ACT OF 1934

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

1.      Introduction:

Nature of business

Bingo.com, Inc. (the "Company") was incorporated on January 12, 1987, under the laws of the State of Florida as Progressive General Lumber Corp. On January 22, 1999, the Company changed its name to Bingo.com, Inc.  The Company is in the business of providing games and entertainment based on the game of bingo through its Internet portal, www.bingo.com. 

Continuing operations

These consolidated financial statements have been prepared on the going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations.  The application of the going concern basis is dependent upon the Company achieving profitable operations to generate sufficient cash flows to fund continued operations, or, in the absence of adequate cash flows from operations, obtaining additional financing.  The Company has reported losses and incurred negative cash flow from operations in the last three years, and has an accumulated deficit of $9,174,243 at December 31, 2002.  As of the date of these financial statements, the Company has utilized substantially all of its available funding. 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts and settlement of the liability amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Management continues to review operations in order to identify additional strategies designed to generate cash flow, improve the Company's financial position, and enable the timely discharge of the Company's obligations.  If management is unable to identify sources of additional cash flow in the short term, it may be required to further reduce or limit operations.

  2.       Summary of significant accounting policies:

     (a)    Basis of presentation:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The financial statements include the accounts of the Company's wholly-owned subsidiaries, Bingo.com (Canada) Enterprises Inc., Bingo.com (Antigua) Inc., Bingo.com (Wyoming) Inc., Bingo Acquisition Corp and the 99% owned subsidiary, of Bingo.com (UK) plc.  All material intercompany balances and transactions have been eliminated in the consolidated financial statements.

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BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Summary of significant accounting policies (Continued):

   (b)    Use of estimates:

The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and recognized revenues and expenses for the reporting periods.  Significant areas requiring the use of estimates include the valuation of long-lived assets, the collectibility of accounts receivable and the valuation of future deferred tax assets.  Actual results may differ significantly from these estimates.

    (c)    Revenue recognition:

         (i)  Advertising revenue:

During the year ended December 31, 2001, revenue related to advertising sold by the Company's sales force has been recognized as the advertising campaign or impressions and clicks are made on the website, when the service is delivered. 

Effective September 1, 2001, the Company contracted with an Internet marketing company to sell advertising on its website directly to corporate customers or through advertising agencies.  The Company received a minimum monthly fee of $112,000 in connection with this contract and the minimum fee was recognized as revenue on a monthly basis. 

This agreement was cancelled effective January 31, 2002.  Between the end of January 2002 and May 21, 2002, the Company and Internet marketing company operated under the terms of a verbal arrangement. This verbal arrangement was terminated effective May 21, 2002. Under the terms of the verbal arrangement, the Internet marketing company provided website management, marketing and Internet advertising services for the Company in exchange for a commission equal to 50% of the revenue generated by the Company's www.bingo.com web portal.  Advertising revenues have been recognized as the advertising campaign or impressions and clicks that were made on the website.

Since May 21, 2002 the Company has managed its own sales of advertising, website hosting and ad serving. Advertising revenues have been recognized as the advertising campaign or impressions and clicks are made on the website and when collection of the amounts are reasonably assured.

        (ii)    Barter revenue:

In 2000, the Company adopted EITF No. 99-17 "Accounting for Advertising Barter Transactions".  EITF 99-17 provides that the Company recognize revenue and advertising expenses from barter transactions at the fair value only when it has a historical practice of receiving or paying cash for similar transactions.

41

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Summary of significant accounting policies (Continued):

 (c)    Revenue recognition: (Continued)

The Company bartered portions of the unsold advertising impressions generated by its website for advertising in media properties owned by third parties. The Company recorded revenues and costs for such barter transactions, with no net income or loss recognized. Barter revenue was $4,000 for the year ended December 31, 2002 (2001 - $371,566, 2000 - $299,480).

    (d)    Foreign currency:

The consolidated financial statements are presented in United States dollars, the functional currency of the Company. The Company accounts for foreign currency transactions and translation of foreign currency financial statements under Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" ("SFAS 52"). Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Nonmonetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in income. Revenues and expenses are translated at the rates of exchange prevailing on the dates such items are recognized in earnings.

The functional currency of the Company's wholly-owned Canadian and United Kingdom subsidiaries is the Canadian dollar and British Pound Sterling respectively. These financial statements are translated into US dollars using the exchange rate at the balance sheet date for assets and liabilities. Exchange gains and losses arising on this translation are excluded from the determination of income and are reported as the foreign currency translation adjustment in stockholders' equity and included in other comprehensive loss.

    (e)    Cash and cash equivalents:

The Company considers all short-term investments with a term to maturity at the date of purchase of three months or less to be cash equivalents.

    (f)      Inventory

Inventory is stated at the lower of cost or market value. It consists of products, such as t-shirts, to sell from our online store.

42

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

    (g)    Equipment:

Equipment is recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for annually over the following periods :

The Company has adopted Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). Under SOP 98-1, computer software costs incurred in the preliminary development stage are expensed as incurred. Computer software costs incurred during the application development stage are capitalized and amortized over the software's estimated useful life.  The Company did not capitalize any software development costs during the year ended December 31, 2002 (2001 - $188,348).

The Company has adopted EITF 00-2 "Accounting for Web Site Development Costs". EITF 00-2 provides guidance on how an entity should account for costs involved in such areas as planning, developing software to operate the website, graphics, content, and operating expenses. EITF 00-2 is effective for website development costs incurred for fiscal quarters beginning after June 30, 2000. The Company adopted EITF 00-2 in 2000, and all website development costs for periods subsequent to June 30, 2000, have been expensed as operating costs. No website development costs were capitalized for the periods ending December 31, 2002 or 2001.

    (h)    Advertising:

The Company expenses the cost of advertising in the period in which the advertising space or airtime is used. Advertising costs charged to selling and marketing expenses in 2002 totaled $2,000 (2001 - $6,258, 2000 - $44,558). 

    (i)      Stock-based compensation:

The Company accounts for its stock-based compensation arrangements with employees in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations.  This practice is allowed under the provisions of SFAS No. 123.  As such, compensation expense under fixed term option plans is recorded at the date of grant only to the extent that the market value of the underlying stock at the date of grant exceeds the exercise price.  In accordance with SFAS 123, since the Company has continued to apply the principles of APB 25 to employee stock compensation, pro forma loss and pro forma loss per share information has been presented as if the options had been valued at their fair values.  The Company recognizes compensation expense for stock options, common stock and other equity instruments issued to non-employees for services received based upon the fair value of the services or equity instruments issued, whichever is more 

43

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

    (i)      Stock-based compensation: (Continued)

reliably determined.  Stock compensation expense is recognized as the stock option is earned, which is generally over the vesting period of the underlying option.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation."   The Company adopted FIN 44, effective July 1, 2000, with respect to certain provisions applicable to new awards, options repricings, and changes in grantee status.  FIN 44 addresses practice issues related to the application of APB 25.   The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". The measurement date used is the earlier of either the performance commitment date or the date at which the equity instrument holder's performance is complete.

Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with the measurement provisions of SFAS 123, the Company's net loss and basic loss per share would have been adjusted as follows:

The fair value of each option grant has been estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

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      BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

        (j)    Impairment of long-lived assets and long-lived assets to be disposed of:

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets". At December 31, 2002, the only long-lived assets reported on the Company's consolidated balance sheet are equipment and domain name rights.  These provisions require that long-lived assets and certain identifiable recorded intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.

    (k)    Comprehensive income:

Comprehensive income consists of net loss and foreign currency translation adjustments that are separately presented in the consolidated statements of stockholders' equity (deficiency). 

    (l)      Income taxes:

The Company follows the asset and liability method of accounting for income taxes.  Under this method, current income taxes are recognized for the estimated income taxes payable for the current period.  Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as the benefit of losses available to be carried forward to future years for tax purposes.

Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered and settled.  The effect on future tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.  A valuation allowance is recorded for future tax assets when it is not more likely than not that such future tax assets will be realized.

    (m)    Net loss per share:

Basic loss per share is computed using the weighted average number of common shares outstanding during the periods.  Diluted loss per share is computed using the weighted average number of common shares and potentially dilutive common stock equivalents, including stock options and warrants and convertible debt, outstanding during the period.  As the Company has a net loss in each of the periods presented, basic and diluted net loss 

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      BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

  (m)    Net loss per share: (Continued)

per share is the same, as any exercise of the share purchase options or conversion of the convertible debenture outstanding would be anti-dilutive.

       (n)      Domain name:

The Company has capitalized the cost of the purchase of the domain name Bingo.com and was amortizing the cost over five years from the date of commencement of operations. In 2002, the Company suspended the amortization of the domain name cost in accordance with SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets", where companies are no longer required to amortize indefinite assets but instead test the indefinite intangible asset for impairment at least annually.  The capitalized amount is based on the net present value of the minimum payments permitted under the terms of the purchase agreement. The domain name was tested for impairment by comparing the future cash flows of the domain name with its carrying value. The Company determined that no impairment existed.

      (o)    Business Combinations:

In June, 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets".  SFAS No. 141 states that all business combinations should be accounted for using the purchase method of accounting.  SFAS No. 141 is effective for business combinations completed after June 30, 2001.

    (p)      New Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities " (SFAS 146), which addresses financial accounting and reporting associated with certain exit or disposal activities. Under SFAS 146, costs associated with certain exit or disposal activities shall be recognized and measured at their fair value in the period in which the liability is incurred rather than at the date of a commitment to an exit or disposal plan.  The Company is required to adopt SFAS 146 for all exit and disposal activities initiated after December 31, 2002.  The adoption of this interpretation is not anticipated to have a material effect on our financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, " Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtness of Others" (FIN 45). Fin 45 provides guidance on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for financial statements of   

46

      BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

(p)      New Accounting Pronouncements (Continued)

interim or annual periods ending after December 15, 2002, and its recognition requirements are applicable for guarantees. The adoption of this interpretation is not anticipated to have a material effect on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation". This statement amends SFAS 123, "Accounting for Stock-Based Compensation". SFAS 148 provides alternative methods of transition for companies that voluntarily change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The disclosure requirements of this statement are effective for financial statements of interim or annual periods ending after December 15, 2002.

In January 2003, the FASB issued FASB Interpretation No. 146, "Consolidation of Variable Interest Entities" (FIN 46). Fin 46 requires a company to consolidate any variable interest entities for which that company has a controlling financial interest. Fin 46 also requires disclosures about variable interest entities that the company is not required to consolidate, but which it has a significant variable interest. The Company is required to adopt the consolidation requirements of FIN 46 for variable interest entities created after January 2003. The adoption of this interpretation is not anticipated to have a material effect on our financial position or results of operations.

    (q)     Financial Instruments

             (i) Fair values:

The fair value of cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximates their financial statement carrying amounts due to the short-term maturities of these instruments. 

The financial statement carrying amount of the debentures payable at December 31, 2002, reflects the market value to the Company for the debt.

           (ii) Foreign Currency risk:

The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations.  The Company has not entered into any forward exchange contracts or other derivative instrument to hedge against foreign exchange risk.

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      BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

2.      Significant accounting policies (Continued):

    (r)     Reclassification

Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.

3.   Prior Period Adjustment:

    Debenture "A"

On April 16, 2001, the Company received a loan from, and issued a secured convertible Debenture "A" to, Redruth Ventures Inc., a British Virgin Islands corporation, for $750,000, and to Bingo, Inc., an Anguilla corporation, for $500,000 (collectively, "the Lenders"). A current director and officer of the Company, is the potential beneficiary of various discretionary trusts that hold approximately 80% of the shares of Bingo, Inc.

The Lenders received a total of 12,000,000 common stock purchase warrants, with an exercise price of $0.25 per share. The common stock purchase warrants issued in connection with the Debenture "A" are exercisable for a period of three years from the date of the Debenture "A". The Company did not account for the value of the warrants upon issuance of the Debenture "A" in accordance with APB 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". Using the Black-Scholes option pricing model, the warrants have an estimated value of $898,394, using the following assumptions: no annual dividend, volatility of 137%, risk-free interest rate of 5.17% and a term of three years. Due to the illiquidity of the Company's shares, a block discount of 40% ($359,357) was applied to this value providing a warrant debenture discount of $539,036.

The Company has restated the comparative prior periods presented in the December 31, 2002 consolidated statements of operations to reflect additional interest expense for the full discounted value of the warrants in the amount of $539,036, which will be amortized to interest expense over the next five years.

The total effect of the restatement was to increase interest expense by $76,363, increase debenture discount by $462,673 and additional paid-in capital by $539,036 for the year ended December 31, 2001, increasing the net loss for the year from $1,878,837 to $1,955,200 and accumulated net deficit from $8,129,172 to $8,205,535. The interest expense and additional paid-in capital accounts in the comparative prior periods balance sheet, statement of operations, statement of changes in stockholders' equity and statement of cash flows have been restated for the effects of the adjustments.

48

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

3.   Prior Period Adjustment: (Continued)

The effects on the Income statement for the year ending December 31, 2001 were as follows:

The effects on the balance sheet as of December 31, 2001 were as follows:

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5.  Domain name rights and contract payable:

The rights to use the domain name bingo.com were acquired in January of 1999 for a cash payment of $200,000 and the issuance of 500,000 shares of common stock of the Company at a deemed value of $2.00 per share. The agreement was signed with Bingo, Inc., an unrelated party at the date of signing of the agreement. Under the terms of the agreement, the Company is required to make quarterly domain name purchase payments to the vendor based on 4% of annual gross revenue (as defined in the agreement), with total minimum payments of $1,100,000 in the first three years, including the initial cash payment, required over the 99 year period ended December 31, 2098. These minimum payments commitments were completed on June 30, 2002.

During the year ended December 31, 2002, the agreement was amended so that the remaining domain name purchase payments to the vendor are made monthly, based on 4% of the preceding month's gross revenue.

Domain name rights have been capitalized on the balance sheet based on the present value of the future minimum royalty payments. In 2002, the Company suspended the amortization of the domain name in accordance with SFAS No. 142 "Accounting for Goodwill and Other Intangible Assets", where companies are no longer permitted to amortize indefinite assets.

Capitalized domain name rights are $1,257,241 at December 31, 2002 (2001 - $1,257,241). As per SFAS 142 there is no accumulated amortization for the year ended December 31, 2002.  (2001 - $677,259). Payments made relating to this contract totaled $196,795 during the year ended December 31, 2002 (2001 - $361,869), of which $185,000 related to the final payment made in accordance with the agreement for the minimum guaranteed domain name purchase payments of the domain name rights and the remaining $12,023 related to payments based on the continuing 4% of the proceeding months gross revenue as defined in the amended agreement.

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BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

5.  Domain name rights and contract payable: (Continued)

The effects of the SFAS 142, where companies are no longer permitted to amortize indefinite assets, on the Company's net loss and basic loss per share were as follows:

The amortization of the Domain Name was commenced during 2000 when the Company's website www.bingo.com became fully operational.

6.   Capital lease obligations:

Future minimum lease payments under capital leases for software and website equipment are as follows:

The timing of the minimum lease payments detailed above is based on the provisions of the original lease agreements. 

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BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

7.   Debenture payable:

Debenture "A"

On April 16, 2001, the Company received a loan and issued a secured convertible Debenture "A" for $1,250,000. Bingo, Inc has subsequently acquired Debenture "A" in its entirety. Under the terms of the Debenture "A" interest shall accrue on the outstanding principal amount of Debenture "A" at the rate of 12% per annum from the issuance date through April 16, 2003, at which time the interest will become payable.  Thereafter, interest shall accrue and be payable on the first business day of each succeeding quarter through and including April 16, 2006.  All principal, accrued but unpaid interest, and any other amounts are payable at maturity on April 16, 2006.

The Company has the option to pay all accrued interest in cash, common stock of the Company, or a combination of both cash and common stock.  Any amounts remaining unpaid on the Debenture "A" on the maturity date, whether principal, interest or other amounts due, shall be paid in full in cash on such date.  Any common stock of the Company delivered to the Holders in payment of the Debenture "A" will be valued at $0.25 per share.

The Holders of the Debenture "A" have the right, but not the obligation, to elect to convert any or all of the outstanding principal amount of the Debenture "A" into shares of the Company's common stock at a conversion price of $0.125 per share until the third anniversary date of the Debenture "A". The common stock that would be issued upon conversion of the Debenture "A" will be subject to certain resale restrictions, as defined in Rule 144 of the Securities and Exchange Act of 1933 (the "Exchange Act").  The Debenture "A" is secured by all assets of the Company.

The Holders of the Debenture "A" received a total of 12,000,000 common stock purchase warrants with an exercise price of $0.25 per share. The common stock purchase warrants issued in connection with the Debenture "A" are exercisable for a period of three years from the date of the Debenture "A". 

The discounted value of the warrants will be amortized to interest expense over the next five years. The total effect of the issuance of the warrants relating to Debenture "A" was to increase interest expense by $107,807 for the year ended December 31, 2002. (2001 - $76,363)

Effective as at the end of business on May 21, 2002, a debenture holder agreed to surrender for cancellation all of the 7,200,000 Warrants issued to them in connection with Debenture "A", in exchange for unused advertising inventory on the bingo.com website.

As of the date of this report, none of the Warrants have been exercised, and with the surrender for cancellation of all of the 7,200,000 warrants issued to a debenture holder, there remains 4,800,000 warrants outstanding under this Debenture "A".

52

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

7.   Debenture payable: (Continued)

Debenture "B"

On July 2, 2002 the Company issued a convertible debenture for $145,000 of which $50,000 was received from Bingo, Inc.

Under the terms of Debenture "B", interest accrues on the outstanding principal amount of Debenture "B" at the rate of 12% per annum through July 2, 2004, at which time the interest will become payable. Thereafter, interest shall accrue and be payable on the first business day of each succeeding quarter through and including July 2, 2006. All principal, accrued but unpaid interest and any other amounts due, are due and payable at maturity on July 2, 2006.

The Company has the option to pay all accrued interest in cash, common stock of the Company, or a combination of both cash and common stock. Any amounts remaining unpaid on the Debenture "B" at the maturity date, whether principal, interest or other amounts due, shall be paid in full in cash on such date. Any common stock of the Company delivered to the holders of Debenture "B" in payment of Debenture "B" will be valued at $0.25 per share.

The Holders of the Debenture "B" have the right, but not the obligation, to elect to convert all, or part, of the outstanding principal amount of Debenture "B" into shares of the Company's common stock at a conversion price of $0.15 per share until the third anniversary date of the Debenture "B". The common stock that would be issued upon conversion of Debenture "B" will be subject to certain resale restrictions, as defined in Rule 144 of the Securities and Exchange Act of 1933 ("The Exchange Act").

The holders of the Debenture "B" received a total of 580,000 common stock purchase warrants with an exercise price of $0.25 per share. The common stock purchase warrants issued in connection with the Debenture "B" are exercisable for a period of three years from the date of Debenture "B". Using the Black-Scholes model, the warrants have an estimated value of $34,038, using the following assumptions: no annual dividend, volatility of 161%, risk-free interest rate of 1.72% and a term of three years. . Due to the illiquidity of the Company's shares, a block discount of 40% ($13,615) was applied to this value providing a warrant debenture discount of $20,423.

The estimated discount value of the warrants will be amortized to interest expense over the next four years. Bingo, Inc. has the potential to become the largest single shareholder and a majority shareholder in the Company should Bingo, Inc. elect to convert any or all of the principal amount of Debenture "A" and its share of Debenture "B" into shares of the Company's common stock, or if the Company elects to repay the principal amount outstanding, and any accrued interest, in shares of the Company's common stock pursuant to the terms of Debenture "A" and Debenture "B".

53

BINGO.COM, INC.

Notes to Consolidated Financial Statements

Years ended December 31, 2002, 2001 (Restated) and 2000

  8.      Stockholders' equity:

    (a) Common stock issuances:

During the year ended December 31, 2002 the Company issued 250,000 shares of common stock to the former Chief Executive of the Company under the terms of a revised employment agreement. The agreed value of $42,500 for these shares was recorded in accrued liabilities at December 31, 2001.

     (b) Stock option plans:

    (i)  1999 stock option plan:

The Company has reserved a total of 1,895,000 common shares for issuance under its 1999 stock option plan.  The plan provides for the granting of non-qualified stock options to directors, officers, eligible employees and contractors of the Company. The Board of Directors determines the terms of the options granted, including the number of options granted, the exercise price and their vesting schedule.

The Company has granted a total of 1,800,000 (2001 - 1,600,000) stock purchase options under this plan, 1,700,000 (2001 - 1,575,000) of which remain outstanding at December 31, 2002.

  (ii) 2001 stock option plan:

During the year ended December 31, 2001, the Company's Board of Directors adopted the 2001 stock option plan. The Company has reserved a total of 2,000,000 common shares for issuance under the 2001 stock option plan.  The plan provides for the granting of incentive and non-qualified stock options to directors, officers, eligible employees and contractors of the Company. The Board of Directors determines the terms of the options granted, including the number of options granted, the exercise price and their vesting schedule.    

The Company has granted a total of 1,400,000 (2001 - 865,000) stock purchase options under the 2001 plan, 1,000,000 (2001 - 865,000) of which remain outstanding as at December 31, 2002.  Of the options outstanding at December 31, 2002, a total of 750,000 were issued where 10% vests at the grant date, 15% one year following the grant date and 2% per month starting 13 months after the grant date.  A total of 108,000 (2001 - 26,500) of these common stock purchase options had vested at December 31, 2002.

  Subsequent to the year ended December 31, 2002, the Company issued an additional 125,000 stock purchase options under the 2001 plan at $0.05.   The options vest 10% at grant date, 15% one year following the grant date and 2% per month starting thirteen months after the grant date. In addition after the year ended December 31, 2002, 25,000 stock purchase options were cancelled.  

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