Each NPS Entity will deliver to Buyer complete and correct copies of all material reports and filings made or filed by such NPS Entity with any Governmental Authority, and all written notices from any Governmental Authority alleging noncompliance with any Governmental Permits.

4.9.     Taxes. The NPS Entities shall pay and discharge when due all Taxes imposed upon their properties or upon the income or profits therefrom (in each case before the same become delinquent and before penalties accrue thereon) (unless such NPS Entity is disputing any of the foregoing in good faith by appropriate proceedings and has established an appropriate reserve therefor on the consolidated financial statements of such NPS Entity).

4.10.     Insurance. The NPS Entities shall keep their respective property and assets insured by financially sound and reputable insurers against such casualties and contingencies, of such types, on such terms and in such amounts as is customary for companies in similar businesses similarly situated.

SECTION 5.          Post-Closing Covenants. The parties agree as follows with respect to the period following the Closing.

5.1.     General. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other party reasonably may request, all at the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification therefor under Section 7 below). Sellers acknowledge and agree that from and after the Closing the Buyer will be entitled to possession of all documents, books, records (including Tax records), minute books, agreements, and financial data of any sort relating to the Company, MSUSA or USCCP.

5.2.     Litigation Support. In the event and for so long as any party actively is contesting or defending against any Litigation in connection with (a) any transaction contemplated under this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving any of the NPS Entities, each of the other parties will cooperate with him or it and his or its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending party (unless the contesting or defending party is entitled to indemnification therefor under Section 7 below).

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5.3.     Transition. No Seller will (and Sellers will not cause or permit any of the NPS Entities to) take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, client, vendor, supplier, agent, employee or other business associate of any of the NPS Entities from maintaining the same business relationships with the NPS Entities after the Closing as it maintained with the NPS Entities prior to the Closing. Each of the Sellers will refer all customer inquiries relating to the businesses of the NPS Entities to the Buyer from and after the Closing.

5.4.     iPayment Confidentiality Agreement. To the extent that the iPayment Confidentiality Agreement is not assignable to Buyer, Sellers shall enforce the covenants of iPayment, Inc. thereunder and promptly notify Buyer of any breaches of such provisions.

5.5.     Name Change Amendments. Within thirty (30) days after the Closing Date, Sellers shall file amendments to the Articles of Incorporation of Manager and the Articles of Organization of Holdings to change their respective corporate names to any name that does not incorporate or use “NPS” or “National Processing Services” or any derivatives of such names or the names of any NPS Entities or Buyer, and shall deliver to Buyer certified copies of the Amendments filed with the Michigan Department of Consumer and Industry Services.

5.6.     Confidentiality Agreements. Within thirty (30) days after the Closing Date, Sellers shall use reasonable efforts to deliver confidentiality, non-disclosure and non-competition agreements substantially in the form attached hereto as Exhibit K, duly executed by each employee of the Company (collectively, the “Confidentiality Agreements”).

5.7.     Confidentiality.

(a)     “Trade Secrets” means all data or information of the NPS Entities, and/or Customers of the NPS Entities, including without limitation, formulas, patterns compilations, programs, devices, methods, techniques, or processes, entrusted or made available to the Sellers, whether in writing, in computer form or conveyed orally, or developed by the Sellers, at any time prior to the Closing Date, that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. “Trade Secrets” include, without limitation, non-public financial information, forecasts, budgets and data, credit procedures and terms, marketing and advertising plans, terms of completed and contemplated agreements, staffing program and support materials, personnel and candidate identities and information, candidate and recruit lists, payment and billing rates, proprietary computer hardware and software and related documentation, product research and designs, employment and personnel information (including, without limitation, the names, addresses, compensation, specific capabilities, and performance evaluations of personnel), Customer information and Customer identities, credit histories, profitability analyses, and Customer-specific price or cost information. Trade Secrets include combinations of information, some of whose individual elements may be known but which, in the aggregate, derive actual or potential economic value by reason of not being known to others who could benefit from them. Sellers recognize that the NPS Entities have invested considerable amounts of time and money in developing and maintaining Trade Secrets, and any unauthorized use or disclosure of such Trade Secrets in any form or manner would irreparably harm Buyer and the Company.

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(b)     “Confidential Information” means any information or data of the NPS Entities and/or Customers of the NPS Entities, other than Trade Secrets, which is valuable to the NPS Entities and not generally known to competitors of the NPS Entities.

(c)     Sellers acknowledge and agree that the NPS Entities have an identifiable interest in protecting their rights and ownership of all of their intellectual property, including, without limitation, their patents, copyrights, trademarks, inventions, know-how, Trade Secrets and other Confidential Information (collectively, “Proprietary Information”).

(d)     Sellers shall not, directly or indirectly, without the prior written consent of Buyer and the Company, use, disclose, reproduce, distribute or reverse engineer, any Proprietary Information, in whole or in part, and shall take no action that threatens to do so, and Sellers shall refrain from action that may cause or contribute to any other person engaging in conduct that results in any Proprietary Information losing its character as Proprietary Information. Sellers shall hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Proprietary Information, unless the Buyer and the Company expressly authorize such in writing. Sellers shall obtain Buyer’s and the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that incorporates any Proprietary Information. Each Seller hereby irrevocably assigns to the Company any rights such Seller may have or acquires in such Proprietary Information and recognizes that all Proprietary Information will be the sole property of the Company and its assigns.

(e)     In the event that any Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Proprietary Information, that Seller will notify Buyer promptly of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 5.7. If, in the absence of a protective order or the receipt of a waiver hereunder, any Seller is, on the advice of counsel, compelled to disclose any Proprietary Information to any Governmental Authority or else stand liable for contempt, that Seller may disclose the Proprietary Information to the Governmental Authority; provided, however, that the disclosing Seller shall use his or its commercially reasonable efforts to obtain, at the reasonable request of Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Proprietary Information required to be disclosed as Buyer shall designate. The foregoing provisions shall not apply to any Proprietary Information which is generally available to the public immediately prior to the time of disclosure.

(f)     This Agreement shall apply to Trade Secrets for as long as such information remains a Trade Secret, and to Confidential Information for a period of three (3) years from the Closing Date.

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(g)     Upon the Closing Date, Sellers shall return to the Company all Proprietary Information, in any form or media, and all copies thereof, and shall delete all Proprietary Information from any computers or other electronic memory devices the Sellers own or use, for the purpose of ensuring that the Proprietary Information and business relationships will not be put at risk.

5.8.     Non-Competition and Non-Solicitation.

(a)     Acknowledgements. The NPS Entities are engaged in the business of providing merchant credit card and debit card services and other forms of electronic funds transfer services and related equipment to merchants through banks, open bank card associations and other issuers of credit and debit cards and certain other forms and methods of electronic fund transfers (the “Business”) throughout the United States (“Territory”). Sellers acknowledge that the goodwill of the Company, and each Seller’s own personal knowledge of and/or involvement in the direct or indirect ownership and operations of the Company, extends throughout the Territory. Sellers further acknowledge that, in view of Sellers’ previous relationship with the Company and in furtherance of and in consideration of Buyer’s purchase of the Company from Holdings, a restriction on Sellers’ competitive activities entered into in connection with the sale of the Company, as described below, limited to five (5) years from the Closing Date (the “Restrictive Period”), is both reasonable and narrowly tailored to protect Buyer’s and the Company’s legitimate interests in preserving the goodwill and intangibles being purchased and in preventing unfair competition.

(b)     Non-competition. During the period commencing on the Closing Date and ending the date thirty (30) months after the Closing Date, Sellers shall not, from any location, without the prior written consent of Buyer, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing or control of, or render services of an executive, employment, advertising, marketing, sales, administrative, supervisory, or consulting nature to, any person or business that is in, or is contemplating entering into, competition with the Business of the Company within the Territory as such Business exists as of the Closing Date. Notwithstanding the foregoing, Sellers shall not be deemed to breach or violate the foregoing covenant or to be engaged in the Business solely by reason of his or her passive ownership of any stock, bond, note, debenture, mortgage or other security issued by any other entity if such securities are actively traded on a stock exchange or on NASDAQ and such securities constitute less than one percent (1%) of the total voting securities issued by such entity.

(c)     Non-solicitation of Customers. During the Restrictive Period, Sellers shall not, from any location, without the prior written consent of Buyer, directly or indirectly, solicit or serve any Customer of the Company on behalf of any person or business that is in, or is contemplating entering into, competition with the Business of the Company within the Territory as such Business exists as of the Closing Date.

(d)     Non-solicitation of Employees. During the Restrictive Period, the Sellers shall not, from any location, without the prior written consent of Buyer, solicit, hire, or attempt to hire any employee of Buyer or the Company, to work at, for, or with any person or business that is in, or is contemplating entering into, competition with the Business of the Company within the Territory as such Business exists as of the date hereof, nor call upon any such employee for such purpose.

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(e)     PPS. Notwithstanding anything to the contrary herein, nothing in this Section 5.8 shall prohibit Sellers from continuing to own and operate Primepoint Systems LLC, a Michigan limited liability company (“PPS”) engaged in the business of developing and issuing tangible prepaid debit/ATM cards for use and/or distribution by retailers and other sales channels and payroll card programs (collectively, the “Current Activities”). For purposes of this Section 5.8, PPS’s Current Activities are not in competition with the Business of the Company or Buyer.

5.9.     Reasonableness of Restrictions; Severability. The parties agree that the restrictions contained in Section 5.7 and Section 5.8 are reasonable and necessary to protect the Proprietary Information, business relationships and employment relationships of the Company, and the goodwill and intangibles associated therewith, and in particular that the duration and scope of the restrictions are reasonable under all the circumstances known on the date hereof. Sellers understand that the covenants set forth herein are essential elements of the consideration underlying this Agreement. The parties further agree that if, at the time these covenants are sought to be enforced, a court of competent jurisdiction determines that any provision is overly broad, unenforceable or void under applicable Law, the court shall reform such overly broad, unenforceable or void provision to the extent needed to make it enforceable or, if reformation is not permissible under applicable Law, strike out such overly broad, unenforceable or void provision, and enforce the other terms as written.

5.10.     Injunctive Relief. Sellers hereby agree that any breach or threatened breach by Sellers of any of the restrictions contained in Section 5.7 or Section 5.8 shall irreparably injure Buyer and the Company and that any remedy at law for any breach or threatened breach by Sellers of any such provisions shall be inadequate, and that Buyer and the Company shall be entitled to seek injunctive relief in addition to any other remedy either of them might have under this Agreement or at law or in equity, without the necessity of bond. Sellers further agree that the grant of such injunctive relief and the enforcement of the terms of this Agreement shall not deprive him or her of his or her ability to earn a living.

5.11.     Equitable Tolling. Notwithstanding any the foregoing, in the event the validity or enforceability of any of the restrictions contained in Section 5.7 or Section 5.8 becomes the subject matter of a legal action, the Restrictive Period set forth herein shall be tolled during the pendency of such legal action and shall restart upon the issuance of an order or judgment by a court of competent jurisdiction enforcing the terms of this Agreement or upon dismissal of such legal action.

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SECTION 6.     Conditions to Obligation to Close.

6.1.     Conditions to Obligation of Buyer. The obligation of Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(a)     the representations and warranties of Sellers set forth in Section 2 above shall be true and correct in all material respects at and as of the Closing Date and Buyer has reviewed and consented to any updates to the disclosure Schedules made by Sellers pursuant to Section 4.6;

(b)     Sellers shall have performed and complied with all of their covenants hereunder in all material respects through the Closing;

(c)     no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (iii) affect adversely the right of Buyer to own the Membership Interests, or (iv) affect adversely the right of the Company to own its assets and to operate its businesses (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); and

(d)     Sellers and the NPS Entities shall have completed all Closing Actions and Deliveries to be completed by them in connection with consummation of the transactions contemplated hereby and Buyer shall have received all Transaction Documents and certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby, duly executed by the appropriate parties thereto and in form and substance reasonably satisfactory to the Buyer.

        Buyer may waive any condition specified in this Section 6.1 if it executes a writing so stating at or prior to the Closing.

6.2.     Conditions to Obligation of Sellers. The obligation of Sellers to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions:

(a)     the representations and warranties of Buyer set forth in Section 3 above shall be true and correct in all material respects at and as of the Closing Date and Sellers have reviewed and consented to any updates to the disclosure Schedules made by Buyer pursuant to Section 4.6; (b) Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing;

(c)     no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); and

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(d)     Buyer shall have completed all Closing Actions and Deliveries to be completed by Buyer in connection with consummation of the transactions contemplated hereby and Sellers shall have received all Transaction Documents and certificates, instruments, and other documents required to effect the transactions contemplated hereby, duly executed by the appropriate parties thereto and in form and substance reasonably satisfactory to the Sellers.

        Sellers may waive any condition specified in this Section 6.2 if they execute a writing so stating at or prior to the Closing.

SECTION 7.      Survival; Indemnification.

7.1.     Survival. All representations and warranties in this Agreement, in any Transaction Document executed in connection with the transactions contemplated by this Agreement or in any certificate or other instrument of a party delivered pursuant to Section 1.4 shall survive the Closing until the date eighteen (18) months after the Closing Date; provided, however, that the representations and warranties set forth in Sections 2.1, 2.2, 2.4, 2.6, 2.26, 3.1, 3.3, 3.4 and 3.6 shall survive indefinitely and the representations and warranties set forth in Sections 2.11, 2.20 and 2.23 shall survive until the thirtieth (30^th) day after expiration of the applicable statute of limitations. All covenants and agreements contained herein and in any other Transaction Document shall survive until performed in accordance with their terms.

7.2.     Indemnification.

(a)     The Sellers, jointly and severally, shall indemnify, defend and hold harmless Buyer, its Affiliates, and each of their respective officers, directors, partners, employees, agents, advisors, consultants, and representatives, and the successors and assigns of any of the foregoing (including any transferee of the Membership Interests) from and against all Losses incurred or suffered by any of the foregoing (whether incurred or suffered directly or indirectly through ownership of the Membership Interests or otherwise) arising out of, relating to, or resulting from (i) the breach of any representation or warranty made by any Seller in any Transaction Document, (ii) the breach of, or the failure to perform, any covenant or agreement of any Seller made in any Transaction Document, (iii) any Excluded Claims, or (iv) any Pre-Closing Liabilities.

(b)     Buyer shall indemnify, defend and hold harmless Sellers, their Affiliates, and each of their respective officers, directors, employees, agents, advisors, consultants, and representatives, and the successors and assigns of any of the foregoing from and against all Losses incurred or suffered by any of the foregoing arising out of, relating to, or resulting from (i) the breach of any representation or warranty made by Buyer in any Transaction Document, (ii) the breach of, or failure to perform, any covenant or agreement of Buyer made in any Transaction Document, or (iii) any Post-Closing Liabilities.

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(c)     As used herein, “Pre-Closing Liabilities” means any liabilities (other than the current liabilities of the Company reflected in the Net Current Assets on the Closing Financial Statements) of the NPS Entities or Sellers arising out of, relating to, or resulting from (i) any in progress or threatened in writing Litigation against or affecting the NPS Entities that arose from any Event existing on or prior to Closing, regardless of whether it is disclosed pursuant to this Agreement, (ii) any obligation for payment of commissions or buyout of Referral Agreements based on the consummation of the transactions contemplated by this Agreement and the other Transaction Documents, (iii) any obligation for payment of commissions to employees or agents of the NPS Entities earned with respect to the Earned Residuals, (iv) any post-Closing adjustment assessed by a third party resulting from an incorrect overpayment received by the Company prior to the Closing, or (v) any Litigation made or filed by any trustee or receiver or other interested party in connection with or as a result of or otherwise following the insolvency, reorganization or bankruptcy of Holdings, whether made or filed as part of formal bankruptcy or reorganization proceedings or otherwise, which claim, demand, action, proceeding or lawsuit in any way challenges, seeks to set aside or deprive Buyer of the benefits of the transaction contemplated by this Agreement.

(d)     As used herein, “Post-Closing Liabilities” means any liabilities of the Company or Buyer arising out of, relating to, or resulting from the operation of the business of the Company or Buyer, occurring after the Closing Date, including any Litigation against or affecting Sellers that arose from any Event not existing on or prior to Closing.

(e)     Any payment by Sellers to Buyer pursuant to this Section 7.2 shall be treated for all income Tax purposes as an adjustment to the Purchase Price paid by Buyer for the Membership Interests pursuant to this Agreement.

(f)     Any claim for indemnification pursuant to this Section 7.2 must be made before the expiration of the survival periods set forth in Section 7.1. No party shall be entitled to indemnification against a Loss arising from the breach of any representations or warranties of any other party unless the party seeking indemnification (the “indemnified party”) shall have given to the party from whom indemnification is sought (the “indemnifying party”) a claim notice in writing relating to such Loss (a “Claim Notice”) prior to expiration of the survival period of the representation or warranty upon which the claim is based. The written Claim Notice shall be given promptly after the indemnified party becomes aware of the facts indicating that a claim for indemnification may be warranted, and shall state in reasonable detail (to the extent known) the nature of the claim. Notwithstanding the foregoing, the failure of any indemnified party to provide a Claim Notice shall not relieve the indemnifying party of its obligations under this Section 7.2, except to the extent that the indemnifying party is materially prejudiced by failure to provide such Claim Notice. The indemnifying party may, through counsel of its own choosing and reasonably satisfactory to the indemnified party, assume the defense of any matter in respect of which indemnification is being claimed hereof or other indemnification obligation with respect thereto; provided, however, that any indemnified party shall be (i) entitled to participate in any such claim with counsel of its own choice but at its own expense and (ii) shall be entitled to participate in any such claim with counsel of its own choice at the expense of the indemnifying party if representation of both parties by the same counsel presents a conflict of interest or is otherwise inappropriate under applicable standards of professional conduct. In any event, if the indemnifying party fails to take reasonable steps necessary to defend diligently the action or proceeding within 20 days after receiving a Claim Notice from such indemnified party, the indemnified party may assume such defense or other indemnification obligation and the reasonable fees and expenses of its attorneys shall be deemed to be a Loss covered by the indemnity provided for in this Section 7.2. The indemnifying party shall not, without the written consent of the indemnified party, which consent will not be unreasonably withheld or delayed, settle or compromise any pending or threatened Litigation or claim in respect of which indemnification may be sought hereunder or consent to the entry of any judgment (x) which does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the indemnified party of a written release from all liability in respect of such action or claim, (y) which includes any statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, or (z) in any manner that involves any injunctive relief against the indemnified party. The indemnified party may not compromise or settle any claim without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed), unless the sole relief granted is equitable relief for which the indemnifying party would have no liability or to which the indemnifying party would not be subject.

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(g)     Notwithstanding anything to the contrary herein, (i) no claim may be made against Sellers for indemnification in respect of any Losses unless the aggregate amount of Losses incurred by the indemnified parties for which the indemnified parties seek indemnification under such provisions exceeds US$200,000 (the “Threshold”) and, once the Losses incurred exceed the Threshold, Sellers shall then be liable for all Losses relating back to the first dollar including the amount of the Threshold, and (ii) the Sellers shall not be required to indemnify any Person pursuant to, and shall not have any further liability under, this Section 7 after such time as the aggregate amount of all payments made by the Sellers pursuant to this Section 7 equals 50% of the Purchase Price (the “Cap”). Notwithstanding the foregoing, the Threshold and the Cap shall not apply with respect to any Losses arising out of or related to a breach of any representations and warranties contained in Sections 2.2, 2.4, or 2.26. No claim may be made against Buyer for indemnification in respect of any Losses unless the aggregate amount of Losses incurred by the indemnified parties for which the indemnified parties seek indemnification thereunder exceeds the Threshold and, once the Losses incurred exceed the Threshold, Buyer shall then be liable for all Losses relating back to the first dollar including the amount of the Threshold.

(h)     The “Material Adverse Effect” and other materiality (or correlative meaning) qualifications included in the representations and warranties in this Agreement or in any of the other Transaction Documents (other than those set forth in Section 2.7(a), Section 2.15 or Section 2.28) shall have no effect on any provisions in this Section 7 concerning the indemnities of the Company or Buyer with respect to such representations and warranties, each of which representations and warranties shall be read as though they contained no “Material Adverse Effect” or other materiality (or correlative meaning) qualification for purposes of determining whether and to what extent a breach of representation or warranty has occurred and whether a party is entitled to indemnity under Section 7.

(i)     Any liability for indemnification hereunder shall be determined without duplication of recovery by reason of the state of facts giving rise to such liability constituting a breach of more than one representation, warranty, covenant or agreement or otherwise; provided, however, that subject to there being no duplication of recovery, the indemnified party shall be entitled to recover to the maximum extent provided in this Agreement (by way of example, if any indemnified party’s entitlement to indemnification is both by reason for a breach of a representation or warranty by the Company to which any of the limitations of Section 7.2(g) apply, and by reason of a covenant to which such limitations do not apply, the indemnified party shall be entitled to indemnification without such limitations being applied).

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7.3.     Indemnification Principles. For purposes of this Agreement, “Losses” shall mean each and all of the following items: claims, losses (including losses of earnings and losses in the value of the Membership Interests), liabilities, obligations, payments, damages (actual, punitive or consequential), charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including interest which may be imposed in connection therewith), costs and expenses of investigation, actions, suits, proceedings, demands, assessments and reasonable fees, expenses and disbursements of counsel, consultants and other experts. Any payment pursuant to this Section 7, shall be paid in cash in United States dollars. Any amount for Losses due to Buyer hereunder shall be deducted first from the Holdback Amount and, if there is no or insufficient Holdback Amount available, then the Sellers, jointly and severally, shall pay the remaining amount of such Losses to Buyer subject to the limitations set forth in Section 7.2(g).

7.4.     Remedies. Each party hereby acknowledges and agrees that, from and after the Closing Date, its sole and exclusive remedy for monetary damages with respect to any and all claims for breach of representations, warranties and covenants relating to the subject matter of this Agreement shall be pursuant to the indemnification provisions set forth in this Section 7. Notwithstanding any implication herein to the contrary, (a) any party to this Agreement shall be entitled to seek specific performance of (or other equitable relief with respect to) such rights without posting a bond or other security, and (b) each party to this Agreement shall have all rights and remedies to which such Person is entitled at law (including common law) or in equity with respect to any claim based on fraud or intentional misconduct.

7.5.     Minimization of Losses. The amount of any Losses for which indemnification is provided under this Section 7 shall be reduced by the Tax benefit arising as the result of any such Losses but only to the extent such Tax benefits are actually realized by the indemnified party (either directly or indirectly through the Company) in the Tax year in which such Losses were incurred and, in the event such Tax benefit is realized after the indemnification payment to which such Losses relate is paid, the indemnified party shall remit to the indemnifying party the lesser of (a) such Tax benefit or (b) the amount of the indemnification payment. The indemnified party shall use commercially reasonable efforts to minimize its Losses by, among other reasonable things and without limiting the generality of the foregoing, taking such reasonable remedial action as it reasonably believes may minimize such Losses. Any insurance proceeds received by indemnified party shall not be considered as an offset or reduction of the Losses and the indemnified party shall not be required to have insurance or apply insurance proceeds to mitigate any Losses.

7.6.     Representative. The Sellers hereby irrevocably designate and appoint Laith Yaldoo (the “Representative”) as the agent and attorney-in-fact for the Sellers and the Representative is authorized and empowered to act, for and on behalf of any or all of the Sellers (with full power of substitution in the premises), in connection with the indemnity provisions of this Section 7 as they relate to the Sellers generally, the Adjustment Amount, the Revenue Adjustment, the Holdback Amount, the notice provision of this Agreement and such other matters as are reasonably necessary for the consummation of the transactions contemplated in this Agreement, including, without limitation, to act as the representative of Sellers to review and authorize all set-offs, claims and other payments authorized or directed by this Section 7 and dispute or question the accuracy thereof, to compromise on their behalf with Buyer any claims asserted thereunder and to authorize payments to be made with respect thereto and to take such further actions as are authorized in this Agreement. In the event that the person serving as Representative dies or becomes disabled or resigns (by written notice to the parties), a replacement shall be designated within ten (10) days by those Sellers receiving a majority of the Purchase Price. The Representative shall not be liable, in his capacity as representative of the Sellers, to any Seller and their respective affiliates with respect to any action taken or omitted to be taken by the Representative under or in connection with this Agreement in his capacity as representative of the Sellers unless such action or omission results from or arises out of fraud, gross negligence, willful misconduct or bad faith on the part of the Representative. The Sellers acknowledge and agrees that Representative will be an employee of the Company after the Closing. Each Seller who receives any portion of the Purchase Price, by acceptance thereof and without any further action, confirms such appointment and authority and acknowledges and agrees that such appointment is irrevocable and coupled with an interest, it being understood that the willingness of Buyer to enter into this Agreement is based, in part, on the appointment of a representative to act on behalf of the Sellers.

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7.7.     Consent. Each Seller, on behalf of himself or herself and each of his or her Affiliates (if applicable), hereby consents to and approves of the sale of the Membership Interests to Buyer. The Sellers consent to and approve of the Merger and the transactions contemplated thereby, including, without limitation, for purposes of Section 701 of the Michigan Limited Liability Company Act and any other applicable merger, anti-takeover or similar statute or regulation.

7.8.     Release. Each Seller hereby releases and forever discharges Buyer, the NPS Entities and each of their respective individual, joint or mutual, past, present and future directors, managers, officers, agents, partners, affiliates, stockholders, members, controlling persons, subsidiaries, successors and assigns (individually, a “Releasee” and collectively, “Releasees”) from any and all claims, demands, proceedings, causes of action, orders, obligations, contracts, agreements, debts and liabilities whatsoever, whether known or unknown, suspected or unsuspected, both at law and in equity (collectively, “Claims”), which each Seller now has, has ever had or may hereafter have against the respective Releasees arising contemporaneously with or prior to the Closing Date or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the Closing Date, including, but not limited to, any rights to indemnification or reimbursement from the Buyer or any NPS Entity, whether or not relating to claims pending on, or asserted after, the Closing Date; provided, however, that this Section 7.8 shall not in any way release any Claims arising under (a) this Agreement, any of the Transaction Documents or any other document executed in connection with the transactions contemplated hereby or thereby, including, without limitation, that certain contribution agreement among the Sellers, (b) any present or future obligation of the NPS Entities to provide indemnification to the Principals under the organizational documents of the NPS Entities, applicable insurance policies maintained by the NPS Entities or applicable law or (c) any obligation of the NPS Entities to pay the Principals any compensation or employee benefits to which the Principals are entitled in their capacity as employees of the NPS Entities that are either paid on or prior to the Closing or reflected on the Closing Financial Statements. Each Seller hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby. Without in any way limiting any of the rights and remedies otherwise available to any Releasee, Sellers shall indemnify and hold harmless each Releasee from and against all Losses, whether or not involving third party claims, arising directly or indirectly from or in connection with the assertion by or on behalf of Sellers of any claim or other matter purported to be released pursuant to this Release.

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SECTION 8.          Tax Matters. The following provisions shall govern the allocation of responsibility as between Buyer and Sellers for certain tax matters following the Closing Date:

8.1.     Tax Periods Ending on or Before the Closing Date. Sellers shall prepare or cause to be prepared and file or cause to be filed all income Tax Returns for Holdings with respect to periods prior to the Closing Date which reflect the operations of the NPS Entities for the periods prior to the Closing Date. Sellers shall prepare or cause to be prepared and Buyer shall file or cause to be filed all Tax Returns for the Company, USCCP and MSUSA for all periods ending on or prior to the Closing Date which are filed after the Closing Date. Sellers shall permit Buyer to review and comment on each such Tax Return described in the preceding sentence prior to filing. Sellers shall pay all Taxes of the NPS Entities with respect to such periods. 8.2. Tax Periods Beginning Before and Ending after the Closing Date. Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company for Tax periods which begin before the Closing Date and end after the Closing Date or any other Tax Returns of the Company not described in Section 8.1 which are due after the Closing Date. Sellers shall pay to Buyer within fifteen (15) days after the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on or before the Closing Date to the extent such Taxes are not reflected in the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Interim Financial Statements. For purposes of this Section, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall (a) in the case of any sales, use, transfer or other similar Taxes, and in the case of employment, payroll or other similar Taxes, be based on an interim closing of the books as of the Closing Date and (b) in the case of any Taxes not described in subsection (a) above (other than Taxes based upon or related to income or receipts), be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company.

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8.3.     Cooperation on Tax Matters. Buyer and Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Sellers agree (a) to retain all books and records with respect to Tax matters pertinent to the NPS Entities relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (b) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, Sellers shall allow the other party to take possession of such books and records in the event that Seller is going to destroy or discard such books and records or provide Buyer with copies of such books and records in the event that Seller is going to transfer such books and records. Buyer and Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). Buyer and Sellers further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Department Regulations promulgated thereunder.

SECTION 9. Termination.

9.1.     Termination of Agreement. The parties may terminate this Agreement as provided below:

(a)     Buyer and Sellers may terminate this Agreement by mutual written consent at any time prior to the Closing;

(b)     Buyer may terminate this Agreement by giving written notice to Sellers at any time prior to the Closing (i) in the event any Seller has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, Buyer has notified Sellers of the breach, and the breach has continued without cure for a period of 15 days after the notice of breach or (ii) if the Closing shall not have occurred on or before July 15, 2004, by reason of the failure of any condition precedent under Section 6.1 (unless the failure results primarily from Buyer itself breaching any representation, warranty, or covenant contained in this Agreement); and

(c)     Sellers may terminate this Agreement by giving written notice to Buyer at any time prior to the Closing (i) in the event Buyer has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, Sellers have notified Buyer of the breach, and the breach has continued without cure for a period of 15 days after the notice of breach or (ii) if the Closing shall not have occurred on or before July 15, 2004, by reason of the failure of any condition precedent under Section 6.2 (unless the failure results primarily from Sellers themselves breaching any representation, warranty, or covenant contained in this Agreement).

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9.2.     Effect of Termination. If any party terminates this Agreement pursuant to Section 9.1 above, all rights and obligations of the parties hereunder shall terminate without any liability of any party to any other party (except for any liability of any party then in breach); provided, however, in the event a party terminates this Agreement (a) as a result of a material breach by another party or (b) by reason of the failure of the conditions contained in Section 6.1(a), (b) or (d) or Sections 6.2(a), (b) or (d), in addition to any other remedies the non-breaching party may have, the breaching party shall reimburse the non-breaching party for all of its out-of-pocket costs and expenses associated with its due diligence investigation of the NPS Entities and its preparation and negotiation of the Transaction Documents.

SECTION 10.           Miscellaneous.

10.1.     Expenses. Each party shall pay the fees and expenses (including the fees and expenses of counsel and accountants retained by such party) incurred by such party in connection with the negotiation and preparation of the Transaction Documents and the consummation of the transactions contemplated hereunder and in connection with any amendments, waivers or consents under or in respect of any of the Transaction Documents.

10.2.     Certain Taxes. Sellers, jointly and severally, agree that they will pay, and will hold Buyer harmless from, any and all liability with respect to any transfer, transfer gains, stamp or similar Taxes which may be determined to be payable in connection with the execution and delivery and performance of this Agreement or any modification, amendment or alteration of the terms or provisions of this Agreement.

10.3.     Disclosures; Press Releases. The parties agree that they will not, (a) except as may be necessary in connection with a request by a Governmental Authority or as required by Law, disclose the transactions contemplated by the Transaction Documents or any of the terms thereof without the prior consent of the other parties, other than to Affiliates, members, partners or employees of such Person or its Affiliates, financial advisors, financial sources, or legal counsel, or (b) use in advertising or publicity the name of any party hereto, or any partner or employee of such party hereto or any of its respective Affiliates, or any trade name, trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof owned by the other party hereto or any of its respective Affiliates, in either case without the prior written consent of such party; provided, however, that Buyer may describe the transactions contemplated hereby in (i) a press release (Sellers shall be given an opportunity to review and comment, but not to approve such press release) and (ii) any promotional literature prepared by or on behalf of Buyer. This covenant shall survive the Closing or the termination of this Agreement.

10.4.     Further Assurances. At any time or from time to time after the Closing, Sellers, on the one hand, and Buyer, on the other hand, agree to cooperate with each other, and at the request of the other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and to otherwise carry out the intent of the parties hereunder.

36

10.5.     Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer on any Person, other than the parties hereto or their respective successors and permitted assigns, any rights or remedies, obligations or liabilities under this Agreement; provided, however, that whether or not any express assignment has been made, the provisions of this Agreement which are for Buyer’s benefit as a purchaser or holder of the Membership Interests are also for the benefit of, and enforceable by, any subsequent holder of such Membership Interests or other successor-in-interest to the business or assets of the Company whether by sale, transfer assignment, merger or operation of law. The parties acknowledge that, subject to compliance with applicable securities Laws, Buyer may transfer and assign all or part of the Membership Interests acquired by it hereunder and may, in its discretion, transfer, assign or otherwise convey all or part of its rights and obligations under this Agreement or any other Transaction Document to any Person. Sellers may not assign any of its rights and obligations under this Agreement or any other Transaction Document without the prior written consent of Buyer.

10.6.     Entire Agreement. This Agreement and the other agreements and instruments referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and thereof, supersede all prior and contemporaneous arrangements or understandings with respect thereto.

10.7.     Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy, nationally recognized overnight courier, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties:

(i)

     
     
     
     
     
     
     

     

     
     
     
     
     
     
     
     

     

     
     
     
     
     
     
     

(ii)

     
     
     
     
     
     
     
     
     
     

     

     
     
     
     
     
     
     
     

if to Sellers, to:

NPS Holdings LLC
4036 Telegraph Road, Suite 205
Bloomfield Hills, MI 48302
Attention: Laith Yaldoo
Phone: (248) 540-7900
Fax: (248) 540-7910
Email: laith@npsvisa.com

ith a copy to (on or before September 1, 2004):

affe, Raitt, Heuer & Weiss, P.C.
ne Woodward Avenue
uite 2400
etroit, MI 48226
ttention: Jeffrey M . Weiss, Esq.
hone: (313) 961-8380
ax: (313) 961-8358
mail: jweiss@jafferaitt.com

ith a copy to (after September 1, 2004):

affe, Raitt, Heuer & Weiss, P.C.
7777 Franklin Road, Suite 2500
Southfield, MI 48034
Attention: Jeffrey M . Weiss, Esq.
hone: (248) 351-3000
ax: (248) 351-3082
Email: jweiss@jafferaitt.com

if to Buyer, to:

Optimal Payments Corp.
c/o Optimal Payments Inc.
2 Place Alexis-Nihon
3500 de Maisonneuve Blvd. W., Suite 700
Montreal, Quebec, Canada
H3Z 3C1
Attention: Michael Liquornik
hone: (514) 384-2707
ax: (514) 983-5615
mail: michael@optimalpayments.com

with a copy to:
Paul, Hastings, Janofsky & Walker LLP
1299 Pennsylvania Avenue, N.W.
Tenth Floor
Washington, DC 20004
Attention: Behnam Dayanim, Esq.
Phone: (202) 508-9564
Fax: (202) 508-8564
Email: behnamdayanim@paulhastings.com
  if to Sellers, to:

  NPS Holdings LLC
  4036 Telegraph Road, Suite 205
  Bloomfield Hills, MI 48302
  Attention: Laith Yaldoo
  Phone: (248) 540-7900
  Fax: (248) 540-7910
  Email: laith@npsvisa.com

 with a copy to (on or before September 1, 2004):

 Jaffe, Raitt, Heuer & Weiss, P.C.
 One Woodward Avenue
 Suite 2400
 Detroit, MI 48226
 Attention: Jeffrey M . Weiss, Esq.
 Phone: (313) 961-8380
 Fax: (313) 961-8358
 Email: jweiss@jafferaitt.com

 with a copy to (after September 1, 2004):

 Jaffe, Raitt, Heuer & Weiss, P.C.
 27777 Franklin Road, Suite 2500
  Southfield, MI 48034
  Attention: Jeffrey M . Weiss, Esq.
 Phone: (248) 351-3000
 Fax: (248) 351-3082
  Email: jweiss@jafferaitt.com

  if to Buyer, to:

  Optimal Payments Corp.
  c/o Optimal Payments Inc.
  2 Place Alexis-Nihon
  3500 de Maisonneuve Blvd. W., Suite 700
  Montreal, Quebec, Canada
  H3Z 3C1
  Attention: Michael Liquornik
 Phone: (514) 384-2707
 Fax: (514) 983-5615
 Email: michael@optimalpayments.com

  with a copy to:

  Paul, Hastings, Janofsky & Walker LLP
  1299 Pennsylvania Avenue, N.W.
  Tenth Floor
  Washington, DC 20004
  Attention: Behnam Dayanim, Esq.
  Phone: (202) 508-9564
  Fax: (202) 508-8564
  Email: behnamdayanim@paulhastings.com

37

        All such notices, requests, consents and other communications shall be deemed to have been given when received.

38

10.8.     Limitations of Representations and Warranties; Disclosure. Buyer acknowledges that the detailed representations and warranties by Sellers set forth in this Agreement and the other Transaction Documents have been carefully negotiated and prepared by the parties. The sole representations and warranties made by the Sellers in connection with the transactions contemplated by this Agreement and the other Transaction Documents are as set forth in this Agreement or the other Transaction Documents. In the event an item is disclosed in any Schedule to this Agreement, it shall be deemed disclosed for all purposes of this Agreement reasonably ascertainable from the context of the disclosure without regard to whether such item is disclosed on another Schedule for which disclosure is required.

10.9.     Amendments. The terms and provisions of this Agreement may be modified, amended or waived (temporarily or permanently) but only by written agreement executed by Sellers and Buyer. Any waiver shall be effective only in the specific instance and for the specific purpose for which given.

10.10.     Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

10.11.     Headings, Titles and Subtitles; Rules of Construction. The headings, titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. No rule of construction against the draftsperson shall be applied in connection with the interpretation or enforcement of this Agreement. Whenever this Agreement shall require a party to take an action, such requirement shall be deemed to include an undertaking by such party to cause its subsidiaries, and to use its reasonable best efforts to cause its other Affiliates, to take all necessary and appropriate action in connection therewith. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice versa. The words “including” and “include” and other words of similar import shall be deemed to be followed by the phrase “without limitation.” All references to Sections, Schedules and Exhibits shall mean to this Agreement unless provided otherwise.

10.12.     Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law of New York, Michigan or any other jurisdiction. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Michigan and of the United States of America, in each case located in Oakland County, Michigan, for any Litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any Litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in this Agreement, or such other address as may be given by one or more parties to the other parties in accordance with the notice provisions of Section 10.7, shall be effective service of process for any Litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any Litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the State of Michigan or the United States of America, in each case located in the County of Oakland, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such Litigation brought in any such court has been brought in an inconvenient forum.

39

10.13.     Specific Performance. In case any one or more of the covenants and/or agreements set forth in this Agreement shall have been breached by Sellers, Buyer may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including an action for damages as a result of any such breach and/or an action for specific performance of any such agreement contained in this Agreement.

10.14.     Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement.

10.15.     Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. This Agreement may be duly executed and delivered by a party by execution and facsimile delivery of the signature page of a counterpart to the other party, provided that, if delivery is made by facsimile, the executing party shall promptly deliver a complete counterpart that it has executed to the other party.

SECTION 11.           Certain Definitions. For purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 11.

        “Affiliate” means with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person.

        “Benefit Plan” shall mean any retirement, thrift, savings, pension, profit sharing, deferred compensation, bonus, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, stock bonus, restricted stock, cafeteria, paid time off, perquisite, fringe benefit, vacation, severance, termination, change-in-control, disability, life insurance, hospitalization, medical, health or other plan, program, policy, agreement, arrangement or understanding (whether or not legally binding) (including each employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) sponsored, maintained, contributed to or required to be contributed to by any NPS Entity for the benefit of any Employee or dependent thereof, or pursuant to which any NPS Entity could incur any direct or indirect liability (contingent or otherwise) in respect of any Employee or dependent thereof, excluding only the Employment Agreements.

        “Company Intellectual Property” shall mean all material Intellectual Property Rights which are used or required for use in connection with the conduct of the business of the NPS Entities.

        “Customer” shall mean any person or entity (i) which has retained, contracted with or agreed to use any NPS Entity in connection with the provision of services that the Company performs in the ordinary course of Business, (ii) which has been actively canvassed by any NPS Entity within the six (6) month period prior to the Closing Date, or (iii) about which, through his or her indirect membership interest in the Company, Sellers learned Confidential Information within the six (6) month period prior to the Closing Date.

40

        “Employee” shall mean any current or former employee, officer, director or consultant of any NPS Entity (but excluding any consultant that is not an individual).

        “Employment Agreement” shall mean any employment, consulting, non-competition, non-solicitation, severance, management, confidentiality, assignment-of-inventions or other, similar agreement to which any NPS Entity is a party with any Employee or pursuant to which any NPS Entity could incur any direct or indirect liability, contingent or otherwise, from any Employee.

        “Encumbrances” shall mean any mortgage, judgment, claim, lien, security interest, pledge, escrow, charge, easement, option, debt, assessment, right of first refusal, imperfection of title, tenancy, legal or equitable right of another Person or other encumbrances of any kind or character whatsoever.

        “Environmental Laws” shall mean any foreign, federal, state or local law, statute, ordinance, rule or regulation governing Environmental Matters, as the same have been or may be amended from time to time, including any common law cause of action providing any right or remedy relating to Environmental Matters, all indemnity agreements and other contractual obligations (including leases, asset purchase and merger agreements) relating to Environmental Matters, and all applicable judicial and administrative decisions, orders, and decrees relating to Environmental Matters.

        “Environmental Matter” shall mean any matter arising out of, relating to, or resulting from pollution, contamination, protection of the environment, public health or safety, health or safety of employees, sanitation, and any matters relating to emissions, discharges, disseminations, releases or threatened releases, of Hazardous Substances into the air (indoor and outdoor), surface water, groundwater, soil, land surface or subsurface, buildings, facilities, real or personal property or fixtures or otherwise arising out of, relating to, or resulting from the manufacture, processing, distribution, use, treatment, storage, disposal, transport, handling, release or threatened release of Hazardous Substances.

        “ERISA Affiliate” shall mean any entity which is (i) a member of a “controlled group of corporations,” under “common control” or an “affiliated service group” within the meaning of Sections 414(b), (c) or (m) of the Code, (ii) required to be aggregated under Section 414(o) of the Code or (iii) under “common control,” within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing sections, in each case with any NPS Entity.

        “Event” shall mean any action, matter, fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction related thereto, occurring on or prior to the Closing Date.

        “Hazardous Substances” shall mean any pollutants, contaminants, toxic or hazardous or extremely hazardous substances, materials, wastes, constituents, compounds, chemicals, natural or man-made elements or forces (including petroleum or any by-products or fractions thereof, any form of natural gas, lead, asbestos and asbestos-containing materials (“ACM”), building construction materials and debris, polychlorinated biphenyls (“PCBs”), mold, radon and other radioactive elements, ionizing radiation, electromagnetic field radiation and other non-ionizing radiation, sonic forces and other natural forces, infectious, carcinogenic, mutagenic, or etiologic agents, pesticides, defoliants, explosives, flammables or corrosives) that are regulated by any Environmental Laws.

41

        “HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

        “Intellectual Property Rights” shall mean (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reissues, continuations, continuations-in-part, revisions, divisions, extensions and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, domain names and corporate names, together with all translations, adaptations, derivations, and combinations thereof, and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith, (e) all trade secrets and confidential business information (including but not limited to research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, flowcharts, block diagrams, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (f) all computer software in whatever form (including data and related documentation), (g) all copies and tangible embodiments of any of the foregoing (in whatever form or medium) and (h) all licenses, sublicenses, permissions or Contracts in connection with any of the foregoing.

        “Interest” shall mean the annual interest rate payable by Fleet Bank on the money market savings account of Buyer.

        “Net Revenues” means the gross residuals and commissions, less all commissions payable to agents on such gross residuals or commissions.

        “NPS Entities” shall mean collectively Holdings, the Company, MSUSA, USCCP and Manager.

        “off-balance sheet arrangements” shall have the meaning set forth in paragraph (c)(4) of Rule 303 (17 CFR § 229.303) of Regulation S-K promulgated under the Securities Act.

        “Person” shall mean any individual, corporation, limited liability company, partnership, joint venture, business association, joint-stock company, trust or unincorporated organization.

        “Securities Act” shall mean the Securities Act of 1933, as amended.

        “Subsidiary” shall mean, with respect to any Person, any company, corporation, partnership, limited liability company or other entity (a) of which shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other similar managing body of such company, corporation, partnership, limited liability company or other entity are at the time owned or controlled, directly or indirectly, by such Person or (b) the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries by such Person.

42

        “to the knowledge of Sellers” shall mean the actual knowledge of any of the Principals after a review of the relevant records and due inquiry of the management of the NPS Entities and all other employees of the NPS Entities and their Subsidiaries who could reasonably be expected to have knowledge of the relevant information.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

43

        IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.

OPTIMAL PAYMENTS CORP.


 By: /s/ Stephen J. Shaper
        Name: Stephen J. Shaper
        Title: President

 NPS HOLDINGS LLC
 by its manager,
 NPS MANAGER, INC.


 By: /s/ Laith Yaldoo
        Name: Laith Yaldoo
        Title: President

 NPS MANAGER, INC.


 By: /s/ Laith Yaldoo
      Name: Laith Yaldoo
      Title: President


 /s/ Laith Yaldoo
 LAITH YALDOO


 /s/ Aj Nafso
 AJ NAFSO



 /s/ Saber Ammori
 SABER AMMORI

[SIGNATURE PAGE TO PURCHASE AGREEMENT

EX-31

EXHIBIT 31.1 (a)

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Neil S. Wechsler, certify that:

1. I have reviewed this Amendment No. 1 to the quarterly report on Form 10-Q of Optimal Group Inc. (the “Registrant”) for the quarter ended September 30, 2004 (this Form 10-Q, as amended by the Amendment No. 1 to that report, the “report”) ;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

i) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

ii) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

iii) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 5, 2004

By:	/s/ Neil S. Wechsler
	Neil S. Wechsler Co-Chairman and Chief Executive Officer

EX-31

EXHIBIT 31.2 (a)

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gary S. Wechsler, certify that:

1. I have reviewed this Amendment No. 1 to the quarterly report on Form 10-Q of Optimal Group Inc. (the “Registrant”) for the quarter ended September 30, 2004 (this Form 10-Q, as amended by the Amendment No. 1 to that report, the “report”) ;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

i) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

ii) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

iii) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 5, 2004

By:	/s/ Gary S. Wechsler
	Gary S. Wechsler Treasurer and Chief Financial Officer

EX-32

EXHIBIT 32.1 (a)

CERTIFICATION PURSUANT TO SECTION
1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Co-Chairman and Chief Executive Officer of Optimal Group Inc. (the “Company”), does hereby certify that to the best of the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q / A (Amendment No. 1) to the Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2004 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 5, 2004

By:	/s/ Neil S. Wechsler
	Neil S. Wechsler Co-Chairman and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of this report or as a separate disclosure document.

EX-32

EXHIBIT 32.2 (a)

CERTIFICATION PURSUANT TO SECTION
1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Treasurer and Chief Financial Officer of Optimal Group Inc. (the “Company”), does hereby certify that to the best of the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q / A (Amendment No. 1) to the Quarterly Report of the Company on Form 10-Q for the quarter ended September 30, 2004 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and

2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 5, 2004

By:	/s/ Gary S. Wechsler
	Gary S. Wechsler Treasurer and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of this report or as a separate disclosure document.