**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              
              FOR
                THE FISCAL YEAR ENDED DECEMBER 31,
                2006





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              
              FOR
                THE TRANSITION PERIOD FROM _____________ TO
                _____________





Commission
      file Number: 000-32355





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**


(Name
      of
      small business issuer in its charter)





Nevada


(State
      or
      other jurisdiction of incorporation or organization)





98-0222927


(I.R.S.
      Employer Identification Number)





Golden
      Cross House


8
      Duncannon Street, Strand,


London,
      UK WC2N 4JF


(Address
      of principal executive offices)





(310)
      691-2585


(Issuer's
      telephone number)





Securities
      registered under Section 12(b) of the Exchange Act:  None





Securities
      registered under Section 12(g) of the Exchange Act:  Common
      Shares





Check
      whether the Issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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.


o Yes x No





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of Issuer's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


o Yes x No





The
      issuer’s revenues for its most recent fiscal year were $0.





The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the registrant was approximately $ 576,063 computed by reference to the
      price
      at which the common equity was sold as of April 16, 2007. Shares of common
      stock
      held by each officer and director and by each person who owns five percent
      or
      more of the outstanding common stock have been excluded from this calculation
      as
      such person may be considered to be affiliated with the Company. As of April
      16,
      2007, the number of shares outstanding of the registrant's Common Stock was
      366,731,439.





Transitional
      Small Business Disclosure Format (Check one): Yes o ;
      No x









**TABLE
      OF CONTENTS**




**PART
                I**
            
            
            3Item
                1. Description of Business
            
            
            3Item
                2. Description of Properties
            
            
            18Item
                3. Legal Proceedings
            
            
            18Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            18**PART
                II**
            
            
            19Item
                5. Market for Common Equity and Related Stockholder
                Matters
            
            
            19Item
                6. Management’s Discussion and Analysis or Plan of
                Operations
            
            
            21Item
                7. Financial Statements
            
            
            26Item
                8. Changes in and Disagreements With Accountants on Accounting and
                Financial Disclosure
            
            
            28Item
                8A. Controls and Procedures
            
            
            28Item
                8B. Other Information**PART
                III**
            
            
            28Item
                9. Directors and Executive Officers of the Registrant and Corporate
                Governance; Compliance with Section 16(a) of the Exchange
                Act.
            
            
            28Item
                10. Executive Compensation
            
            
            31Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            
            
            32Item
                12. Certain Relationships and Related Transactions, and Director
                Independence
            
            
            34Item
                13. Exhibits
            
            
            36Item
                14. Principal Accounting Fees and Services
            
            
            39




2




**FORWARD-LOOKING
      STATEMENTS**




Information
      included or incorporated by reference in this prospectus may contain
      forward-looking statements. This information may involve known and unknown
      risks, uncertainties and other factors which may cause our actual results,
      performance or achievements to be materially different from the future results,
      performance or achievements expressed or implied by any forward-looking
      statements. Forward-looking statements, which involve assumptions and describe
      our future plans, strategies and expectations, are generally identifiable by
      use
      of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other
      variations on these words or comparable terminology.




This
      report contains forward-looking statements, including statements regarding,
      among other things, (a) our projected sales and profitability, (b) our
      growth strategies, (c) anticipated trends in our industry, (d) our
      future financing plans and (e) our anticipated needs for working capital.
      These statements may be found under “Management’s Discussion and Analysis” and
“Description of Business,” as well as in this prospectus generally. Actual
      events or results may differ materially from those discussed in forward-looking
      statements as a result of various factors, including, without limitation, the
      risks outlined under “Risk Factors” and matters described in this prospectus
      generally. In light of these risks and uncertainties, there can be no assurance
      that the forward-looking statements contained in this prospectus will in fact
      occur.




The
      subsequent forward-looking statements relating to the matters described in
      this
      document and attributable to us or to persons acting on our behalf are expressly
      qualified in their entirety by such factors. We have no obligation to publicly
      update or revise these forward-looking statements to reflect new information,
      future events, or otherwise, except as required by applicable Federal securities
      laws, and we caution you not to place undue reliance on these forward looking
      statements.





**PART
      I**





Item
      1.
      Description of Business





CYOP
      Systems International, Incorporated (the “Company” or “CYOP”) was originally
      incorporated on October 29, 1999 under the name Triple 8 Development Corporation
      under the laws of the State of Nevada to engage in any lawful business or
      activity for which corporations may be organized under the laws of the State
      of
      Nevada. The Company changed its name to CYOP Systems International Incorporated
      on October 30, 2000. On November 3, 2000, the Company acquired 100% of the
      issued and outstanding shares of CYOP Systems Inc., Barbados (“CYOP Barbados”).
      This transaction was accounted for as a reverse acquisition and a
      recapitalization.





CYOP
      Barbados was incorporated under the laws of Barbados on June 20, 2000. On August
      31, 2000, CYOP Barbados acquired 100% of the issued and outstanding shares
      of
      Moshpit Entertainment Inc., Canada (“Moshpit”), a company incorporated under the
      laws British Columbia, Canada. CYOP Barbados sold 100% of the issued and
      outstanding shares of Moshpit by an agreement dated April 1, 2002 to a former
      stockholder and the sole director. On April 29, 2005 the Company incorporated
      Red Felt Software under the laws of the United Kingdom.





Business





The
      Company, and its subsidiaries, is a developer of multimedia transactional
      technology solutions and services for the entertainment industry outside of
      the
      United States. The range of products and services that the Company is pursuing
      include financial transaction platforms for on-line video games, and integrated
      e-commerce transaction technology for on-line merchants.





The
      global online gaming market has experienced rapid growth since its establishment
      in the 1990s but remains relatively immature. According to GamingPublic.com,
      global revenues from online gambling will reach USD$16 billion in 2006, up
      from
      USD$ 12 billion in 2005 and USD$ 7.0 billion in 2004.




For
      the
      five-year period from 2005 to 2009, it is estimated that revenues generated
      by
      the global online gaming market will increase to approximately $22.7 billion,
      representing a compound annual growth rate of approximately 22 percent. On
      this
      basis, the global online gaming market would still only represent approximately
      8 percent of the total global gaming market in 2009.




By
      2010,
      the online gaming industry will surpass USD$25 billion.




3




The
      Internet is altering the method by which gambling occurs, and this
      transformation is starting to have an effect on how people gamble. Online games
      do not need any traditional retailers, and retailing does not offer anything
      the
      Internet cannot provide, except that the consumer can physically see and feel
      the product. With our software, the customer’s experience only differs by his
      surroundings as the play of games is an exact replica of the casinos and in
      retail outlets.





According
      to the ‘Computer Industry Almanac’, the number of Internet users in the world in
      1999 amounted to 185 million and the number is now put at almost 1.07 Billion.





Computer
      games have not replaced the opulence of the brick and mortar casino, but they
      have been an excellent substitute for the hard-core gambler. Internet generally
      and on-line gaming in particular creates opportunities to eliminate a couple
      of
      phases in the distribution chain and provide entertainment from the safety
      of
      home.





The
      entertainment industry is proceeding towards a more clear integration of
      computer games, music, video and Internet. With the total integration of the
      entertainment branch, computer gambling will obtain a greater acceptance and
      reach a larger public, by the side of so-called “hardcore gamblers” according to
      Datamonitor.





**Global
      iGaming Overview**




Global
      revenues from online gambling will reach USD$15 billion in 2006, up from USD
      $10
      billion in 2005 and USD $7.0 billion last year.




The
      global online gaming market has experienced rapid growth since its establishment
      in the 1990's but remains relatively immature. Although estimates as to the
      current size and growth rates of the global online gaming market vary
      considerably, it is estimated that the market generated revenue of approximately
      $7.0 billion in 2004, representing just over three percent of the total global
      gaming market. In 2004, casino and bingo games represented approximately 29
      percent of the online gaming market, and poker represented approximately 13
      percent.




Analyzing
      the market by “product” shows that betting generally in betting exchanges and
      sportsbooks dominates at 38 percent with online casinos handling 23 percent
      of
      the action and online poker close behind at 22 percent. Skill Gaming and Bingo
      hold 2 percent and 5 percent respectively with online lotteries in a growth
      phase expected to surge from a current 10 percent to 27 percent by
      2010.




Sub-market
      delivery channels include mobile or m-gaming at 15 percent with growth to 27
      percent likely by 2010, and interactive TV at 3 percent with surprisingly slow
      growth to only 5 percent over the same period.




For
      the
      five-year period from 2005 to 2009, it is estimated that revenues generated
      by
      the global online gaming market will increase to approximately $22.75 billion,
      representing a compound annual growth rate of approximately 23 percent. On
      this
      basis, the global online gaming market would still only represent approximately
      8 percent of the total global gaming market in 2009.





**Expansion
      in Existing Markets** ****





Governments
      moving towards a more prohibitive or more permissive stance in any country
      will
      have a definite impact on the growth of Internet gaming in that particular
      market - albeit that prohibitive policies will prove difficult to enforce.
      The
      details of the legal situation are discussed in detail later in this plan,
      but
      we would highlight again three particular markets to watch on this front:





The
      United States is the “big one” for potential near-to-medium term growth, if it
      were to become more permissive, assuming that the massive 50+% of today’s online
      gambling market that already originates from the United States could be
      significantly bigger if it became (indisputably) legal to offer online gambling
      to U.S. residents.




4




A
      scenario in which the US becomes more prohibitive would probably cause a
      near-term decline in U.S.-derived revenues (depending on what measures were
      implemented), but we do not see a credible way of enforcing a prohibition in
      the
      longer term, in the context of other jurisdictions being willing to regulate
      the
      industry. That said, an issue with the legislation is whether it enables
      advertising and sponsorship as getting increasingly harder or easier. If the
      U.S. legal situation remains as the status quo, we still see considerable
      momentum in the growth of gambling revenue from U.S. punters.





Europe
      is
      the next biggest gambling market at present. The United Kingdom is out in front
      in terms of developing a permissive regulation, and the rest of Europe seems
      to
      be slowly coming to terms with the fact that Internet gambling is not going
      to
      go away. Our best guess is that liberalization will come to Europe over the
      next
      2-5 years, either through the European courts, or possibly through an EC
      directive, but it will gradually come. Again, prohibition will be tough to
      enforce, particularly when EU member states like the United Kingdom and Malta
      are happy to regulate operators.





China,
      representing a large proportion of the global population, also represents a
      huge
      untapped online gambling market if it ever opens up. At present, prohibition
      is
      enforced with pretty severe penalties for individuals breaking the law, so
      we
      can only see upside in terms of the revenue potential from China. Although
      whether companies will continue to take bets from Chinese citizens, given the
      clear illegality, appears to be questionable.





Regarding
      these key markets, we suggest it is an all-or-nothing situation - i.e. it
      becomes increasingly untenable in a global Internet-based market for a given
      country to stick by a prohibitionist stance. If the U.S., Europe and China
      were
      to stand united in prohibition, it might then be feasible to control and
      restrict it - but with Europe showing signs of cracking, led by the United
      Kingdom, the long-term development must be in the direction of regulating rather
      than trying to prohibit online gambling.





The
      legal
      situation in each market will also determine how competitive each market is.
      At
      present in the U.S., with the ambiguous legality, it seems to be a case of
“he
      who dares wins”, in that many operators refuse to take bets from the U.S. at
      present, while the likes of Sportingbet make the majority of their profits
      from
      U.S. customers and enjoy relatively limited competition, particularly from
      the
      big land-based brands like the U.S. listed gaming companies or most United
      Kingdom bookmakers. The later you leave it, the greater the economic
      consequences for such a crackdown - what will be the combined market
      capitalization and employee size of the online gaming companies in three years
      time?





Legal
      developments will also mean that the relative growth of the different forms
      of
      online gambling on a global scale will depend on the cultural preferences of
      those markets that are being legalized.





In
      2005,
      the Company embarked on a strategy to develop its services and production
      capabilities by embarking on a number of new ventures. These “business centers”
are as follows:





SkillArcade.com





www.skillarcade.com
      is CYOP’s central games portal; an online games destination where people play
      popular skill games against other players and compete in tournaments to win
      real
      money prizes. Games on the site include over the Internet, including Puzzle,
      Board, Trivia, Learning games, Action Games, Strategy, and Role Play games.
      Online skill games are games that have been formatted so that the rules of
      the
      game eliminate elements of luck, without changing the fundamental nature of
      what
      makes the game enjoyable and appealing. Players win cash and/or prizes based
      on
      one or more skills including: hand-eye coordination, reaction time, dexterity,
      spatial memory, long-term memory, pattern recognition, organizational skills,
      strategic planning, game play knowledge, general knowledge and intelligence.





Each
      contestant pays an entry fee to enter a tournament and the winner collects
      all
      the entry fees paid minus a tournament maintenance fee to CYOP Systems for
      providing the games, online tournament software and e-commerce banking.





The
      fees
      collected by CYOP range between $0.25 to $2.00 per game per player. This system
      of micro-payments is based on users playing multiple games over a user-session
      online. Tournaments generally run no longer than five minutes and involve five
      people on average. CYOP’s current hardware configuration can currently operate
      10,000 tournaments consecutively at any given time, and the Company has the
      ability to increase that to 100,000 tournaments consecutively in the
      future.




5




The
      Company also allows players to play on SkillArcade.com for free, and is planning
      to monetize these customers by placement of advertising on the website and
      by
      converting the free-player database into cash-players through marketing
      strategies. At December 31, 2005, SkillArcade.com currently had about 250,000
      members.





The
      SkillArcade.com operations have been wound down. The domain and other associated
      properties have been allowed to lapse and revert to other owners. The carrying
      value of the intangible asset associated with these operations was reduced
      by
      $28,916 during fiscal 2006, to a value of $0.





Red
      Felt
      Software





The
      Company launched www.redfeltsoftware.com through a United Kingdom Company,
      Red
      Felt Software Ltd., which has been organized as a wholly owned subsidiary of
      CYOP Systems International Incorporated.  With
      Red
      Felt Software Ltd., it was intended that the Company would pursue turnkey
      licensing opportunities in the iGaming market place for enterprises wishing
      to
      enter and capitalize in this market space. The United Kingdom is recognized
      as a
      jurisdiction embracing and regulating this sector.





Online
      gaming is forecasted to be an industry segment with significantly above-average
      growth. Gaming consultants Christian Capital forecast that gaming revenue will
      rise to $22.7 billion by 2009, from $8.2 billion in 2004, an annualized growth
      rate of 22 percent. Online gaming is also expected to seize an 8.1% share of
      the
      worldwide global gaming market according to www.GamingPublic.com .





Red
      Felt
      Software is a simple non-download gaming system that can be easily executed
      and
      distributed to end-users by any webmaster or administrator. We also provide
      the
      necessary management experience and support to our licensees and their
      customers.





Upon
      receipt of financing, we intend to begin marketing activities with respect
      to
      the licensing of the software to existing portals online gaming operators as
      well as to traditional casinos. Furthermore, upon receipt of financing, we
      intend to increase the sales force to solicit licensing agreements with
      companies that have global clientele.





These
      games are being made available to third party operators whereby they pay
      one-time customization fees, followed by an ongoing percentage of the net
      revenues to CYOP. Given the changes in the laws in the United States regarding
      iGaming payment processing, Red Felt will no longer operate in the United
      States. Non USA facing licensees will pay an upfront set up fee, a percentage
      of
      the net and a monthly hosting fee for:





Management
      of gaming software


Marketing
      support


Hosting
      and collocation of web servers


Hosting
      and collocation of gaming and transaction servers


Technical
      Support and Security Monitoring


Fully
      built gaming site


Non-Download
      gaming software


Real
      Time
      live reporting


Hosting
      & Server monitoring


Credit
      Card Processing




6




By
      structuring the software fees this way, Red Felt believes it has positioned
      itself so that it will not benefit from wagering that occurs in the USA and
      it
      will remain in compliance with the Unlawful Internet Gambling Enforcement Act
      of
      2006 (included in HR 4954, the Port Security Improvement Act of
      2006).





Non
      USA
      facing licensees will pay an upfront set up fee, a percentage of the net and
      a
      monthly hosting fee for:




·
            Fully
                built gaming site





·
            Non-Download
                gaming software





·
            Real
                Time live reporting





·
            Hosting
                & Server monitoring





·
            Credit
                Card Processing




RedFeltPoker.com





The
      RedFeltPoker.com site, previously known as TenSeatPoker.com, is the flagship
      play-for-cash non-USA facing poker site featuring the our licensed poker games,
      and will be marketed with the goal of establishing brand recognition and driving
      revenues from targeted audience areas. Operated through its subsidiary, Red
      Felt
      Software Ltd., we announced an executed agreement with Action Poker Gaming
      Inc.,
      to license their online poker system.





The
      software includes classic poker games of Texas Hold’em, Omaha and 7 Card Stud,
      as well favorites such as Omaha Hi. Players will be able to pick from ring
      game
      action, daily tournaments with entries to the World Poker Tour, the World Series
      of Poker and all the major events.





We
      have
      negotiated with a number of payment processors to ensure global payments
      including the ability to leverage Check
      21,
      laws regulating paper drafts, and new technologies to provide the optimal online
      payment processing. This also includes direct debit from banking institutions,
      major credit cards and multiple currencies.





More
      than
      200 online poker sites collectively are generating about $3 billion a year
      in
      revenues, equal to 60% of last year's $5 billion in gambling revenues from
      all
      of the Las Vegas “Strip”. An estimated 1.7 million players are active online;
      meaning they've played Internet poker in the past six months and about 150,000
      people play on an average day, according to PokerPulse.com.





We
      plan
      to derive revenues from a percentage of the rake and through processing fees.
      Rake is the percentage of the pot that the house collects as compensation for
      hosting the game. The maximum rake in ring games is $3, with a minimum pot
      size
      needed for any rake. Tournament style games do not have a rake, but have an
      entry fee.





Distribution
      Methods Of Our Products And Services





The
      Company has licensed a financial transaction platform to seamlessly integrate
      the front end and player experience. The Company will be providing online
      gambling software for business, and shall derive a percentage of the gross
      wagers made by customers with the ultimate goal of being recognized as a top
      software provider.





iGaming
      is similar to Brick & Mortar wagering. A customer enters the site and opens
      an account by completing an information form. A credit card or other method
      of
      payment is used to deposit a minimum of USD$20.00, although larger deposits
      can
      be made.




7




The
      gamer
      then chooses a game to play and a wager is debited from the gamer’s
      account.





Here's
      how it works:





A
      player
      simply chooses a betting amount in the drop down menu from the website. The
      player then selects the total amount of the bet. The player makes the bet.
      The
      player wins or loses and the account information is updated automatically.
      If a
      gamer wishes to withdraw their funds, he or she posts a withdrawal notice and
      a
      check is sent to the gamers’ listed address or the merchant processor is
      credited back.





The
      Company will also license an end-to-end solution to gaming communities and
      portals to generate further revenues and offer partner sites an additional
      revenue source by charging a percentage of the gross amount wagered and won,
      as
      well a percentage of the processing fees. Licensing in this manner builds brand
      awareness quickly and is commonplace throughout the online casino industry.





Collecting
      and processing fees through financial institutions and disbursing funds through
      a revenue sharing model to vertical channel partners in this manner creates
      market opportunity through revenue sharing and reducing upfront investment
      costs
      for affiliate sites and portals in a vertically integrated marketing
      channel.





Growth
      Drivers





Channels





The
      key
      to success in the aggregation of players within an online gaming network is
      identifying and offering multiple channels to customers who will participate
      in
      multiple methodologies of connecting to the network. The Company will establish
      its platform as the most progressive channel offering, granting customers access
      to the network through a number of sophisticated entry points. Attracting
      customers through multiple channels allows the Company to take advantage of
      the
      growth and technology advancements of the Internet, Mobile, and Kiosk/iTV
      markets.





One
      of
      the strategies is the future development of a number of new iGaming vertical
      portals, which shall be used to drive traffic to its flagship site,
      RedFelt.com.com.





Internet





This
      will
      represent the majority of how customers participate within the online gaming
      network. Customers will interface with our platforms through the World Wide
      Web,
      where they can participate from any Internet connection. This will be the focal
      point of all platforms, and the Company has positioned itself to offer the
      most
      enticing offering of any gaming operator in the space.





Mobile





Carriers
      are rolling out packages that place emphasis on games, and value added services
      such as SMS, stock quotes and email. The growth of wireless gaming is the next
      step in the evolution of the video game industry. While Japan was the leader
      in
      wireless gaming technology, Europe has been getting a good reputation in
      developing SMS, MMS and Java games for a variety of Wireless ASP’s looking to
      develop their content.





This
      is
      the fastest growing trend within internet gaming market is estimated by Juniper
      Research to be $6.9 billion in 2009.




8




The
      Company has significant experience and expertise within the mobile gaming
      sector, and will clearly understand the technologies and communications to
      launch a mobile platform. The online gaming network will be the key focus in
      offering a mobile channel.





Customers
      will have the option to participate and take part in the online gaming network
      from virtually any point. The key to the mobile application is to connect to
      the
      customer from anywhere and grant them access to the network from literally
      any
      location.





Again,
      the key focus of the mobile applications is to allow customers within the online
      gaming network to access the gaming offerings from any location, as well as
      notify them via SMS (also via email notification if on web) messaging when
      specific games they want are available.





The
      key
      to these services is to constantly interact with the customer, and become their
      sole provider of all relative information pertaining to the online gaming
      network.





Kiosk/iTV





The
      strategy behind the Kiosk/iTV markets is to establish ourselves as the leading
      online gaming network, and explore all opportunities and channels that make
      sense in regards to distribution of the network.





With
      the
      growing market of gaming kiosks distributed in North America, Europe, Asia,
      and
      South America, the Company would look to establish relationships with these
      distribution partners. Either by partnering with existing kiosk distributors
      or
      building out our own network of kiosks, the Company plans to gain traction
      and
      take part in this emerging market.





The
      blueprint for success is to monetize our existing network and connect with
      players through a number of methodologies such as a kiosk
      application.





As
      this
      venture gains momentum and builds a viable online gaming network, the Company
      would seek to establish partnerships with current iTV operators. This channel
      will evolve into connecting with players through multiple iTV avenues. Currently
      the Company has begun discussions with iTV technology operators, and seek to
      implement this channel as we expand into new markets.





Languages
      & Currencies





The
      Company intends to build and upgrade the architecture of the online gaming
      network software to easily accept various currencies, incorporate additional
      languages to attract new players and reach markets that have not yet been
      exposed to the methodology of an online gaming network. Services will also
      have
      the capacity to be translated into multiple languages, and we will customize
      multiple sports information sites to cater to the relevant sports and news
      specific to those markets.





Co-Branded
      and Private Label Distribution Programs





The
      Company intends to enter into agreements with celebrities, businesses and game
      portals under which these wholesale distribution partners can offer Red Felt’s
      products and services. The Company will consider arrangements in which; the
      distribution partner is allowed to offer our services using its own brand if
      the
      benefits derived include greater market reach without fixed overhead costs
      and
      the ability to use partners to assist in the delivery of complete solutions
      to
      meet customer needs. We are actively pursuing the expansion of these
      distribution programs both domestically and internationally.





Advertising/Sponsorship
      Programs





The
      Company believes that many large corporations would take advantage of the
      Company’s sites in order to reach the demographics that players represent. As an
      example, Budweiser presently sponsors poker throughout the country paying for
      boards and equipment for many of the tournaments. They also provide added prize
      money for tournaments as do many such corporations and companies throughout
      the
      world.




9




Licensing
      Opportunities





The
      Company intends to license its software to other portals, verticals and gaming
      sites. This would include set up fee and ongoing licensing fees depending on
      volume. Red Felt provides the following to licensees who pay an upfront set
      up
      fee, a percentage of the net and / or a monthly hosting fee for:





Fully
      built gaming site


Non-Download
      gaming software


Real
      Time
      live reporting


Hosting
      & Server monitoring


Credit
      Card Processing





Marketing
      Support





The
      Company also intends to sell Turnkey sites to smaller investors for a smaller
      upfront fee plus ongoing licensing fees depending on volume.





RedFeltGold.com
      Super Affiliates





The
      Company began marketing a Super Affiliate program to existing qualified online
      web operators who wish to link to the RedFeltGold.com Network. Affiliates are
      not charged any set up fees and will receive between 25% and 50% of the Net
      Customer Loss (NCL*). NCL is defined as the Gross Bet made by a player less
      payout less processing charges.





The
      Affiliate program will only be open to sites with above average traffic and
      who
      demonstrate an ability to market themselves progressively.





Joint
      Ventures & Strategic Alliances





The
      Company intends to introduce its products to the high-end business community
      within the next six months. Other targeted opportunities include European-
      and
      Asian- based companies enabling the Company to be first to market in emerging
      areas of opportunity. Given that North America is approximately two to five
      years ahead of the rest of the Internet world, there exists an opportunity
      for
      start-up ventures in Asia and Europe due to the relative ease and low cost
      of
      marketing as compared to the Americas.




How
      We
      Plan To Expand Our Business Model





We
      intend
      to capitalize on our experience in the online gaming Industry by leveraging
      our
      experience and contacts in this, the most profitable sector of the global
      digital economy. With the ability to integrate with popular online games like
      bingo, we believe that we have the opportunity to gain acceptance by licensing
      our software to the mainstream Internet portals and games sites as a viable
      on
      going alternative to advertising and subscription-based revenues.





During
      2006, operations had not advanced to a level where we were able to generate
      revenue. Nor did the subsidiary company incur any expenses. Red Felt Sofware
      Ltd
      remains active and in good standing in the United Kingdom.





Anti-Gaming
      Legislation and Discontinuation of Gaming Operations





During
      fiscal 2006, new anti-gaming legislation was enacted in the United States.
      The
      Company was forced to make the decision to indefinitely discontinue all of
      its
      US-based gaming-related operations as of December 31, 2006. All gaming-related
      websites were taken offline; all gaming-related services offerings were ceased;
      and all bank accounts and transactional systems relating to gaming operations
      were closed, with the balances written down to $0 at December 31, 2006. Losses
      have been segmented in the financial statement presentation, net of tax. Because
      the Company had no liability associated with these losses, and because it is
      probable that the net operating losses cannot be utilized in future, the tax
      effect on the losses from discontinued operations was estimated at
      nil.




10




Operations





We
      have a
      history of losses since our inception. If we are unable to generate enough
      revenue and become profitable, our company will fail.





Management





While
      our
      management has signed agreements, they are under no contractual obligation
      to
      remain with us and their departure could cause the Company to fail. Our
      directors and our officers have varied business interests and are working for
      other companies from time to time. Members of management have signed written
      employment agreements with us, and have deferred fees as we have not been able
      to afford to pay management members.





Manufacturing




We
      do not
      engage in any manufacturing activities.




Government
      Regulation




The
      Gambling Act 2005 replaces most of the existing law about gambling in Great
      Britain and puts in place an improved, more comprehensive structure of gambling
      regulation. This includes a new structure of flexible protections for children
      and vulnerable adults and, in particular, brings the burgeoning
      Internet gaming sector within British regulation for the first time. It
      creates a new independent regulatory body, the Gambling Commission, which
      will be the new, tough national regulator for commercial gambling in
      Great Britain.




The
      Gambling Commission will be accepting applications for remote gaming operating
      licenses under the Gambling Act 2005 from January 2007. However, licenses will
      only take effect from September 2007, when the Act will be fully implemented.
      When the new regulatory regime comes into being remote operators will only
      be
      licensed by the Commission if key equipment relating to licensable activities
      is
      based in Great Britain.




CYOP
      intends to apply for a license to operate remote gambling in the UK under the
      aforementioned laws.




Intellectual
      Property




On
      May
      21, 2002, we terminated the software development agreement and a software
      licensing, technical support and operation of customer service and data centre
      agreement with a related company (related by a common director). As at that
      date
      $240,000 license fees were billed with $200,000 remaining unpaid at May 21,
      2002.




In
      satisfaction of this unpaid amount and in consideration of terminating the
      agreement, the related company assigned all right, title and interest in: the
      Skill-Bingo Patents and the Skill-Bingo Inventions purchased from FYRC
      Inc.




As
      of
      December 31, 2006, due to market conditions, and a lack of adequate
      capitalization to fund certain activities, we have elected to wind down
      skill-related gaming operations. The remaining carrying value of the skill
      gaming technology at March 31, 2006 was 21,688. At December 31, 2006, this
      value
      was impaired and revalued at nil.





Competition




Our
      competitive position in the on-line gaming industry is dependent on our ability
      to market our system and acquire traffic and affiliates. Even though we believe
      our system is world class for delivering games online, it is possible we could
      receive intense competition from better financed companies with in-house
      software development capabilities who are able to offer online games.




Employees




At
      present, we employ one full time employee and no part-time employees. Other
      services are on contract and for marketing and administration, management and
      directors are relied upon.




11




Financing





We
      are
      highly dependent on financing for ongoing operations. We were cleared by the
      Securities Exchange Commission (“SEC”) and National Association of Securities
      Dealers (“NASD”) in September 2002 to have our securities quoted on the
      Over-the-Counter Bulletin Board exchange. We have been and continue to be
      dependent upon management for loans to the Company to fund our operations.
      The
      Company in December 2003 negotiated a financing with Cornell Capital Partners,
      LP (“Cornell”) of up to five million dollars ($5,000,000). The financing is
      based on a draw-down and the purchase price is set at 98% of the Market Price.
      This was completed in the fall of 2004.





On
      September 2, 2005, we entered into an Equity Distribution Agreement with
      Cornell. Under the Equity Distribution Agreement, CYOP may issue and sell to
      Cornell common stock for a total purchase price of up to $15,000,000. For each
      share of common stock purchased under the Equity Distribution Agreement, Cornell
      will pay us 98% of the lowest volume weighted average price of our common stock
      as quoted by the Over-the-Counter Bulletin Board during the five trading days
      immediately following the notice date. Cornell will also retain 4% of each
      advance under the Equity Distribution Agreement. The amount of each cash advance
      is subject to a maximum amount of $800,000, with no cash advance occurring
      within seven trading days of a prior advance. Cornell received two warrants
      to
      purchase 27,500,000 shares of our common stock as a one-time commitment fee
      under the Equity Distribution Agreement. The first warrant for 15,000,000 shares
      of our common stock has an exercise price equal to $0.05. The second warrant
      for
      12,500,000 shares of our common stock has an exercise price equal to $0.06.
      The
      warrants expire three years from September 2, 2005. The Equity Distribution
      Agreement with Cornell was terminated pursuant to a Termination Agreement dated
      December 15, 2005.




In
      addition, on September 2, 2005, we entered into a Securities Purchase Agreement
      (SPA) with Cornell. Pursuant to the Securities Purchase Agreement, Cornell
      purchased a secured convertible debenture in the original principal amount
      of
      $650,000. Cornell surrendered this $650,000 convertible debenture plus unpaid
      and accrued interest totaling $19,660.58 in consideration in part for the
      Debentures that were issued.





On
      December 15, 2005, the Company entered into a Securities Purchase Agreement
      (SPA) with Cornell. Pursuant to the SPA, Cornell purchased secured convertible
      debentures in the original principal amount of $1,350,000. The debentures have
      a
      three-year term and accrued annual interest of 10%. Funds of $700,000 were
      advanced to the Company upon execution of the SPA. Funds of $150,000 were
      advanced on June 15, 2006. The balance of $500,000 will be disbursed upon the
      discharge of certain conditions placed upon the Company in the SPA. The
      debentures mature on December 15, 2008. The secured convertible debentures
      may
      be redeemed by the Company at any time, in whole or in part. The Company will
      pay a redemption premium of 20% of the amount redeemed in addition to such
      redemption. The debentures are convertible from time to time into our common
      stock by Cornell at the price per share of an amount equal to ninety percent
      (90%) of the lowest average volume weighted average price of our Common Stock,
      as quoted by Bloomberg, LP, for the thirty (30) trading days immediately
      preceding the conversion date. We granted Cornell a security interest in certain
      of its assets pursuant to amended and restated security agreement dated December
      15, 2005. Cornell also received five year warrants to purchase 2,970,000 shares
      of common stock, 1,350,000 shares at an exercise price of $0.05 per share and
      1,620,000 shares at an exercise price of $0.06 per share.





On
      June
      15, 2006, the Company executed a second amendment of the SPA of December 15,
      2005 Cornell Capital LP. One of the revised terms gives Mitch White, a former
      officer and director of the Company, the option to convert such portion of
      his
      outstanding shareholder loan (valued at December 31 at $ 1,176,058 into common
      shares — at a 20% discount to the market price — so as to effect a majority
      ownership of the shares of CYOP, with the balance of the shareholder loan,
      if
      any, being convertible into a newly-created series of preferred shares in CYOP,
      the terms of which must be agreed upon by both the Company and Cornell.
      Alternatively, Mr. White may convert the entire balance of his outstanding
      shareholder loan into common shares of the Company at a 35% discount to the
      market price, which would however also give Cornell the right to convert its
      convertible debenture, in whole or in part, into common shares of the Company
      at
      a 35% discount to the market price. As of April 16, 2007, no election has been
      made by Mr. White.





On
      July
      19, 2006, Cornell converted $75,000 of the convertible debenture into 14,691,883
      common shares of the Company at a conversion price of $0.00513 per share. The
      face value of the convertible debenture outstanding at that date, and at
      year-end, was $1,425,000.





Subsequent
      to the year-end, on February 20, 2007, Cornell converted a further $33,446.58
      of
      the convertible debenture and accrued interest into 11,613,396 common shares
      of
      the Company at a conversion price of $0.00288 per share. The face value of
      the
      convertible debenture outstanding at that date was $1,411,000.




Persons
      who acquire our common shares have limited liquidity or opportunity to sell
      their shares and may not be able to recover any funds, which have been invested
      in our common shares. Our common shares fall within the definition of a penny
      stock. All transactions involving our shares will be subject to special rules
      established by the Securities and Exchange Commission which require brokers
      and
      dealers to complete due diligence on penny stocks being acquired on behalf
      of
      clients. These requirements are onerous and may make an investment in penny
      stocks less appealing to certain investors, which could affect your ability
      to
      sell our common shares.




12




Stock
      Price Volatility





The
      market price of CYOP’s common stock has fluctuated significantly in the past,
      and is likely to continue to be highly volatile. The Company cannot provide
      assurance that the sales price of its common stock will not fluctuate or decline
      significantly in the future. In addition, the U.S. equity markets have from
      time
      to time experienced significant price and volume fluctuations that have
      particularly affected the market prices for the stocks of technology companies.
      These broad market fluctuations may materially adversely affect the market
      price
      of CYOP’s common stock in the future. Such fluctuations and variations may be
      the result of changes in CYOP’s business, operations or prospects, announcements
      of technological innovations and new products by competitors, CYOP or its
      competitors entering into new contractual relationships with strategic partners,
      proposed acquisitions by CYOP or its competitors, financial results that fail
      to
      meet public market analyst expectations of performance, regulatory
      considerations and general market and economic conditions in the U.S. and
      throughout the world.





Dilutive
      Effect of Future Sales of Securities





Future
      sales of substantial amounts of CYOP’s Common stock in the public market could
      adversely affect the market price of the Common stock and shareholders could
      experience dilution in their stock ownership of the Company and in the value
      of
      their shares. Dilution is a reduction in the value of the holder’s investment
      measured by the difference between the purchase price of the shares of the
      Common stock and the net tangible book value of the shares after the purchase
      takes place. As at December 31, 2006, there were 355,118,043 shares of Common
      stock outstanding.





Future
      Capital Needs





CYOP
      has
      capital requirements for such applications as geographical expansion, marketing
      and advertising, development of new applications and infrastructure, and
      completing joint venture agreements with potential partners. CYOP may not be
      successful in generating sufficient cash from operations for those purposes
      and
      will need to utilize additional equity capital. Failure to generate sufficient
      cash flows may require CYOP to revise, delay or abandon some or all of its
      development and expansion plans or otherwise forego market opportunities and
      may
      make it difficult to respond to competitive pressures, any of which could have
      a
      material adverse effect on CYOP’s business, results of operations and financial
      condition.





**RISK
      FACTORS**




***We
      are subject to various risks that may materially harm our business, financial
      condition and results of operations. You should carefully consider the risks
      and
      uncertainties described below and the other information in this filing before
      deciding to purchase our common stock. If any of these risks or uncertainties
      actually occurs, our business, financial condition or operating results could
      be
      materially harmed. In that case, the trading price of our common stock could
      decline and you could lose all or part of your
      investment.***




**Risks
      Related To Our Business**




**We
      Are Subject To Various Risks That May Materially Harm Our Business, Financial
      Condition And Results Of Operations**




You
      should carefully consider the risks and uncertainties described below and the
      other information in this filing before deciding to purchase our common stock.
      If any of these risks or uncertainties actually occurs, our business, financial
      condition or operating results could be materially harmed. In that case, the
      trading price of our common stock could decline and you could lose all or part
      of your entire investment.




**Management
      Recognizes That We Must Raise Additional Financing To Fund Our Ongoing
      Operations And Implement Our Business Plan Or We Could Be Forced To Curtail
      Or
      Cease Operations**




It
      is
      imperative that we obtain debt and/or equity financing to implement our business
      plan and to finance ongoing operations. There can be no assurance that any
      new
      capital will be available or that adequate funds will be sufficient for our
      operations, whether from financial markets, or that other arrangements will
      be
      available when needed or on terms satisfactory to our management. Our failure
      to
      obtain adequate additional financing may require us to delay, curtail or scale
      back some or all of our operations and may hinder our ability to expand our
      business. Any additional financing may involve dilution to our then-existing
      shareholders, which could result in a decrease in the price of our
      shares.




13




Currently,
      we are dependent upon external financing to fund our operations. Our financing
      needs are expected to be provided, in large part, by the Secured Convertible
      Debentures sold pursuant to our Securities Purchase Agreement with Cornell
      Capital Partners, L.P.




**We
      Have Been The Subject of a Going Concern Opinion By Our Independent Auditors
      Which Have Raised Substantial Doubt As To Our Ability To Continue As A Going
      Concern**




Our
        consolidated financial statements have been prepared assuming we will continue
        as a going concern. We have experienced recurring net losses from operations,
        which losses have caused a net loss of 3,573,962 for the year ended December
        31,
        2006 and accumulated deficit of $ 8,991,193. In addition, for the year ended
        December 31, 2006, we had a working capital deficit of $4,276,191 and a working
        capital deficit of $2,371,842 for the year ended December 31, 2005. These
        factors, among others, raise substantial doubt about our ability to continue
        as
        a going concern. Our financial statements do not include any adjustment that
        might result from the outcome of this uncertainty. Assurances cannot be given
        that adequate financing can be obtained to meet our capital needs. If we
        are
        unable to generate profits and unable to continue to obtain financing to
        meet
        our working capital requirements, we may have to curtail our business sharply
        or
        cease operations altogether. Our continuation as a going concern is dependent
        upon our ability to generate sufficient cash flow to meet our obligations
        on a
        timely basis to retain our current financing, to obtain additional financing,
        and, ultimately, to attain profitability. Should any of these events not
        occur,
        the accompanying financial statements will be adversely effected and we may
        have
        to cease operation.


**We
      Will Need To Raise Additional Capital and Debt Funding To Sustain
      Operations**




We
      are
      reliant on either term debt financing or sale of equity to obtain cash to pay
      our employees and suppliers. Thus, unless we can become profitable, we will
      require additional capital to sustain operations and we may need access to
      additional capital or additional debt financing to grow our sales.




Since
      inception in 1999, we have relied on external financing to fund our operations.
      Such financing has historically come from a combination of borrowings and the
      sale of common stock to related and third parties. We cannot assure you that
      financing whether from external sources or related parties will be available
      if
      needed or on favorable terms. Our inability to obtain adequate financing will
      result in the need to scale back our business operations. Any of these events
      could be materially harmful to our business and may result in a lower stock
      price. We will need to raise additional capital from either the equity market
      or
      from debt sources to fund our operating costs, current liabilities and
      anticipated future expansion.




**We
      Are Subject To A Working Capital Deficit, Which Means That Our Current Assets
      On
      December 31, 2006 Were Not Sufficient To Satisfy Our Current
      Liabilities**




We
      had a
      working capital deficit of $2,851,192 at December 31, 2006, which means that
      our
      current liabilities as of that date exceeded our current assets by that amount.
      Current assets are assets that are expected to be converted to cash within
      one
      year and, therefore, may be used to pay current liabilities as they become
      due.
      If our ongoing operations do not begin to provide sufficient profitability
      to
      offset the working capital deficit, we may have to raise capital or debt to
      fund
      the deficit or reach agreement with some of our creditors to convert debt to
      equity or curtail our operations.




**Our
      Common Stock May Be Affected By Significant Trading Volume Fluctuations, Which
      Could Adversely Affect Our Shareholders’ Ability To Sell Our Common Stock In
      Short-Time Periods**




An
      absence of an active trading market could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all.
      Our
      common stock has experienced, and is likely to experience in the future,
      significant price and volume fluctuations, which could adversely affect the
      market price of our common stock without regard to our operating performance.
      In
      addition, we believe that factors such as quarterly fluctuations in our
      financial results and changes in the overall economy or the condition of the
      financial markets could cause the price of our common stock to fluctuate
      substantially. We cannot predict the actions of market participants and,
      therefore, can offer no assurances that the market for our stock will be stable
      or appreciate over time.




14




**Our
      Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
      Investors To Sell Their Shares Due To Suitability
      Requirements**




Our
      common stock is deemed to be “penny stock” as that term is defined in
      Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
      requirements may reduce the potential market for our common stock by reducing
      the number of potential investors. This may make it more difficult for investors
      in our common stock to sell shares to third parties or to otherwise dispose
      of
      them. This could cause our stock price to decline. Penny stocks are
      stock:




With
      a
      price of less than $5.00 per share;




That
      are
      not traded on a “recognized” national exchange;




Whose
      prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed
      stock must still have a price of not less than $5.00 per share); or




In
      issuers with net tangible assets less than $2.0 million (if the issuer has
      been
      in continuous operation for at least three years) or $5.0 million (if in
      continuous operation for less than three years), or with average revenues of
      less than $6.0 million for the last three years.




Broker/dealers
      dealing in penny stocks are required to provide potential investors with a
      document disclosing the risks of penny stocks. Moreover, broker/dealers are
      required to determine whether an investment in a penny stock is a suitable
      investment for a prospective investor.




**Our
      Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
      Significantly, Which May Affect Our Shareholders’ Ability To Sell Shares Of Our
      Common Stock**




Prior
      to
      this filing, there has been a limited public market for our common stock and
      there can be no assurance that a more active trading market for our common
      stock
      will develop. An absence of an active trading market could adversely affect
      our
      shareholders’ ability to sell our common stock in short time periods, or
      possibly at all. Our common stock has experienced, and is likely to experience
      in the future, significant price and volume fluctuations, which could adversely
      affect the market price of our common stock without regard to our operating
      performance. In addition, we believe that factors such as quarterly fluctuations
      in our financial results and changes in the overall economy or the condition
      of
      the financial markets could cause the price of our common stock to fluctuate
      substantially. These fluctuations may also cause short sellers to enter the
      market from time to time in the belief that we will have poor results in the
      future. We cannot predict the actions of market participants and, therefore,
      can
      offer no assurances that the market for our stock will be stable or appreciate
      over time. The factors may negatively impact shareholders’ ability to sell
      shares of our common stock.




**We
      Could Fail To Attract Or Retain Key Personnel**




Our
      success largely depends on the efforts and abilities of key executives and
      consultants, including Patrick Smyth, our Chairman and Chief Executive Officer,
      and Canon Bryan, our Chief Financial Officer and Secretary. The loss of the
      services of either officer could materially harm our business because of the
      cost and time necessary to replace and train a replacement. Such a loss would
      also divert management attention away from operational issues. We do not
      presently maintain key-man life insurance policies on either Messrs. Smyth
      or
      Bryan. In addition, we need to attract additional high quality sales and
      consulting personnel. To the extent that we are smaller than our competitors
      and
      have fewer resources we may not be able to attract the sufficient number and
      quality of staff.




15




**We
      Are Subject To Price Volatility Due To Our Operations Materially Fluctuating;
      As
      A Result, Any Quarter-To-Quarter Comparisons In Our Financial Statements May
      Not
      Be Meaningful**




As
      a
      result of the evolving nature of the markets in which we compete, as well as
      the
      current nature of the public markets and our current financial condition, we
      believe that our operating results may fluctuate materially, as a result of
      which quarter-to-quarter comparisons of our results of operations may not be
      meaningful. If in some future quarter, whether as a result of such a fluctuation
      or otherwise, our results of operations fall below the expectations of
      securities analysts and investors, the trading price of our common stock would
      likely be materially and adversely affected. You should not rely on our results
      of any interim period as an indication of our future performance. Additionally,
      our quarterly results of operations may fluctuate significantly in the future
      as
      a result of a variety of factors, many of which are outside our control. Factors
      that may cause our quarterly results to fluctuate include, among others:




our
      ability to retain existing clients and customers;




our
      ability to attract new clients and customers at a steady rate;




our
      ability to maintain client satisfaction;




the
      extent to which our products gain market acceptance;




the
      timing and size of client and customer purchases;




introductions
      of products and services by competitors;




price
      competition in the markets in which we compete;




our
      ability to attract, train, and retain skilled management;




the
      amount and timing of operating costs and capital expenditures relating to the
      expansion of our business, operations, and infrastructure; and




general
      economic conditions and economic conditions specific to media distribution
      and
      music.




**We
      May Not Be Able To Compete Effectively In Markets Where Our Competitors Have
      More Resources**




Many
      of
      our competitors have longer operating histories, larger customer bases, longer
      relationships with clients, and significantly greater financial, technical,
      marketing, and public relations resources than CYOP. Based on total assets
      and
      annual revenues, we are significantly smaller than many of our competitors.
      Similarly, we compete against significantly larger and better-financed companies
      in our business. We may not successfully compete in any market in which we
      conduct business currently or in the future. The fact that we compete with
      established competitors who have substantially greater financial resources
      and
      longer operating histories than us, enables them to engage in more substantial
      advertising and promotion and attract a greater number of customers and business
      than we currently attract. While this competition is already intense, if it
      increases, it could have an even greater adverse impact on our revenues and
      profitability.




**If
      We Are Unable To Respond To The Rapid Changes In Technology And Services Which
      Characterize Our Industry, Our Business And Financial Condition Could Be
      Negatively Affected**




Our
      business is directly impacted by changes in the Internet and website services
      industry. Changes in technology could affect the market for our services and
      necessitate changes to those services. We believe that our future success will
      depend largely on our ability to anticipate or adapt to such changes, to offer
      on a timely basis, services that meet these evolving standards and demand of
      our
      customers. We also believe that our future success will depend upon how
      successfully we are able to respond to the rapidly changing technologies and
      products. We cannot offer any assurance that we will be able to respond
      successfully to these or other technological changes, or to new products and
      services offered by our current and future competitors, and cannot predict
      whether we will encounter delays or problems in these areas, which could have
      a
      material adverse affect on our business, financial condition and results of
      operations.




16




**We
      May Be Unable To Manage Growth, Which May Impact Our Potential
      Profitability**




Successful
      implementation of our business strategy requires us to manage our growth. Growth
      could place an increasing strain on our management and financial resources.
      To
      manage growth effectively, we will need to:




·
            Establish
                definitive business strategies, goals and
                objectives.




·
            Maintain
                a system of management controls.




·
            Attract
                and retain qualified personnel, as well as, develop, train and manage
                management-level and other
                employees.




If
      we
      fail to manage our growth effectively, our business, financial condition or
      operating results could be materially harmed, and our stock price may
      decline.




**Existing
      Shareholders Will Experience Significant Dilution From Our Sale Of The
      Debentures and subsequent Conversion and the Sale of Shares Underlying the
      Debentures**




The
      sale
      of the Secured Convertible Debentures and Warrants pursuant to the Securities
      Purchase Agreement will have a dilutive impact on our stockholders upon
      conversion into common stock. The conversion and exercise prices of the
      aforesaid Debentures and Warrants may be less than your cost to acquire our
      common shares. In the event of the exercise of these securities, you could
      suffer substantial dilution of your investment in terms of your percentage
      ownership in the Company as well as the book value of your common shares. As
      a
      result, our net income per share could decrease in future periods, and the
      market price of our common stock could decline.




**The
      Shareholders Intend To Sell Their Shares Of Common Stock In The Market, Which
      Sales May Cause Our Stock Price To Decline**




The
      selling stockholders in our registration statement on Form SB-2 that was amended
      on February 14, 2007 but not yet effective, intend to sell in the public market
      91,060,813 shares of common stock being registered in this offering. That means
      that up to 91,060,813 shares may be sold pursuant to this registration
      statement. Such sales may cause our stock price to decline. Our officers and
      directors and those shareholders who are significant shareholders as defined
      by
      the SEC will continue to be subject to the provisions of various insider trading
      and Rule 144 regulations.




**The
      Sale Of Our Stock Under Secured Convertible Debentures Could Encourage Short
      Sales By Third Parties, Which Could Contribute To The Future Decline Of Our
      Stock Price**




In
      many
      circumstances the provision of Secured Convertible Debentures for companies
      that
      are traded on the Over-the-Counter Bulletin Board has the potential to cause
      a
      significant downward pressure on the price of common stock. This is especially
      the case if the shares being placed into the market exceed the market’s ability
      to take up the increased stock or if we have not performed in such a manner
      to
      show that the debt raised will be used for our growth. Such an event could
      place
      further downward pressure on the price of common stock.




Our
      outstanding Secured Convertible Debentures are convertible at a discount to
      the
      market price of our common stock. As a result, the opportunity exists for short
      sellers and others to contribute to the future decline of our stock price.
      Persons engaging in short sales first sell shares that they do not own, and
      thereafter, purchase shares to cover their previous sales. To the extent the
      stock price declines between the time the person sells the shares and
      subsequently purchase the shares, the person engaging in short sales will profit
      from the transaction, and the greater the decline in the stock, the greater
      the
      profit to the person engaging in such short-sales. Because the Secured
      Convertible Debentures are convertible at a discount to market, it is possible
      that the debentures could be converted if the market price of our common stock
      declines, thus, supplying any short sellers with the opportunity to cover their
      short positions. By contrast, a person owning a long position in a stock, such
      as an investor purchasing shares in this offering, first purchases the shares
      at
      the then market price, the stock price declines while the person owns the
      shares, then upon the sale of such shares the person maintaining the long
      position will incur a loss, and the greater the decline in the stock price,
      the
      greater the loss which is incurred by the person owning a long position in
      the
      stock.




17




If
      there
      are significant short sales of stock, the price decline that would result from
      this activity will cause the share price to decline more so which in turn may
      cause long holders of the stock to sell their shares thereby contributing to
      sales of stock in the market. If there is an imbalance on the sell side of
      the
      market for our stock, the price will likely decline. It is not possible to
      predict if the circumstances where by a short sales could materialize or to
      what
      our share price could drop. In some companies that have been subjected to short
      sales their stock price has dropped to near zero. We cannot provide any
      assurances that this situation will not happen to us.




**Our
      Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
      Significantly, Which May Affect Our Shareholders’ Ability To Sell Shares Of Our
      Common Stock**




Prior
      to
      this filing, there has been a limited public market for our common stock and
      there can be no assurance that a more active trading market for our common
      stock
      will develop. An absence of an active trading market could adversely affect
      our
      shareholders’ ability to sell our common stock in short time periods, or
      possibly at all. Our common stock has experienced, and is likely to experience
      in the future, significant price and volume fluctuations, which could adversely
      affect the market price of our common stock without regard to our operating
      performance. In addition, we believe that factors such as quarterly fluctuations
      in our financial results and changes in the overall economy or the condition
      of
      the financial markets could cause the price of our common stock to fluctuate
      substantially. These fluctuations may also cause short sellers to enter the
      market from time to time in the belief that we will have poor results in the
      future. We cannot predict the actions of market participants and, therefore,
      can
      offer no assurances that the market for our stock will be stable or appreciate
      over time. The factors may negatively impact shareholders’ ability to sell
      shares of our common stock.




Item
      2.
      Description of Properties





At
      December 31, 2006, we maintained an office at Golden Cross House, 8 Duncannon
      Street, Strand, London, UK WC2N 4JF. This office space is provided free of
      charge by one of our Directors. Monthly lease payments on this office space
      are
      close to $0. These facilities are temporary until our revenue exceeds our
      expenses. All our infrastructure and equipment is located in the Westin Building
      in Seattle, Washington on a co-location agreement for $1,500.00 per month.
      Subsequent to year-end, on April 1, 2007, we obtained office space in San Jose,
      Costa Rica that is provided free-of-charge by our CEO.





Item
      3.
      Legal Proceedings





We
      may be
      involved from time to time in various claims, lawsuits, disputes with third
      parties or breach of contract actions incidental to the normal course of
      business operations. We are currently not involved in any such litigation or
      any
      pending legal proceedings that management believes could have a material adverse
      effect on our financial position or results of operations.





Item
      4.
      Submission of Matters to Vote of Security Holders





None.





18





**PART
      II**





Item
      5.
      Market for Common Equity and Related Stockholder Matters




**(a)
      Market Information**




Our
      stock
      began trading on the Over-the-Counter Bulletin Board in September 2002 under
      the
      symbol “CYOS.OB.”




The
      following table sets forth the high and low bid prices for our common stock
      for
      the periods indicated as reported by the NASDAQ Over-the-Counter Bulletin Board.
      The quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or
      commission and may not represent actual transactions.




**YEAR
                2004**
            
            
            **High
                Bid**
            
            
            **Low
                Bid**Quarter
                Ended March, 31, 2004
            
            $
            0.0500
            
            $
            0.0160Quarter
                Ended June 30, 2004
            
            $
            0.0380
            
            $
            0.0090Quarter
                Ended September 30, 2004
            
            $
            0.0150
            
            $
            0.0020Quarter
                Ended December 31, 2004
            
            $
            0.0049
            
            $
            0.0010




**YEAR
                2005**
            
            
            **High
                Bid**
            
            
            **Low
                Bid**Quarter
                Ended March 31, 2005
            
            $
            0.0610
            
            $
            0.0018Quarter
                Ended June 30, 2005
            
            $
            0.2150
            
            $
            0.0070Quarter
                Ended Sept. 30, 2005
            
            $
            0.0569
            
            $
            0.0034Quarter
                Ended Dec. 31, 2005
            
            $
            0.0340
            
            $
            0.0121




**YEAR
                2006**
            
            
            **High
                Bid**
            
            
            **Low
                Bid**Quarter
                Ended March 31, 2006
            
            $
            0.1900
            
            $
            0.0010Quarter
                Ended June 30, 2006
            
            $
            0.0170
            
            $
            0.0051Quarter
                Ended September 30, 2006
            
            $
            0.0350
            
            $
            0.0055Quarter
                Ended December 31, 2006
            
            $
            0.0660
            
            $
            0.0031




**YEAR
                2007**
            
            
            **High
                Bid**
            
            
            **Low
                Bid**Quarter
                Ended March 30, 2007
            
            $
            0.0044
            
            $
            0.0022




**(b)**  **Holders
      of Common Stock**




As
      of
      April 11, 2007, we had approximately 211 shareholders of our common stock and
      366,731,439 shares of our common stock were outstanding. The transfer agent
      and
      registrar for our common stock is Nevada Agency and Trust Company. Their address
      is Suite 880, Bank of America Plaza, 50 West Liberty Street, Reno, Nevada 89501,
      and their telephone number is (775) 322-0626.




19


**(c)**  **Dividends**




We
      have
      never declared or paid a cash dividend. There are no restrictions on the common
      stock or otherwise that limit the ability of us to pay cash dividends if
      declared by the Board of Directors. The holders of common stock are entitled
      to
      receive dividends if and when declared by the Board of Directors, out of funds
      legally available therefore and to share pro-rata in any distribution to the
      shareholders. Generally, we are not able to pay dividends if after payment
      of
      the dividends, we would be unable to pay our liabilities as they become due
      or
      if the value of our assets, after payment of the liabilities, is less than
      the
      aggregate of our liabilities and stated capital of all classes. We do not
      anticipate declaring or paying any cash dividends in the foreseeable
      future.




**(d)**  **Equity
      Compensation Plan**




**Plan
                Category**
            
            **Number
                of**
              **Securities**
              **to
                be Issued Upon**
              **Exercise
                of**
              **Outstanding**
              **Options,**
              **Warrants
                and**
              **Rights**
              **(a)**
            
            **Weighted**
              **Average**
              **Exercise
                Price of**
              **Outstanding**
              **Options,**
              **Warrants
                and**
              **Rights**
              **(b)**
            
            **Number
                of**
              **Securities**
              **Remaining**
              **Available**
              **for
                Future**
              **Issuance**
              **Under
                Equity**
              **Compensation**
              **Plans**
              **(Excluding**
              **Securities**
              **Reflected
                in**
              **Column
                (a))**
              **(c)**Equity
                compensation plans approved by security holders
            
            
            0
            
            $
            0
            
            
            0Equity
                compensation plans not approved by equity holders
            
            
            0
            
            
            0
            
            
            38,000,000Total
            
            
            0
            
            $
            0
            
            
            38,000,000




**(e)**  **Description
      of Equity Compensation Plans**




*2003
      Consultant Stock Plan*




Our
      2003
      Stock Plan (the "2003 Plan") was adopted by the Company on October 21, 2003.
      Pursuant to the 2003 Plan, it is a ten (10) year plan to grant common shares
      or
      right to receive common shares by consultants (per individual agreement) to
      a
      maximum 2,500,000 shares (restated for the Company’s stock split). The allocated
      number of shares includes an indeterminate number of additional shares that
      may
      be issued to adjust the number of shares issued pursuant to the stock plan
      described herein as the result of any future stock split, stock dividend or
      similar adjustment of the registrant’s outstanding common stock.




20




The
      purpose of the 2003 plan is to advance the interests of the Company by helping
      the Company obtain and retain the services of persons providing consulting
      services upon whose judgment, initiative, efforts and/or services the Company
      is
      substantially dependent, by offering to or providing those persons with
      incentives or inducements affording such persons an opportunity to become owners
      of capital stock of the Company.




On
      October 29, 2003, we filed with the SEC a registration statement on Form S-8
      for
      the purpose of registering the common shares issuable under the 2003 Plan under
      the Securities Act of 1933. As of April 16, 2007, there are no shares available
      under the 2003 Plan.




*2005
      Consultant Stock Plan*




We
      adopted our 2005 Non-Qualified Stock Option Plan (the "2005 Plan") on February
      18, 2005, and itis intended to promote our financial success and interests
      and
      materially increase shareholder value by giving incentives to our eligible
      officers and our other employees and directors of and consultants and advisors
      and any of our present or future subsidiaries through providing opportunities
      to
      acquire our stock.




We
      reserved a total of 40,000,000 common shares for issuance under the 2005 Plan.
      The Stock Plan provides for the grants of common stock. No awards may be issued
      after the ten year anniversary of the date we adopted the Stock Plan, the
      termination date for the plan.




On
      February 24, 2005, we filed with the SEC a registration statement on Form S-8
      for the purpose of registering the common shares issuable under the 2005 Plan
      under the Securities Act of 1933. As of April 16, 2007, there are no shares
      available under the 2005 Plan.





*2006
      Consultant Stock Plan*




We
      adopted our 2006 Non-Qualified Stock Option Plan (the "2006 Plan") on September
      1, 2006, and it is intended to promote our financial success and interests
      and
      materially increase shareholder value by giving incentives to the eligible
      officers and our other employees and directors of and consultants and advisors
      and any present or future of our subsidiaries through providing opportunities
      to
      acquire our stock..




We
      reserved a total of 45,000,000 common shares for issuance under the 2006 Plan.
      The Stock Plan provides for the grants of common stock. No awards may be issued
      after the ten year anniversary of the date we adopted the Stock Plan, the
      termination date for the plan.




On
      September 1, 2006, we filed with the SEC a registration statement on Form S-8
      for the purpose of registering the common shares issuable under the 2006 Plan
      under the Securities Act of 1933. As of April 16, 2007, there are 38,000,000
      shares available under the 2006 Plan.




*Stand-Alone
      Grants*




From
      time
      to time our board of directors grants common share purchase options or warrants
      to selected directors, officers, employees, consultants and advisors in payment
      of goods or services provided by such persons on a stand-alone basis outside
      of
      any of our formal stock plans. The terms of these grants are individually
      negotiated.





**Recent
      Sales of Unregistered Securities**





**2006**




On
      July
      20, 2006, Cornell Capital Partners, LP, converted $75,000 of a convertible
      debenture into 14,619,883 shares of our common stock.




Unless
      otherwise noted in this section, with respect to the sale of unregistered
      securities referenced above, all transactions were exempt from registration
      pursuant to Section 4(2) of the Securities Act of 1933, and Regulation D
      promulgated under the 1933 Act. In each instance, the purchaser had access
      to
      sufficient information regarding CYOP so as to make an informed investment
      decision. More specifically, we had a reasonable basis to believe that each
      purchaser was an “accredited investor” as defined in Regulation D of the 1933
      Act and otherwise had the requisite sophistication to make an investment in
      CYOP’s securities.




Item
      6.
      Management’s Discussion and Analysis or Plan of Operations





The
      information contained in this Management's Discussion and Analysis of Financial
      Condition and Results of Operation contains "forward looking statements." Actual
      results may materially differ from those projected in the forward-looking
      statements as a result of certain risks and uncertainties set forth in this
      report. Although management believes that the assumptions made and expectations
      reflected in the forward looking statements are reasonable, there is no
      assurance that the underlying assumptions will, in fact, prove to be correct
      or
      that actual future results will not be materially different from the
      expectations expressed in this Annual Report. The following discussion should
      be
      read in conjunction with the audited Consolidated Financial Statements and
      related Notes thereto included in Item 8, with "Item 6. Selected Financial
      Data," with the Risk Factors section of Item 1 and with the Special Note
      regarding forward-looking statements included elsewhere in this report.





21




Overview





We
      provide multimedia transactional technology solutions and services for the
      entertainment industry. Our range of products and services include financial
      transaction platforms for on-line video games and integrated e-commerce
      transaction technology for on-line merchants.





Going
      Concern




Our
      consolidated financial statements have been prepared assuming we will continue
      as a going concern. We have experienced recurring net losses from operations,
      which losses have caused a net loss of $1,736,614 for the nine months ended
      September 30, 2006 and accumulated deficit of $7,153,847. In addition, for
      the quarter ended September 30, 2006, we had a working capital deficit of
      $3,400,228 and a working capital deficit of $2,371,842 for the year ended
      December 31, 2005. These factors, among others, raise substantial doubt
      about our ability to continue as a going concern. Our financial statements
      do
      not include any adjustment that might result from the outcome of this
      uncertainty. Assurances cannot be given that adequate financing can be obtained
      to meet our capital needs. If we are unable to generate profits and unable
      to
      continue to obtain financing to meet our working capital requirements, we may
      have to curtail our business sharply or cease operations altogether. Our
      continuation as a going concern is dependent upon our ability to generate
      sufficient cash flow to meet our obligations on a timely basis to retain our
      current financing, to obtain additional financing, and, ultimately, to attain
      profitability. Should any of these events not occur, the accompanying financial
      statements will be adversely effected and we may have to cease
      operation.




Anti-Gaming
        Legislation and Discontinuation of Gaming Operations
 
 During
        fiscal 2006, new anti-gaming legislation was enacted in the United States.
        The
        Company was forced to make the decision to indefinitely discontinue all of
        its
        US-based gaming-related operations as of December 31, 2006. All gaming-related
        websites were taken offline; all gaming-related services offerings were ceased;
        and all bank accounts and transactional systems relating to gaming operations
        were closed, with the balances written down to $0 at December 31, 2006. Losses
        have been segmented in the financial statement presentation, net of tax.
        Because
        the Company had no liability associated with these losses, and because it
        is
        probable that the net operating losses cannot be utilized in future, the
        tax
        effect on the losses from discontinued operations was estimated at
        nil.


Critical
      Accounting Policies




***Revenue
      Recognition***




We
      derive
      revenue from providing services on software development and online Internet
      transaction platform maintenance. Service revenues are recognized when services
      have been performed and delivered in accordance with service agreements, we
      have
      no significant remaining performance requirements, there are no material
      uncertainties regarding customer acceptance and collection of the resulting
      receivable is deemed probable.




22




***Income
      Taxes***




We
      have
      adopted Statement of Financial Accounting Standards No. 109, “ *Accounting
      for Income Taxes”* ,
      which
      requires us to recognize deferred tax liabilities and assets for the expected
      future tax consequences of events that have been recognized in our financial
      statements or tax returns using the liability method.  Under this method,
      deferred tax liabilities and assets are determined based on the temporary
      differences between the financial statement and tax bases of assets and
      liabilities using enacted tax rates in effect in the years in which the
      differences are expected to reverse.  The effect on deferred income tax
      assets and liabilities of a change in income tax rates is included in the period
      that includes the enactment date.




***Stock-Based
      Compensation***




We
      have
      adopted the disclosure-only provisions of SFAS No. 123 “Accounting for
      Stock-based Compensation.” SFAS 123 encourages, but does not require, companies
      to adopt a fair value based method for determining expense related to
      stock-based compensation. We account for stock-based compensation issued to
      our
      employees and directors using the intrinsic value method as prescribed under
      Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock
      Issued To Employees” and related interpretations.




***Goodwill
      And Other Intangible Assets***




Effective
      January 1, 2002, we adopted Statement of Financial Accounting Standards No.
      142,
“Goodwill and Other Intangible Assets”.  This statement requires that
      intangible assets with an indefinite life are not amortized.  Intangible
      assets with a definite life are amortized over its useful life or estimated
      of
      its useful life.  Indefinite life intangible assets will be tested for
      impairment annually, and will be tested for impairment between annual tests
      if
      any events occur or circumstances change that would indicate that the carrying
      amount may be impaired.  Intangible assets with a definite life are tested
      for impairment whenever events or circumstances indicate that a carrying amount
      of an asset (asset group) may not be recoverable.  An impairment loss would
      be recognized when the carrying amount of an asset exceeds the estimated
      non-discounted cash flows used in determining the fair value of the assets.
       The amount of the impairment loss to be recorded is calculated by the
      excess of the assets carrying value over its fair value.




Management
      has financed most of our operations to date along with Cornell Capital Partners,
      LP (“Cornell”). However, management is not under any contractual obligation to
      provide continued funding. We will spend approximately $1 million in the next
      12
      months to maintain current operations at our current expenditure rate, not
      including any marketing initiatives or expansion plans.





Executive
      and key personnel have executed management contracts; however fees and salaries
      have been accrued by the Company. To ensure retention of executive and key
      personnel, the Company will again be paying fees and salaries or accruing them
      as necessary for 2007.





In
      September 2002, we launched a suite of free and “pay for play” games including
      card, strategy, arcade, sports and multiplayer games, terminating our licensing
      contract with Bingo.com. Our proprietary site www.skillarcade.com as at
      December 31, 2006 had about 275,000 members, 250 affiliate sites and had
      processed approximately 3.5 million transactions since inception. During fiscal
      year 2006, all operations related to skillarcade.com were wound down. The domain
      and other associated properties have been allowed to lapse and revert to other
      owners. The carrying value of the intangible asset associated with these
      operations was reduced by $28,916 during fiscal year 2006, to a value of
      $0.





During
      fiscal year 2006, new anti-gaming legislation was enacted in the United States.
      The Company was forced to make the decision to indefinitely discontinue all
      of
      its US-based gaming-related operations as of December 31, 2006. All
      gaming-related websites were taken offline, all gaming-related services
      offerings were ceased, and all bank accounts and transactional systems relating
      to gaming operations were closed, with the balances written down to $0 at
      December 31, 2006. Losses have been segmented in the financial statement
      presentation, net of tax. Because the Company had no liability associated with
      these losses, and because it is probable that the net operating losses cannot
      be
      utilized in future, the tax effect on the losses from discontinued operations
      was estimated at nil.





We
      do not
      expect to acquire any material physical assets or significant equipment in
      the
      next 12 months. We will not be performing any significant research and
      development in the next 12 months as our pay for play software operations have
      been discontinued.





In
      the
      future, the funds required for ongoing operations will come from our equity
      financing.





**Results
      of Operations For the Year Ended December 31, 2006 As Compared to the Year
      Ended
      December 31, 2005**





Revenue





Revenue
      decreased to $0 during the year ended December 31, 2006, compared to $8,138
      for
      the year ended December 31, 2005. This decrease is a result of limited
      marketing, and the discontinuation of the Company’s revenue-generating
      activities, which was a response to new anti-gaming legislation enacted in the
      United States during the period. Management was forced to minimize operations
      and to prioritize reporting and compliance activities.





Cost
      of
      Revenue





The
      Company recorded cost of revenue of $626 during the year ended December 31,
      2006
      and $59,302 during the year ended December 31, 2005. This decrease reflects
      the
      Company’s discontinuation of US-based gaming-related operations, which was a
      response to new anti-gaming legislation enacted in the United States during
      2006.




23




Sales
      and
      Marketing expenses




Sales
        and
        marketing expenses decreased to $30,224 for the year ended December 31, 2006
        from $69,915 for the year ended December 31, 2005. This decrease is a result
        of
        the Company’s discontinuation of US-based gaming-related operations, which was a
        response to new anti-gaming legislation enacted in the United States during
        2006.


General
      and Administrative expenses




General
      and administrative expenses from continuing operations consist primarily of
      legal and audit professional fees, finance, and other general corporate and
      office expenses. General and administrative expenses from continuing operations
      increased to $328,333 in 2006 as compared to $281,726. This was primarily due
      to
      increased costs to comply with Sarbanes-Oxley legislation.





We
      expect
      to continue to incur general and administrative expenses to support the
      business, and there can be no assurances that the Company will be able to
      generate sufficient revenue to cover these expenses. The Company will be relying
      on the equity financing to support the business.





Consulting
      fees





Consulting
      fees from continuing operations decreased to $885,945in 2006 from $1,194,552
      in
      2005. This decrease was not due to any identifiable factors. Although the
      Company engaged fewer consultants during 2006, the fees charged by consultants
      for their services increased.





Corporate
      financing fees





Corporate
      financing fees decreased to $11,500 in 2006 from $213,169 in 2005 due to
      dramatically decreased external financing activity during the year.





Interest
      expense





Imputed
      interest expense increased to $265,132 in 2006 from $120,568 in 2005 due to
      increases in outstanding demand loans from related parties, as well as the
      increase in the convertible debenture outstanding.





Loss
      per
      share and net loss





The
      Company ended the year with a net loss of ($3,573,962) in 2006, compared to
      ($2,012,050) in 2005. The net loss position for 2006 reflects a ($0.0104) per
      share loss compared to the 2005 per share loss of ($0.0065).





Liquidity
      and capital resources





While
      the
      Company will have a source of financing upon effectiveness of a registration
      statement, there can be no assurances that the Company will in the future
      achieve a consistent and reliable revenue stream adequate to support operations.




The
        Company had cash and cash equivalents of $21,336 and a working capital
        deficiency of ($4,276,191) at December 31, 2006. This compares to cash and
        cash
        equivalents of $218,844 and working capital deficiency of ($2,371,842) at
        December 31, 2005. This reflects the continued commitment by management with
        an
        increase of advancing shareholder loans and initial funding from Cornell
        in the
        form of promissory notes and convertible debentures to cover the cost of
        operations.




24




During
      the year ended December 31, 2006, the Company used cash of $709,695 in operating
      activities compared to using $1,424,298 in the prior year.





Net
      cash
      provided by financing activities was $524,642 in 2006, which compares to
      $1,694,374 in 2005. During the year ended December 31, 2006, $150,000 in
      additional convertible debentures were issued to Cornell, while shareholders
      made advances of $374,642. At December 31, 2006, $1,425,000 plus accrued
      interest remained outstanding on the convertible debenture.





Our
      future capital requirements will depend on a number of factors, including the
      possible acquisition of businesses, products and technologies. We do not have
      sufficient cash or cash equivalents on hand to conduct our operations through
      the second quarter of 2007, and are substantially dependent on the equity
      financing and interim funding from one of our affiliates to continue operations.





The
      Company concluded an underwriting in the third and fourth quarters of 2005
      with
      Cornell and the associated SB-2 was filed subsequent to the year-end on March
      16, 2006 on EDGAR. As there have been only nominal revenues since 2004, due
      to
      the lack of capitalization of the Company, the Promissory Note for $1.8 million
      (“the note”) (discounted to $1,605,739) that was additionally guaranteed by the
      shareholder loan of Mitch White was assigned to an affiliated
      company.





The
      original marketing and licensing and exploitation agreement (Filed on Form
      8-K
      on April 15, 2002) anticipated the promissory note to be paid down from
      generated revenues. To date, this has not occurred due to lack of revenues.
      Consequently an agreement was reached exchanging the note for 25 million shares
      of Gaming Transactions Inc (“GGTS”) a pink sheet issuer at a deemed price of
      $0.075 per share. As at December 2006, Gaming Transactions was an inactive
      company, and the shares were thinly traded. In accordance with SFAS 115, at
      December 31, 2006, the carrying value of this asset was reviewed for impairment.
      The last price of the shares of GGTS as quoted on the Pink Sheets, was $0.006
      per share. It was concluded that the carrying value of the asset was impaired,
      and was written down accordingly, to a value of $150,000.





Pursuant
      to the above-mentioned Marketing and Distribution Agreement executed on December
      1, 2001, the anticipated revenue considered more than adequate to pay down
      the
      promissory at the time of the Agreement had not materialized as at December
      31,
      2006. In light of this lack of revenue, the Company has concluded that the
      realization of the deferred revenue was highly improbable for the foreseeable
      future. The Company wrote this deferred revenue down by $2,173,507 to a value
      of
      $0, and credited the Company’s additional paid-in capital for this
      amount.





The
      auditors' report on the Company's December 31, 2006 consolidated financial
      statements contains an explanatory paragraph that states that the Company has
      suffered losses and negative cash flows from operations that raise substantial
      doubt about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





The
      Company has no financial instruments for trading purposes, or derivative or
      other financial instruments with off balance sheet risk. The fair value of
      all
      financial instruments at December 31, 2006 is not materially different from
      their carrying value.





On
      December 15, 2005, the Company entered into a Securities Purchase Agreement
      (SPA) with Cornell. Pursuant to the SPA, Cornell purchased secured convertible
      debentures in the original principal amount of $1,350,000. The debentures have
      a
      three-year term and accrues annual interest of 10%. Funds of $700,000 were
      advanced to the Company upon execution of the SPA.





25




Funds
      of
      $150,000 were advanced on June 15, 2006. The balance of $500,000 will be
      disbursed upon the discharge of certain conditions placed upon the Company
      in
      the SPA.





The
      debentures mature on December 15, 2008. The secured convertible debentures
      may
      be redeemed by the Company at any time, in whole or in part. The Company will
      pay a redemption premium of 20% of the amount redeemed in addition to such
      redemption. The debentures are convertible from time to time into our common
      stock by Cornell at the price per share of an amount equal to ninety percent
      (90%) of the lowest average volume weighted average price of our Common Stock,
      as quoted by Bloomberg, LP, for the thirty (30) trading days immediately
      preceding the conversion date. We granted Cornell a security interest in certain
      of its assets pursuant to amended and restated security agreement dated December
      15, 2005. Cornell also received five year warrants to purchase 2,970,000 shares
      of common stock, 1,350,000 shares at an exercise price of $0.05 per share and
      1,620,000 shares at an exercise price of $0.06 per share.





On
      June
      15, 2006, the Company executed a second amendment of the SPA of December 15,
      2005 Cornell Capital LP. One of the revised terms gives Mitch White, a former
      officer and director of the Company, the option to convert such portion of
      his
      outstanding shareholder loan (valued at December 31 at $ 1,176,058) into common
      shares — at a 20% discount to the market price — so as to effect a majority
      ownership of the shares of CYOP, with the balance of the shareholder loan,
      if
      any, being convertible into a newly-created series of preferred shares in CYOP,
      the terms of which must be agreed upon by both the Company and Cornell.
      Alternatively, Mr. White may convert the entire balance of his outstanding
      shareholder loan into common shares of the Company at a 35% discount to the
      market price, which would however also give Cornell the right to convert its
      convertible debenture, in whole or in part, into common shares of the Company
      at
      a 35% discount to the market price. As of April 16, 2007, no election has been
      made by Mr. White.





On
      July
      19, 2006, Cornell converted $75,000 of the convertible debenture into 14,691,883
      common shares of the Company at a conversion price of $0.00513 per share. The
      face value of the convertible debenture outstanding at that date, and at
      year-end, was $1,425,000.





Subsequent
      to the year-end, on February 20, 2007, Cornell converted a further $33,446.58
      of
      the convertible debenture and accrued interest into 11,613,396 common shares
      of
      the Company at a conversion price of $0.00288 per share. The face value of
      the
      convertible debenture outstanding at that date was $1,411,000.





These
      instruments are not for trading purposes. They are classified as embedded
      derivatives pursuant to SFAS No. 133 Accounting for Derivative Instruments
      and
      Hedging Activities, and as such are carried at the difference of the exercise
      prices and the trading prices as prescribed by the SPA at the balance sheet
      dates.





To
      December 31, 2006, cash costs have been incurred in both United States dollars
      and in Canadian dollars and as such, are subject to foreign currency exchange
      rate risk. To date, the Company has not entered into foreign currency contracts
      to hedge against foreign currency risks between the Canadian dollar or other
      foreign currencies and our reporting currency, the United States
      dollar.





**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that are material to investors.




**New
      Accounting Pronouncements**




In
      December 2004, The Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard number 123r, “ *Share
      Based Payments* ”
(“SFAS
      123r”) which superseded SFAS 123 and APB No. 25. This statement eliminates the
      use of the intrinsic method as previously allowed under APB 25 and is effective
      for small issuers for years ending after December 15, 2005. We do not
      expect adoption of this statement to have an impact on their operations.




In
      December 2004, The Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard number 153 “ *Exchanges
      of Non Monetary Assets - An Amendment of APB No 29* ”.
      This
      statement removed the exemption in APB 29 to the use of the fair value method
      in
      certain transactions and is effective for years beginning after June 15,
      2005. We do not expect the adoption of this statement to have an impact on
      their
      operations.




In
      March
      2005, The Financial Account Standards Board issued FASB Interpretation No.
      47
      (“FIN 47”) “ *Accounting
      for Conditional Asset retirement Obligations”* .
      This
      statement requires the recognition of liabilities associated with assets that
      will be retired in the future be accounted for in the cost of the assets if
      a
      reasonable estimate of the fair value of such cost can be made. This
      interpretation becomes effective for annual statements ending after December
      15,
      2005. We do not expect the adoption of this statement to have an impact on
      their
      operation.




In
      May
      2005, The Financial Accounting Standards Board issued Statement of Financial
      Accounting Standard number 154 “ *Accounting
      for Changes and Error Corrections, a replacement of APB Opinion No. 20 and
      FASB
      Statement No. 3”* .
      This
      statement changes the application and reporting of changes in accounting
      principles and correction of errors. We do not expect the adoption of this
      statement to have an impact on their operations.





Item
      7.
      Financial Statements





The
      financial statements of the Company and related schedules are included following
      this page.





26




**CYOP
      SYSTEMS INTERNATIONAL**


**INCORPORATED**




Consolidated
      Financial Statements


**(Expressed
      in U.S. Dollars)**





December
      31, 2006 and 2005




Index




Report
                of Independent Registered Public Accounting Firms
            
            F-1Consolidated
                Balance Sheets
            
            F-2Consolidated
                Statement of Stockholders’ Deficiency
            
            F-3Consolidated
                Statements of Operations
            
            F-5Consolidated
                Statements of Cash Flows
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7





27




**Report
      of Independent Registered Public Accounting Firm**





We
      have
      audited the accompanying consolidated balance sheets of CYOP Systems
      International Incorporated and it’s Subsidiaries as of December 31, 2006 and
      2005, and the related consolidated statements of operations, stockholders'
      equity, and cash flows for the years then ended. These financial statements
      are
      the responsibility of the Company's management. Our responsibility is to express
      an opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company at December 31, 2006
      and 2005, and the results of its operations and its cash flows for the years
      then ended, in conformity with U.S. generally accepted accounting
      principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations and a
      net
      capital deficiency that raise substantial doubt about its ability to continue
      as
      a going concern. Management's plans in regard to these matters are also
      described in Note 1. The financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.





De
      Leon
& Company, P.A.


Pembroke
      Pines, Florida


April
      14,
      2007





F-1




**CYOP
                SYSTEMS INTERNATIONAL INCORPORATED**Consolidated
                Balance SheetsDecember
                31, 2006 and 2005**(Expressed
                in U.S. Dollars)**




2006
            
            2005**ASSETS****Current**Cash
                and cash equivalents
            
            $
            21,336
            
            $
            218,844Accounts
                receivable
            
            
            —
            
            
            711Prepaid
                expenses and deposit
            
            
            713
            
            
            473,518**Total
                current assets**
            
            
            22.049
            
            
            693,073**Fixed
                assets****Continuing
                operations**
            
            
            6,823
            
            
            92,694**Discontinuing
                operations**
            
            
            61,955
            
            
            —**Investment
                in equity - method investee**
            
            
            150,000
            
            
            1,618,278**Intangible
                assets**
            
            
            —
            
            
            28,916**Total
                assets**
            
            $
            240,826
            
            $
            2,432,962**LIABILITIES****Current**Demand
                loans related party
            
            $
            1,622,950
            
            $
            1,161,167Accounts
                payable and accrued liabilities
            
            
            1,037,566
            
            
            244,326Convertible
                debenture
            
            
            1,425,000
            
            
            1,369,660Player
                funds on deposit
            
            
            —
            
            
            46,088Short-term
                loan
            
            
            212,725
            
            
            212,725Conversion
                option
            
            
            —
            
            
            30,949**Total
                **Current** Liabilities**
            
            
            4,298,241
            
            
            3,064,916**STOCKHOLDERS'
                DEFICIENCY****Share
                capital**Authorized:500,000,000
                shares of common stock with a par valueof
                $0.00002 per shareIssued,
                allotted and outstanding:355,118,043
                shares of common stock (2005 - 181,103,355)
            
            
            7,101
            
            
            6,669**Additional
                paid-in capital**
            
            
            4,926,677
            
            
            4,778,610**Deficit
                accumulated**
            
            
            (8,991,193
            )
            
            (5,417,232
            )**Total
                stockholders' deficiency**
            
            
            (4,057,415
            )
            
            (631,953
            )**Total
                liabilities and stockholders' deficiency**
            
            $
            240,826
            
            $
            2,432,962




**The
        accompanying notes are an integral part of these financial
        statements.**
  F-2




**CYOP
                SYSTEMS INTERNATIONAL INCORPORATED**Consolidated
                Statement of Stockholders' DeficiencyYears
                  ended December 31, 2006, 2005 and 2004
            Page
                1 of 2**(Expressed
                in U.S. Dollars)**






Additional
            
            
            
            TotalCommon
                stock
            
            paid-in
            
            Deficit
            
            Stockholders'Shares
            
            Amount
            
            capital
            
            accumulated
            
            (deficiency)**Balance**,
                December 31, 2003
            
            
            142,973,160
            
            
            2,860
            
            
            695,464
            
            
            (2,355,677
            )
            
            (1,657,353
            )Shares
                issued for legal services at $0.03995 per shareon
                January 27, 2004
            
            
            212,500
            
            
            4
            
            
            7,434
            
            
            —
            
            
            7,438Shares
                issued for corporate finance fees at $0.032 pershare
                on January 27, 2004
            
            
            7,500,000
            
            
            150
            
            
            262,350
            
            
            —
            
            
            262,500Shares
                issued for escrow agent services at $0.032 pershare
                on January 27, 2004
            
            
            312,500
            
            
            6
            
            
            10,931
            
            
            —
            
            
            10,937Shares
                issued to Cornell Capital at $0.0032 per shareon
                September 9, 2004
            
            
            3,125,000
            
            
            63
            
            
            12,437
            
            
            —
            
            
            12,500Shares
                issued to Cornell Capital at $0.0011 per shareon
                November 5, 2004
            
            
            4,545,454
            
            
            91
            
            
            11,273
            
            
            —
            
            
            11,364Shares
                issued to Cornell Capital at $0.0015 per shareon
                November 10, 2004
            
            
            3,333,333
            
            
            67
            
            
            7,266
            
            
            —
            
            
            7,333Shares
                issued to Cornell Capital at $0.0013 per shareon
                November 16, 2004
            
            
            3,846,154
            
            
            77
            
            
            8,385
            
            
            —
            
            
            8,462Shares
                  issued to Cornell Capital at $0.00185 per share on November 23,
                  2004
            
            
            5,405,405
            
            
            108
            
            
            16,108
            
            
            —
            
            
            16,216





**The
        accompanying notes are an integral part of these financial
        statements.**
  F-3




**CYOP
                SYSTEMS INTERNATIONAL INCORPORATED**Consolidated
                Statement of Stockholders' DeficiencyYears
                  ended December 31, 2006, 2005 and 2004
            Page 2
                of 2**(Expressed
                in U.S. Dollars)**




Additional
            
            
            
            TotalCommon stock
            
            paid-in
            
            Deficit
            
            StockHoldersShares
            
            Amount
            
            capital
            
            accumulated
            
            (deficiency)(continued
                from page 1)Shares
                issued to Cornell Capital at $0.00185 per share on November 30,
                2004
            
            
            5,405,405
            
            
            108
            
            
            17,189
            
            
            —
            
            
            17,297Shares
                issued to Cornell Capital at $0.00185 per share on November 30,
                2004
            
            
            4,444,444
            
            
            89
            
            
            14,133
            
            
            —
            
            
            14,222Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,049,505
            )
            
            (1,049,505
            )**Balance,**December 31, 2004
            
            
            181,103,355
            
            $
            3,623
            
            $
            1,062,970
            
            $
            (3,405,182
            )
            $
            (2,338,589
            )**Balance**,
                Forward
            
            
            181,103,355
            
            $
            3,623
            
            $
            1,062,970
            
            $
            (3,405,182
            )
            $
            (2,338,589
            )Shares
                issued to Cornell Capital at $0.0071 per share
            
            
            107,394,805
            
            
            2,146
            
            
            760,033
            
            
            —
            
            
            762,179Shares
                issued for services at $0.0174 per share
            
            
            45,000,000
            
            
            900
            
            
            782,100
            
            
            —
            
            
            783,000Write
                down of deferred revenue
            
            
            —
            
            
            
            
            
            2,173,507
            
            
            —
            
            
            2,173,507Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,012,050
            )
            
            (2,012,050
            )**Balance**,
                December 31, 2005
            
            
            333,498,160
            
            
            6,669
            
            
            4,778,610
            
            
            (5,417,232
            )
            
            (631,953
            )Balance,
                Forward
            
            
            333,498,160
            
            
            6,669
            
            
            4,778,610
            
            
            (5,417,232
            )
            
            (631,953
            )Shares
                issued to Cornell Capital at $0.00513 per share
            
            
            14,619,883
            
            
            292
            
            
            74,708
            
            
            —
            
            
            75,000Shares
                for services
            
            
            7,000,000
            
            
            140
            
            
            73,360
            
            
            —
            
            
            73,500Net
                loss for the period
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,573,962
            )
            
            (3,573,962
            )Balance,
                December 31, 2006
            
            
            355,118,043
            
            
            7,101
            
            
            4,926,677
            
            
            (8,991,194
            )
            
            (4,057,415
            )


**The
        accompanying notes are an integral part of these financial
        statements.**




F-4




**CYOP
                SYSTEMS INTERNATIONAL INCORPORATED**Consolidated
                Statements of OperationsYears
                ended December 31, 2006 and 2005**(Expressed
                in U.S. Dollars)**




2006
              
              2005ExpensesConsultants
                  fees
              
              
              885,945
              
              
              1,194,552Corporate
                  Finance fees
              
              
              11,500
              
              
              213,169General
                  and Admin fees
              
              
              328,333
              )
              
              281,726Conversion
                  option
              
              
              (30,949
              )
              
              30,949**Operating
                  loss**
              
              
              (1,194,830
              )
              
              (1,720,396
              )**Other
                  income (loss)**Interest
                  Expense
              
              
              (265,132
              )
              
              (120,568
              )Equity
                  in losses of equity-method investee
              
              
              (48,726
              )
              
              (50,007
              )Mark-to-market
                  adjustment for securities
              
              
              (1,419,552
              )
              
              --**Loss
                  from continuing operations**
              
              $
              (2,928,240
              )
              $
              (1,890,971
              )**Discontinued
                  operations**Gain
                  (loss) on disposal of discontinued operations (net of $0 in income
                  taxes)
              
              
              (645,722
              )
              
              (121,079
              )**Net
                  Loss for the period**
              
              
              (3,573,962
              )
              
              (2,012,050
              )**Loss
                  per share -**basic
                  and dilutedLoss
                  from operations
              
              $
              (0.0086
              )
              $
              (0.0060
              )Loss
                  from discontinued operations
              
              
              (0.0018
              )
              
              (0.0005
              )Net
                  loss
              
              $
              (0.0104
              )
              $
              (0.0065
              )**Weighted
                  average number of common shares outstanding -**basic
                  and diluted
              
              
              342,486,928
              
              
              307,953,741


**The
                accompanying notes are an integral part of these financial
                statements.**




F-5




**CYOP
                  SYSTEMS INTERNATIONAL INCORPORATED**Consolidated
                  Statements of Cash FlowsYears
                  Ended December 31, 2006 and 2005**(Expressed
                  in U.S. Dollars)**
  2006
              
              2005**Cash
                  flows from (used in) operating activities**Net
                  loss for the year
              
              $
              (3,573,962
              )
              $
              (2,012,050
              )Adjustments
                  to reconcile net loss to net cashUsed
                  in operating activities:-
                  amortization of intangible assets
              
              
              28,916
              
              
              28,916-
                  depreciation of fixed assets
              
              
              36,371
              
              
              23,489-
                  imputed interest on related party loan
              
              
              67,480
              
              
              —-
                  investment in equity interest
              
              
              48,726
              
              
              50,007-
                  shares issuance for services
              
              
              73,500
              
              
              899,309Changes
                  in assets and liabilities:-
                  accounts receivable
              
              
              711
              
              
              49,347-
                  note receivable related party
              
              
              —
              
              
              —-
                  prepaid expenses and deposit
              
              
              472,805
              
              
              (471,078
              )-
                  accounts payable and accrued liabilities
              
              
              793,240
              
              
              (24,798
              )-
                  player funds on deposit
              
              
              (46,085
              )
              
              1,930-
                  deferred revenue
              
              
              —
              
              
              (315
              )-
                  intangible assets
              
              
              1,419,552
              
              
              —-
                  conversion option
              
              
              (30,949
              )
              
              30,949(709,695
              )
              
              (1,424,298
              )**Cash
                  flows from (used in) investing activities**Purchase
                  of fixed assets
              
              
              (12,455
              )
              
              (61,615
              )(12,455
              )
              
              (61,615
              )**Cash
                  flows from (used in) financing activities**Shares
                  issued
              
              
              —
              
              
              642,826Increase
                  in due from director
              
              
              374,642
              
              
              (128,453
              )Proceeds
                  from promissory note
              
              
              —
              
              
              (100,000
              )Proceeds
                  from convertible debenture
              
              
              150,000
              
              
              1,280,000524,642
              
              
              1,694,373**Increase
                    (decrease) in cash and cash equivalents**
              
              
              (197,508
              )
              
              208,460*Effect
                  of exchange rate on cash*
              
              
              —
              
              
              3,047**Cash
                  and cash equivalents,**beginning
                  of year
              
              
              218,844
              
              
              7,337**Cash
                  and cash equivalents**,
                  end of year
              
              $
              21,336
              
              $
              218,844**Cash
                  and cash equivalents represented by:**Cash
              
              $
              21,336
              
              $
              217,450Cash
                  with processors
              
              
              —
              
              
              1,394$
              21,336
              
              $
              218,844
  **The
                  accompanying notes are an integral part of these financial
                  statements.**




F-6


**CYOP
        SYSTEMS INTERNATIONAL INCORPORATED**
 
 Notes
        to
        Consolidated Financial Statements
 Years
        Ended December 31, 2006 and 2005
 **(Expressed
                    in U.S. dollars)**
  **1.** **** **Nature
        and Continuance of Operations**
  The
        Company was incorporated on October 29, 1999 as Triple 8 Development Corporation
        under the laws of the State of Nevada to engage in any lawful business or
        activity for which corporations may be organized under the laws of the State
        of
        Nevada. The Company changed its name to CYOP Systems International Incorporated
        on October 30, 2000. On November 3, 2000, the Company acquired 100% of the
        issued and outstanding shares of CYOP Systems Inc., Barbados (“CYOP Barbados”).
        This transaction was accounted for as a reverse acquisition and a
        recapitalization.
  CYOP
        Barbados was incorporated under the laws of Barbados on June 20, 2000. On
        August
        31, 2000, CYOP Barbados acquired 100% of the issued and outstanding shares
        of
        Moshpit Entertainment Inc., Canada (“Moshpit”), a company incorporated under the
        laws British Columbia, Canada. CYOP Barbados sold 100% of the issued and
        outstanding shares of Moshpit by an agreement dated April 1, 2002 to a former
        stockholder and the sole director.
  The
        Company, and its subsidiaries, is a developer of multimedia transactional
        technology solutions and services for the entertainment industry outside
        of the
        United States. The range of products and services that the Company is pursuing
        include financial transaction platforms for on-line video games, and integrated
        e-commerce transaction technology for on-line merchants.
 
 During
        2006, new anti-gaming legislation was enacted in the United States. The Company
        was forced to make the decision to indefinitely discontinue all of its US-based
        gaming-related operations as of December 31, 2006. All gaming-related websites
        were taken offline, all gaming-related services offerings were ceased, and
        all
        bank accounts and transactional systems relating to gaming operations were
        closed, with the balances written down to $0 at December 31, 2006. Losses
        have
        been segmented in the financial statement presentation, net of tax. Because
        the
        Company had no liability associated with these losses, and because it is
        probable that the net operating losses cannot be utilized in future, the
        tax
        effect on the losses from discontinued operations was estimated at
        $0.
  These
        consolidated financial statements have been prepared using the generally
        accepted accounting principles applicable to a going concern which contemplates
        the realization of assets and the satisfaction of liabilities and commitments
        in
        the normal course of business. The Company has suffered recurring losses
        from
        operations and has a net capital deficiency. The ability of the Company to
        continue as a going concern is dependent upon many factors, including the
        ability of the Company to obtain financing to fund working capital requirements,
        the degree of competition encountered by the Company, technology risks,
        government regulation and general economic conditions. The Management’s plan in
        this regard is to raise equity financing as required and keep abreast with
        the
        multimedia technology. These consolidated financial statements do not include
        any adjustments that might result from this uncertainty.
  **2.** **** **Significant
        Accounting Policies**
  **(a)** **** **Basis
        of Consolidation**
  These
        consolidated financial statements, prepared in accordance with accounting
        principles generally accepted in the United States of America, include the
        accounts of the Company and its wholly owned subsidiaries CYOP Barbados and
        Red
        Felt Software limited (UK). Significant inter-company accounts and transactions
        have been eliminated.
  F-7
  **CYOP
        SYSTEMS INTERNATIONAL INCORPORATED**
 
 Notes
        to
        Consolidated Financial Statements
 Years
        Ended December 31, 2006 and 2005 **** **(Expressed
                    in U.S. dollars)**
  **(b)** **** **Accounting
        Estimates**
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amount of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amount of revenues and expenses during the period. Actual results
        may differ from those estimates.
  **(c)** **** **Cash
        Equivalents**
  For
          purposes of the statement of cash flows cash equivalents usually consist
          of
          highly liquid investments which are readily convertible into cash with
          maturity
          of three months or less when purchased. The Company occasionally will have
          amounts on deposit at financial institutions that exceed the $100,000 FDIC
          insurance limit. The Company believes there is no significant risk with
          respect
          to these deposits. At December 31, 2006 and 2005 the Company had $0 and
          $117,500
          deposits, respectively with financial institutions that exceeded the insured
          amounts.
  **(d)** **** **Equity
        Investments**
  The
        Company has certain investment in equity securities. These investments are
        accounted for using the equity method of accounting if the investment gives
        the
        Company the ability to exercise significant influence, but not control, over
        an
        investee. Significant influence is deemed to exist if the Company has an
        ownership interest in the voting stock of the investee of between 20% and
        50%,
        although other factors, such as representation on the investee’s Board of
        Directors and the impact of commercial arrangements, are considered in
        determining whether the equity method of accounting is appropriate. The Company
        records its investment in equity-method investees on the consolidated balance
        sheet as “Investments in equity-method investees” and its share of the
        investees’ earnings or losses as “Equity in losses of equity-method
        investees”.
  **(e)** **** **Fixed
        Assets**
  Fixed
        assets are recorded at historical cost. Depreciation is charged to earnings
        in
        amounts sufficient to allocate the costs over their estimated useful lives,
        as
        follows:
  Audio
                  and visual equipment
              
              20%
                  declining-balance basisComputer
                  hardware
              
              30%
                  declining-balance basisComputer
                  software
              
              50%
                  declining-balance basisOffice
                  furniture and equipment
              
              20%
                  declining-balance basisLeasehold
                  improvements
              
              20%
                  straight-line basis
  F-8





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**(f)** ******** **Revenue
      recognition**




The
      Company derives revenue from providing services on software development and
      online internet transaction platform maintenance. Service revenues are
      recognized when services have been performed and delivered in accordance with
      service agreements, the Company has no significant remaining performance
      requirements, there are no material uncertainties regarding customer acceptance
      and collection of the resulting receivable is deemed probable.





**(g)** ******** **Software
      Development Costs**




Software
      development costs incurred prior to the establishment of technological
      feasibility are charged to expenses as incurred. Cost incurred after
      technological feasibility are capitalized and amortized over the estimated
      benefit period in accordance with Emerging Issue Taskforce Number
      98-5.




**(h)   ****** **Sales
      and Marketing Costs**




The
      Company expenses sales and marketing costs as incurred. Total sales and
      marketing costs charged to expenses for the year ended December 31, 2006
      amounted to $30,224 and (2005 - 69,915).




**(i)   ****** **Foreign
      Currency Transactions**




The
      Company and CYOP Barbados maintain their accounting records in the reporting
      currency. Foreign currency transactions are translated into their reporting
      currency in the following manner. At the transaction date, each asset,
      liability, revenue and expense is translated into the reporting currency by
      the
      use of the exchange rate in effect at that date. The resulting foreign exchange
      gains and losses are included in operations. The Company does not have any
      assets or liabilities in foreign countries or foreign denominations or would
      create translation income or losses under other comprehensive
      income.




**(j)   ****** **Income
      Taxes**




The
      Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
      109, " *Accounting
      for Income Taxes,"* which
      requires the Company to recognize deferred tax liabilities and assets for the
      expected future tax consequences of events that have been recognized in the
      Company's financial statements or tax returns using the liability method. Under
      this method, deferred tax liabilities and assets are determined based on the
      temporary differences between the financial statement and tax bases of assets
      and liabilities using enacted tax rates in effect in the years in which the
      differences are expected to reverse. The effect on deferred income tax assets
      and liabilities of a change in income tax rates is included in the period that
      includes the enactment date.




**(k)   ****** **Long-Lived
      Assets Impairment**




Effective
      January 1, 2002, certain long-term assets of the Company are reviewed when
      changes in circumstances require consideration as to whether their carrying
      value has become impaired pursuant to guidance established in Statement of
      Financial Accounting Standards (“SFAS”) No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      Management considers assets to be impaired if the carrying value exceeds the
      future projected cash flows from related operations. If impairment is deemed
      to
      exist, the assets will be written down to fair value. Prior to January 1, 2002,
      the Company evaluated long-term assets of the Company in accordance with SFAS
      No. 121, *Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      of* .
      The
      adoption of SFAS No. 144 did not have a material effect on the consolidated
      financial statements.




F-9





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**(l)   ****** **Financial
      Instruments and Concentration of Risks**




Fair
      value of financial instruments are made at a specific point in time, based
      on
      relevant information about financial markets and specific financial instruments.
      As these estimates are subjective in nature, involving uncertainties and matters
      of significant judgment, they cannot be determined with precision. Changes
      in
      assumptions can significantly affect estimated fair values.




The
      carrying value of cash and cash equivalents, interest receivable, note
      receivable, demand loans, accounts payable and accrued liabilities, player
      funds
      on deposit and short-term loans approximate their fair values because of the
      short-term maturity of these instruments.




Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist of interest receivable and note receivable, the balances of which are
      stated on the balance sheet. The Company performs ongoing credit evaluations
      of
      its debtors and maintains allowances for possible losses with, when realized,
      have been within the range of management’s expectations. The Company places its
      cash in high credit quality financial institutions. The Company does not require
      collateral or other security to support financial instruments subject to credit
      risk.




**(m)   ****** **Accounting
      for Derivative Instruments and Hedging Activities**




The
      Financial Accounting Standards Board (“FASB”) issued SFAS No. 133 *Accounting
      for Derivative Instruments and Hedging Activities* .
      SFAS
      No. 133 requires companies to recognize all derivatives contracts as either
      assets or liabilities in the balance sheet and to measure them at fair value.
      If
      certain conditions are met, a derivative may be specifically designated as
      a
      hedge, the objective of which is to match the timing of gain or loss recognition
      on the hedging derivative with the recognition of (i) the changes in the fair
      value of the hedged asset or liability that are attributable to the hedged
      risk
      or (ii) the designated as a hedging instrument, the gain or loss is recognized
      in income in the period of change. As at December 31, 2005, the Company has
      not
      entered into any derivative contracts either to hedge existing risks or for
      speculative purposes. The Emerging Issue task Force Number 00-19 (“EITF 00-19”)
      requires that embedded instruments be accounted for as derivatives when certain
      exclusions are not met. The Company has recorded a derivative expense in
      accordance with EITF 00-19.





**(n)   ****** **Net
      Income (Loss) Per Share**




Basic
      net
      income (loss) per share are computed using the weighted-average number of shares
      of common stock outstanding during the period. Diluted net income (loss) per
      share incorporates the incremental shares issuable upon the assumed exercise
      of
      stock options and other dilutive securities.




F-10





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**(o)   ****** **Stock-based
      Compensation**




The
      Company has adopted SFAS Number R123, "Accounting for Stock-based Compensation."
      SFAS R123 requires companies to adopt a fair value based method for determining
      expense related to stock-based compensation.




**(p)   ****** **Goodwill
      and Other Intangible assets**




Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” This statement
      requires that intangible assets with an indefinite life are not amortized.
      Intangible assets with a definite life are amortized over their useful lives
      or
      over their estimated useful lives. Indefinite life intangible assets will be
      tested for impairment annually, and will be tested for impairment between annual
      tests if any events occur or circumstances change that would indicate that
      the
      carrying amount may be impaired. Intangible assets with a definite life are
      tested for impairment whenever events or circumstances indicate that a carrying
      amount of an asset (asset group) may not be recoverable. An impairment loss
      would be recognized when the carrying amount of an asset exceeds the estimated
      non-discounted cash flows used in determining the fair value of the assets.
      The
      amount of the impairment loss to be recorded is calculated by the excess of
      the
      assets carrying value over its fair value.




**(q)   ****** **New
      Accounting Pronouncements**




In
      January 2003, the Financial Accounting Standard Board issued FASB Interpretation
      No. 46 (FIN 46), *Consolidation
      of Variable Interest Entities - An Interpretation of Accounting Research
      Bulletin (ARB) No. 51.* This
      interpretation addressed the requirements for business enterprises to
      consolidate related entities in which they are determined to be the primary
      economic beneficiary as a result of their variable economic interest. The
      interpretation is intended to provide guidance in judging multiple economic
      interests in an entity and in determining the primary beneficiary. The
      interpretation outlines disclosure requirements for VIEs in existence prior
      to
      January 31, 2003, outlines consolidation requirements for VIEs created after
      January 31, 2003. The company has reviewed its major commercial relationship
      and
      its overall economic interests with other companies consisting of related
      parties, vendors, loan creditors and other suppliers to determine the extent
      of
      its variable economic interest in these parties. The review has not resulted
      in
      a determination that the Company would be judged to be the primary economic
      beneficiary in any material relationships, or that any material entities would
      be judged to be Variable Interest Entities of the Company.




In
      April
      2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities." This Statement amends and clarifies
      financial accounting and reporting for derivative instruments, including certain
      derivative instruments embedded in other contracts (collectively referred to
      as
      derivatives) and for hedging activities under SFAS No. 133, "Accounting for
      Derivative Instruments and Hedging Activities." This Statement is effective
      for
      contracts entered into or modified after June 30, 2003. We do not expect the
      implementation of SFAS No. 149 to have a material impact on our consolidated
      financial statements.




F-11





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







In
      May
      2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
      Instruments with Characteristics of Both Liabilities and Equity." This Statement
      establishes standards for how an issuer classifies and measures certain
      financial instruments with characteristics of both liabilities and equity.
      It
      requires that an issuer classify a financial instrument that is within its
      scope
      as a liability (or an asset in some circumstances). This Statement is effective
      for financial instruments entered into or modified after May 30, 2003, and
      otherwise is effective at the beginning of the first interim period beginning
      after June 15, 2003. We do not expect the implementation of SFAS No. 150 to
      have
      a material impact on our consolidated financial statements.





In
      December 2004, The Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard number 123r, “ Share Based Payments” (“SFAS 123r”)
      which superseded SFAS 123 and APB No. 25. This statement eliminates the use
      of
      the intrinsic method as previously allowed under APB 25 and is effective for
      small issuers for years ending after December 15, 2005. The Company does not
      expect adoption of this statement to have an impact on their
      operations.







In
      December 2004, The Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard number 153 “Exchanges of Non Monetary Assets - An
      Amendment of APB No 29”. This statement removed the exemption in APB 29 to the
      use of the fair value method in certain transactions and is effective for years
      beginning after June 15, 2005. The Company does not expect the adoption of
      this
      statement to have an impact on their operations.





**3.**  **Investment
      in equity method investee**





At
      December 31, 2006, The Company’s equity-method investee approximate ownership
      interest consisted of an 18.8% interest based on the outstanding shares of
      Gaming Transactions, Inc. (OTC:GGTS). The Company has the ability to
      significantly influence GGTS. Summarized Balance Sheet and Operations
      information is as follows:





Balance
                Sheet
            
            2006Current
                assets
            
            $
            25Non
                current assets
            
            $
            688,783Current
                Liabilities
            
            $
            222,228Non
                current liabilities
            
            $
            806,315OperationsNet
                sales
            
            $
            —Gross
                profits
            
            $
            —Net
                loss
            
            $
            (246,756
            )




The
      Company acquired the investment in December 2004 and valued the investment
      at
      $1,674,973. The Company has recorded a cumulative losses of $105,421 based on the proportionate share of the investee’s
      loss which resulted in a reduction in the carrying amount to $1,569,552 at
      December 31, 2006. In accordance with SFAS 115, at December 31, 2006, the
      carrying value of this asset was reviewed for impairment. The last price of
      the
      shares of GGTS as quoted on the Pink Sheets, was $0.006 per share. It was
      concluded that the carrying value of the asset was impaired, and was written
      down accordingly, to a value of $150,000.




F-12





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**4.** **** **Fixed
      assets**




December
                31, 2005Cost
            
            Accumulated
                depreciation
            
            Net
                book
              ValueAudio
                and visual equipment
            
            $
            21,558
            
            $
            15,072
            
            $
            6,486Computer
                hardware
            
            
            135,979
            
            
            73,988
            
            
            61,991Computer
                software
            
            
            22,500
            
            
            296
            
            
            22,204Office
                furniture and equipment
            
            
            9,227
            
            
            7,214
            
            
            2,013Total
            
            $
            189,264
            
            $
            96,570
            
            $
            92,694




December
                31, 2006Cost
            
            Accumulated
                depreciation
            
            Net
                book
              ValueAudio
                and visual equipment
            
            $
            21,558
            
            $
            16,351
            
            $
            5,207Computer
                hardware
            
            
            140,234
            
            
            93,590
            
            
            46,644Computer
                software
            
            
            30,700
            
            
            15,390
            
            
            15,310Office
                furniture and equipment
            
            
            9,227
            
            
            7,611
            
            
            1,616Total
            
            $
            210,719
            
            $
            132,942
            
            $
            68,778




**5.** **** **Intangible
      Assets**




On
      May
      21, 2002, the Company terminated the software development agreement and a
      software licensing, technical support and operation of customer service and
      data
      centre agreement with a related company (related by a common director) was
      terminated. As at that date $240,000 license fees were billed with $200,000
      remaining unpaid at May 21, 2002.




In
      satisfaction of this unpaid amount and in consideration of terminating the
      agreement the related company assigned all right, title and interest
      in:




The
      Skill-Bingo Patents and the Skill-Bingo Inventions purchased from FYRC Inc.




The
      above
      was collectively recorded as intellectual property with an expected useful
      life
      of 5 years.




the
      Skill-Bingo game software


the
      website located at http://www.bigrbingo.com


the
      trademark “BiG’rBingo”


the
      BiG’rBingo customer deposits




F-13





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**




As
      of
      September 30, 2006, due to market conditions, and a lack of adequate
      capitalization to fund certain activities, the Company has elected to wind
      down
      all skill-related gaming operations. The remaining carrying value of the skill
      gaming technology at March 31, 2006 was 21,688. At September 30, 2006, this
      value was impaired with the carrying value reduced to $0.





The
      changes in the carrying amount of intellectual property as follows:




2006
            
            2005Balance,
                beginning of year
            
            $
            28,916
            
            $
            57,833Intangible
                assets acquired during the period-
                intellectual property
            
            
            —
            
            
            —Impairment
                of intangible assets during the period
            
            
            (21,688
            )Fair
                valueAccumulated
                amortization
            
            
            (7,229
            )
            
            (28,917
            )Balance,
                end of year
            
            $
            —
            
            $
            28,916




**6.   ****** **Loans**





**(a)   ****** **Demand
      Loans Related Party**




December
                31, 2006
            
            December
                31, 2005i. 
                Interest bearing and unsecured at 5% per annum:-
                Andrea Carley - a former officer
            
            $
            122,881
            
            $
            44,671-
                Mitch White - a former director and stockholder
            
            
            1,176,059
            
            
            869,044-
                Gordon Samson - a former director
            
            
            110,310
            
            
            110,109-
                Patrick Smyth - an officer and director
            
            
            169,075
            
            
            92,718Total
            
            $
            1,578,325
            
            $
            1,116,542





**(b)   ****** **Short
      term Loan**




December
                31, 2005
            
            December
                31, 2004i. 
                Non-Interest bearing and unsecured-
                Jack Carley - related to a director and stockholder
            
            $
            44,625
            
            $
            44,625Total
            
            $
            44,625
            
            $
            44,625




**(c)** **** **Short-term
      Loan Related Party**




December
                31, 2006
            
            December
                31, 2005i. 
                Interest at 10% per annum:-
                RedRuth Ventures
            
            
            212,725
            
            
            212,725Total
            
            $
            212,725
            
            $
            212,725





**(d)** **** **Convertible
      debenture**





On
      September 2, 2005, we entered into an Equity Distribution Agreement with Cornell
      Capital Partners, LP (“Cornell”). Under the Equity Distribution Agreement, CYOP
      may issue and sell to Cornell Capital Partners common stock for a total purchase
      price of up to $15,000,000. For each share of common stock purchased under
      the
      Equity Distribution Agreement, Cornell will pay us 98% of the lowest volume
      weighted average price of our common stock as quoted by the Over-the-Counter
      Bulletin Board during the five trading days immediately following the notice
      date. Cornell will also retain 4% of each advance under the Equity Distribution
      Agreement. The amount of each cash advance is subject to a maximum amount of
      $800,000, with no cash advance occurring within seven trading days of a prior
      advance. Cornell received two warrants to purchase 27,500,000 shares of our
      common stock as a one-time commitment fee under the Equity Distribution
      Agreement. The first warrant for 15,000,000 shares of our common stock has
      an
      exercise price equal to $0.05. The second warrant for 12,500,000 shares of
      our
      common stock has an exercise price equal to $0.06. The warrants expire three
      years from September 2, 2005. The Equity Distribution Agreement with Cornell
      was
      terminated pursuant to a Termination Agreement dated December 15,
      2005.




F-14





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







In
      addition, on September 2, 2005, we entered into a Securities Purchase Agreement
      (SPA) with Cornell. Pursuant to the Securities Purchase Agreement, Cornell
      purchased a secured convertible debenture in the original principal amount
      of
      $650,000. Cornell surrendered this $650,000 convertible debenture plus unpaid
      and accrued interest totaling $19,660.58 in consideration in part for the
      Debentures that were issued.





On
      December 15, 2005, the Company entered into a Securities Purchase Agreement
      (SPA) with Cornell. Pursuant to the SPA, Cornell purchased secured convertible
      debentures in the original principal amount of $1,350,000. The debentures have
      a
      three-year term and accrued annual interest of 10%. Funds of $700,000 were
      advanced to the Company upon execution of the SPA. Funds of $150,000 were
      advanced on June 15, 2006. The balance of $500,000 will be disbursed upon the
      discharge of certain conditions placed upon the Company in the SPA. The
      debentures mature on December 15, 2008. The secured convertible debentures
      may
      be redeemed by the Company at any time, in whole or in part. The Company will
      pay a redemption premium of 20% of the amount redeemed in addition to such
      redemption. The debentures are convertible from time to time into our common
      stock by Cornell at the price per share of an amount equal to ninety percent
      (90%) of the lowest average volume weighted average price of our Common Stock,
      as quoted by Bloomberg, LP, for the thirty (30) trading days immediately
      preceding the conversion date. We granted Cornell a security interest in certain
      of its assets pursuant to amended and restated security agreement dated December
      15, 2005. Cornell also received five year warrants to purchase 2,970,000 shares
      of common stock, 1,350,000 shares at an exercise price of $0.05 per share and
      1,620,000 shares at an exercise price of $0.06 per share.





On
      June
      15, 2006, the Company executed a second amendment of the SPA of December 15,
      2005 Cornell. One of the revised terms gives Mitch White, a former officer
      and
      director of the Company, the option to convert such portion of his outstanding
      shareholder loan (valued at December 31 at $ 1,176,058 into common shares --
      at
      a 20% discount to the market price -- so as to effect a majority ownership
      of
      the shares of CYOP, with the balance of the shareholder loan, if any, being
      convertible into a newly-created series of preferred shares in CYOP, the terms
      of which must be agreed upon by both the Company and Cornell. Alternatively,
      Mr.
      White may convert the entire balance of his outstanding shareholder loan into
      common shares of the Company at a 35% discount to the market price, which would
      however also give Cornell the right to convert its convertible debenture, in
      whole or in part, into common shares of the Company at a 35% discount to the
      market price. As of April 16, 2007, no election has been made by Mr.
      White.





On
      July
      19, 2006, Cornell converted $75,000 of the convertible debenture into 14,691,883
      common shares of the Company at a conversion price of $0.00513 per share. The
      face value of the convertible debenture outstanding at that date, and at
      year-end, was $1,425,000.





Subsequent
      to the year-end, on February 20, 2007, Cornellconverted a further $33,446.58
      of
      the convertible debenture and accrued interest into 11,613,396 common shares
      of
      the Company at a conversion price of $0.00288 per share. The face value of
      the
      convertible debenture outstanding at that date was $1,411,000.




**7.   ****** **Sale
      and License-back of Computer Software**





On
      December 14, 2001, the Company sold computer software identified as Crediplay
      System to the sole director and a major stockholder and creditor of the Company
      for $3,000,000. The purchase price was settled by retiring $1,200,000 of debt
      owed to the purchaser and a promissory note for $1,800,000. The promissory
      note
      bears interest at 5% per annum with maturity on December 14, 2010. The
      promissory note is secured through a first priority lien and security interest
      in the Crediplay System and amount due to Mr. Mitch White (the “Purchaser”)
      totaling $517,613 (2001 - $0). As at December 31, 2002 the present value of
      the
      promissory note is $1,585,034 after calculating at the discount of 7% and
      accruing interest at 5%. Interest receivable was calculated at 1,800,000 X
      5% or
      $90,000. As at December 31, 2003, the present value of the promissory note
      is
      $1,605,986 after calculating at the discount of 7% and accruing interest at
      5%.
      Interest receivable was calculated at $1,800,000 X 5% or $90,000.




F-15





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







Pursuant
      to a Marketing, Development and Distribution Agreement entered into on the
      same
      date, the Crediplay System was licensed back to the Company for a term of 15
      years. A licensing fee payable will be calculated on Gross Earnings derived
      from
      the Crediplay System as follows:




2002
            
            Gross
                Earnings x 20%2003
            
            Gross
                Earnings x 17%2004
            
            Gross
                Earnings x 15%2005
                to 2017
            
            Gross
                Earnings x 10%





As
      there
      have been only minor revenues since inception due to the lack of capitalization
      of the Company, the Promissory Note for $1.8 million (“the note”) was assigned
      to an affiliated company, Gaming Transactions Inc., after releasing the
      guarantee provided by the shareholder loan of Mitch White in consideration
      of
      twenty five (25) million shares of restricted stock of Gaming Transactions
      Inc.,
      (“GGTS) a pink sheet issuer. As at December 2004 (Form 8-K filed December 13,
      2004) this company was thinly traded and a deemed price of $0.075 per share
      was
      used. As no reductions have been made as contemplated in the agreements executed
      December 31, 2001 and filed on Edgar by Form 8-K on April 15, 2002 a market
      asset was exchanged to ensure value to the Company.




The
      development costs of the Crediplay System expended by the Company amounted
      to
      approximately $1,273,406 of which $778,348 was expensed previously.




Management
      of the Company has estimated the $3,000,000 value based on the discounted future
      cash flow projection and the estimate provided by knowledgeable parties of
      the
      software.




The
      gain
      on the sale of the Crediplay System is calculated as follows:




Sales
                priceRetirement
                of loan due to the purchaser
            
            $
            1,200,000Present
                value of $1,800,000 promissory note discounted at 7% per
                annum
            
            
            1,565,4522,765,452Software
                development costs incurred in 2001
            
            
            (495,058
            )Deferred
                gain 2001
            
            $
            2,270,394Recognized
                gain
            
            
            (71,842
            )Deferred
                gain 2002
            
            $
            2,198,552Recognized
                gain in 2003
            
            
            (16,040
            )Deferred
                gain in 2003
            
            $
            2,182,512Recognized
                gain in 2004
            
            
            (8,690
            )Deferred
                gain 2004
            
            
            2,173,822




F-16





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







Pursuant
      to the Marketing and Distribution Agreement executed on December 1, 2001, the
      anticipated revenue, considered more than adequate to pay down the promissory
      at
      the time of the Agreement, had not materialized as at December 31, 2005. In
      light of this lack of revenue, the Company has concluded that the realization
      of
      the deferred revenue was highly improbable for the foreseeable future, thereby
      changing management’s estimate of realizeability. The Company wrote this
      deferred revenue down by $2,173,507 to a value of $0, and credited the Company’s
      additional paid-in capital for this amount.




**8.   ****** **Stockholders’
      Equity (Deficit)**




**(a)   ****** **Issuance
      of Common Shares**




During
      2004, the Company issued 88,130,195 shares to Cornell Capital LLP including
      a
      corporate finance fee of 312,500 shares to Newbridge Securities Corp as an
      escrow agent fee and 50,000,000 in escrow in connection with the Standby equity
      underwriting agreement for financing as originally filed on the Company’s SB-2
      on March 1, 2004. During 2005 the Company has issued 107,394,805 common shares
      drawing down the escrow shares as well as new issuances to Cornell Capital,
      LP.




On
        September 1, 2006, the Company issued 7,000,000 to Richardson and Patel LLP
        in
        partial settlement of an amount owing for services rendered.


On
      July
      19, 2006, Cornell Capital converted $75,000 of the convertible debenture into
      14,691,883 common shares of the Company at a conversion price of $0.00513 per
      share. The face value of the convertible debenture outstanding at that date,
      and
      at year-end, was $1,425,000.




**(b)   ****** **2003
      Consultant Stock Plan**




On
      October 21, 2003, the Board of Directors of the Company approved and adopted
      “2003 Consultant Stock Plan” (“2003 Plan”). Pursuant to the 2003 Plan, it is a
      ten (10) year plan to grant common shares or right to received common shares
      by
      consultants (per individual agreement) to a maximum 2,500,000 shares (restated
      for the company’s stock split). The allocated number of shares includes an
      indeterminate number of additional shares that may be issued to adjust the
      number of shares issued pursuant to the stock plan described herein as the
      result of any future stock split, stock dividend or similar adjustment of the
      registrant's outstanding common stock.




**(c)   ****** **Stock
      Option**




There
      were no stock options granted for the period ended December 31, 2006 or
      2005.





**(d)   ****** **Earnings
      Per Share**




The
      Company follows Financial Accounting Standards Number 128 “Earnings Per Share”
(FASB 128”). This statement requires the computation of basic and diluted
      earnings per share. Potential dilutive securities were not included in the
      dilutive earnings per share computation since the inclusion of such instruments
      would be anti-dilutive.




F-17





**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**9.   ****** **Income
      Taxes**





As
      at
      December 31, 2006, the Company has non-capital losses and undepreciated capital
      cost of approximately $7,666,000 and $2,080,000, respectively, which can be
      carried forward for tax purposes and are available to reduce taxable income
      of
      future years. The non-capital losses expire commencing in 2007 through
      2011.




The
      tax
      effect of temporary differences that give rise to the Company’s deferred tax
      assets are as follows:




2006
                
                2005Undepreciated
                    capital cost of capital assets over their net book value
                
                $
                19,000
                
                $
                19,000Estimated
                    tax loss carryforward
                
                
                2,683,000
                
                
                1,391,000Less:
                    valuation allowance
                
                
                (2,702,000
                )
                
                (1,410,000
                )


The
      valuation allowance reflects the realization of the tax assets is
      unlikely.




**10.   ****** **Related
      Party Transactions**




Related
      party transactions not disclosed elsewhere in the consolidated financial
      statements are as follows:





During
      the fiscal year 2006, the Company accrued imputed interest of approximately
      $62,927 at an interest rate of 5% per annum on interest-free loans totaling
      $1,116,542 from directors of the Company. At October 1, 2004 these loans started
      to accrue interest at 5% per annum.





Additionally,
      the Company accrued interest of $21,272 from a note due to a Company controlled
      by a related party at 10% on a balance of $212,725.





See
      Note
      6 and 7.





On
      December 1, 2004 by agreement (Form 8-K December 13, 2004) the discounted
      promissory note, face value $1,800,000.00 dated December 1, 2001 and maturing
      December 14, 2010 (the “note”), was assigned to an affiliated company, Gaming
      Transactions Inc., (“assignee”) in consideration of 25 million restricted shares
      of the assignee’s common stock.





The
      following schedule reflects payments on related party obligations and interest
      accrued on such obligations for the year ended December 31, 2006:





Related
                Party
            
            Payments
                Made on Loans
            
            Interest
                AccruedAndrea
                Carey (Former officer)
            
            $
            —
            
            $
            3,210Mitch
                White (Former officer)
            
            $
            
            
            $
            49,105Gordon
                Samson (Former officer)
            
            $
            5,000
            
            $
            5,202Patrick
                Smith (Officer and director)
            
            $
            —
            
            $
            5,410




F-18




**CYOP
      SYSTEMS INTERNATIONAL INCORPORATED**





Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006 and 2005


**(Expressed
      in U.S. dollars)**







**11.**  **Derivative
      Instruments**




On
      December 15, 2005, the Company entered into a debt instrument that included
      the
      ability of the lender to convert such debt to common stock of the Company.
      In
      accordance with Statement of Financial Accounting Standards Number 133 (“SFAS
      133”) and EITF 00-19 such options are considered a derivative instrument (“DR”).
      The Company determined the value of such DR at December 31, 2006 by utilizing
      the Black-Scholes method of valuing options. Such amounts have been recorded
      as
      a liability in the current year balance sheet. Under SFAS 133 the Company is
      required to revalue such liability at the balance sheet date and record the
      difference as income or expense at such time in the statement of operations.
      The
      Company does not utilize any other derivative instruments as
      hedges.


For
        the
        purposes of valuing the options, the Company has calculated the following
        inputs: i) a risk-free rate of 4.875%, ii) volatility was calculated as 193.77%;
        iii) the closing stock price for the Company’s shares on December 29, 2006 of
        $0.036; iv) a conversion price for the convertible debentures of $0.00369
        per
        share, and for the shareholder loan of $0.00288 per share.




**12.**  **Geographic
      Information**




All
      the
      Company’s operations and fixed assets are located in the United
      States.




**13.** **Development
        Stage Enterprise**
 
 During
        the fourth quarter of 2006 the Company discontinued it’s operations in the
        United States due to unfavorable legislation. The Company’s subsidiary (Red Felt
        Software) is incorporated in England and the Company plans to operate there.
        At
        the present time the Company does not have any significant operations in
        England
        without any revenues. Due to this fact in accordance with Statement of
        Accounting Standards 7 the Company will be classified as a Development Stage
        Enterprise effective January 1, 2007.




14.
Anti-Gaming
      Legislation and Discontinuation of Gaming
      Operations




During
      fiscal 2006, new anti-gaming legislation was enacted in the United States.
      The
      Company was forced to make the decision to indefinitely discontinue all of
      its
      US-based gaming related operations as of December 31, 2006. All gaming-related
      websites were taken offline; all gaming-related services offerings were ceased;
      and all bank accounts and transactional systems relating to gaming operations
      were closed, with the balances written down to $0 at December 31, 2006. Losses
      have been segmented in the financial statement presentation, net of tax. Because
      the Company had no liability associated with these losses, and because it is
      probable that the net operating losses cannot be utilized in future, the tax
      effect on the losses from discontinued operations was estimated at
      nil.




**15.**  **Subsequent
      Events**





Subsequent
      to the year-end, on February 20, 2007, Cornell Capital converted a further
      $33,446.58 of the convertible debenture and accrued interest into 11,613,396
      common shares of the Company at a conversion price of $0.00288 per share. The
      face value of the convertible debenture outstanding at that date was
      $1,411,000.




F-19




Item
      8.
      Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure





The
      Company filed a Current Report on Form 8-K, dated February 16, 2005, to report
      a
      change of its auditors. Such report was filed with the Securities & Exchange
      Commission on February 18, 2005.





Item
      8A.
      Controls and Procedures




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports that are filed or submitted
      under the Securities Exchange Act of 1934 (the “Exchange Act”) reports is
      recorded, processed, summarized and reported within the time periods specified
      in the regulations promulgated by United States Securities and Exchange
      Commission (the “SEC”), and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure.




Within
      90
      days prior to the date of this report, we carried out an evaluation, under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      design and operation of our disclosure controls and procedures pursuant to
      Rule
      13a-14 promulgated by the SEC under the Exchange Act. Based upon the foregoing,
      our Chief Executive Officer and our Chief Financial Officer concluded that
      our
      disclosure controls and procedures are effective. There were no changes in
      our
      internal control over financial reporting during the fiscal year ended December
      31, 2006, that would materially affect or is reasonably likely to materially
      affect, our internal control over financial reporting.




As
      of
      this date, given the small size of the Company and its limited operations and
      over the last year, the Company utilized a preliminary and basic standard of
      internal controls and procedures related to its financial reporting for the
      period covered by this report. Management is in the process of developing and
      adopting new and more stringent controls and procedures and anticipates such
      controls and procedures to be in place prior to the end of fiscal year 2006.
      Management expects to be in compliance with the internal control requirements
      of
      Section 404 of the Sarbanes-Oxley Act prior to the required compliance date.




**PART
      III**





Item
      9.
      Directors and Executive Officers of the Registrant.




**MANAGEMENT**




**Officers
      And Directors**




The
      following table sets forth the names and positions of our executive officers
      and
      directors. Our directors are elected at our annual meeting of stockholders
      and
      serve for one year or until successors are elected and qualify. Our Board of
      Directors elect our officers, and their terms of office are at the discretion
      of
      the Board, except to the extent governed by an employment contract.




28





As
      of
      December 31, 2006, our directors and executive officers, their age, positions,
      the dates of their initial election or appointment as directors or executive
      officers, and the expiration of their terms are as follows:




**Name
                of Director/Executive Officer**
            
            **Age**
            
            **Position**
            
            **Period
                Served**Patrick
                Smyth
            
            39
            
            Chairman
                of the Board, Chief Executive Officer
            
            November
                2006 to presentCanon
                Bryan
            
            33
            
            Chief
                Financial Officer, Secretary and Treasurer
            
            January
                2006 to presentRandy
                Peterson
            
            54
            
            Director
            
            February
                2005 to presentJorge
                Andrade
            
            62
            
            Director
            
            March
                2005 to present




Below
      are
      the biographies of each of our officers and directors as of December 31,
      2006.




***Mr.
      Patrick Smyth, Chairman, CEO, Miami, FL***




PATRICK
      SMYTH was appointed to his positions on November 24, 2006. He was the President
      of CYOP from 2002 to 2005 where he was directly responsible for Operations,
      Global Growth Strategies, Investor Relations, Public Relations, and
      Communications. Patrick Smyth is the founder and editor of GamingPublic.com,
      which presents analysis on a number of gaming products including online poker,
      Internet casinos, sportsbooks, lotteries, mobile gaming and pari-mutuel racing.
      Mr. Smyth acts as an expert e-commerce consultant to Gerson Lehrman's Consumer
      Goods & Services Group and a "GLG Leader" and is in the top 5% of their
      global network. He deals with investment banks, hedge funds and large brokerages
      who are looking for insights into and recommendations on various companies
      in
      the Gaming, eCommerce and Software industries. He was most recently the Chairman
      and CEO of Gaming Transactions Inc. (Pink Sheets GGTS) from September 2004
      to
      November 2006, the parent company of Keno.com; an online casino, poker, and
      sportsbook site. Prior to joining CYOP, he was the President of NextLevel.com
      Inc., a digital marketing company specializing in new media, celebrity
      web-property management, and online streaming. Central to his position was
      negotiating content deals with A-List musicians including U2, Madonna, Van
      Halen, Britney Spears, Jessica Simpson as well as major record companies. In
      1999, he founded and was CEO & President of Wiremix Media Inc., a very
      successful advertising and marketing agency specializing in online gaming and
      e-commerce. They also had a suite of celebrities with whom he negotiated
      endorsement deals including Larry Holmes, Fuzzy Zoeller and Rodney Dangerfield.
      From 1998 to 2000, he was Vice President of Casino Marketing at WorldGaming,
      whose licensees included Sportingbet (SBT.L) and Sportsbetting.com.




***Mr.
      Canon Bryan, Chief Financial Officer, Secretary, Treasurer, Vancouver, BC,
      Canada***




CANON
      BRYAN was appointed Principal Financial Officer on January 17, 2006. Mr. Bryan
      has 15 years experience as a financial analyst with mining, biotechnology,
      information technology companies and financial institutions that are
      publicly-listed in Canada, the United States and Europe. Since mid-2004, Mr.
      Bryan has been contracted by Uranium Energy Corp, a Bulletin-Board listed
      company, providing financial advisory and investor relations services. From
      the
      year 2000 to the present, he has been the managing director of his private
      company, ACB Analytics Inc, providing financial advisory services to private
      and
      public companies. From 1999 to 2002, Mr. Bryan was senior financial analyst
      of
      Lasik Vision Corporation, a Vancouver Stock Exchange-listed
      company.




***Mr.
      Randy Peterson, Director, Vancouver, BC, Canada***




RANDY
      PETERSON was appointed to his position on February 22, 2005 as an independent
      Director. Mr. Peterson is a retired police detective, with a distinguished
      reputation and is also a judicially recognized gaming expert. As a highly
      respected member of the gaming community, he is also the inventor of a number
      of
      games including skill-bingo and skill-poker. Mr. Peterson is a disinterested
      member of the Audit Committee. Mr. Peterson served with the Vancouver Police
      Department from October 1978 until his retirement on November 30, 2003. As
      a
      detective, Mr. Peterson worked primarily in gambling, internal investigations
      and, for the last two years, was the Departmental Security Officer. Since his
      retirement, he has worked part-time for Gateway Casinos in their surveillance
      department and is licensed with the Provincial Government as a security
      consultant. Mr. Peterson will assist the Company on developing its entry into
      new product launches, providing solutions for technical issues relating to
      current research and development, and identifying commercial opportunities
      for
      the creation of strategic partnerships.




29





**Family
      Relationships**




There
      are
      no family relationships among the directors or executive officers of
      CYOP.




**Involvement
      In Certain Legal Proceedings**




None
      of
      our officers, directors, promoters or control persons have been involved in
      the
      past five years in any of the following:




(1)
      any bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the bankruptcy
      or within two years prior to that time;






(2)
      any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor offenses);






(3)
      Being
      subject to any order, judgment or decree, not subsequently reversed, suspended
      or vacated, or any court of competent jurisdiction, permanently or temporarily
      enjoining, barring, suspending or otherwise limiting his involvement in any
      type
      of business, securities or banking activities; or




(4)
      Being
      found by a court of competent jurisdiction (in a civil action), the Commission
      or the Commodity Futures Trading Commission to have violated a federal or state
      securities or commodities law, and the judgment has not been reversed,
      suspended, or vacated.




**Audit
      Committee And Financial Expert**




Mr.
      Peterson serves on CYOP’s audit committee. The audit committee reports to the
      Board of Directors regarding the appointment of our independent public
      accountants, the scope and results of our annual audit, compliance with our
      accounting and financial policies and management’s procedures and policies
      relative to the adequacy of our internal accounting controls. We do not have
      an
      audit committee member who qualifies as a financial expert.





**Compensation
      Committee**





The
      Board
      of Directors performs the functions of an compensation committee.





**Nominating
      Committee**





We
      do not
      have a nominating committee of the Board of Directors, or any committee
      performing similar functions. Nominees for election as a director are selected
      by the Board of Directors.





Except
      as
      disclosed in the applicable employment agreements discussed in the section
      of
      this document titled “The Company — Director and Executive Officer Compensation
— Employment Agreements” and as disclosed in the section of this document titled
“The Company — Certain Relationships and Related Transactions,” no arrangement
      or understanding exists between any executive officer and any other person
      pursuant to which any executive officer was selected to serve as an executive
      officer.




**Code
      Of Ethics**




We
      have a
      Code of Ethics, which we adopted on April 7, 2004.




30




**Section
      16(a) Beneficial ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires the Company's directors
      and executive officers, and persons who own more than ten percent of a
      registered class of the Company's equity securities, to file with the Securities
      and Exchange Commission (the "SEC") initial reports of ownership and reports
      of
      changes in ownership of common stock and other equity securities of the
      Company.





Officers,
      directors and greater than ten percent stockholders are required by SEC
      regulation to furnish the Company with copies of all Section 16(a) forms they
      file.





To
      the
      Company's knowledge, based solely on review of the copies of such reports
      furnished to the Company and representations that no other reports were required
      during the year ended December 31, 2006, and except as disclosed elsewhere
      in
      this document, the Company's officers, directors and greater than ten percent
      beneficial owners have complied with all Section 16(a) filing requirements
      in  a
      timely
      manner.





Item
      10.
      Executive Compensation





*Summary
      Compensation Table* ***.*** The
      following summary compensation table shows certain compensation information
      for
      services rendered in all capacities for the year ended December 31, 2006. Other
      than as set forth herein, no executive officer’s cash salary and bonus exceeded
      $100,000 in any of the applicable years. The following information includes
      the
      dollar value of base salaries, bonus awards, the value of restricted shares
      issued in lieu of cash compensation and certain other compensation, if any,
      whether paid or deferred:




**SUMMARY
                COMPENSATION TABLE**Name
                and principal position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Stock
                Awards
              ($)
                (1)
            
            Option
                Awards
              ($)
                (1)
            
            Non-Equity
                Incentive Plan Compen-sation
              ($)
                (2)
            
            Nonquali-fied
                Deferred Compen-sation Earnings
              ($)
            
            All
                Other Compen-sation ($)
            
            Total
                ($)(A)
            
            
            (B)
            
            
            (C)
            
            
            (D)
            
            
            (E)
            
            
            (F)
            
            
            (G)
            
            
            (H)
            
            
            (I)
            
            
            (J)Patrick
                Smyth, Chief Executive Officer
            
            
            2006
            
            
            69,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            69,000Canon
                Bryan, Chief Financial Officer
            
            
            2006
            
            
            31,385
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            31,385Mitch
                White, former Chief Executive Officer
            
            
            2006
            
            
            129,444
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            129,444Andrea
                Carley, former Treasurer and Secretary
            
            
            2006
            
            
            100,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            100,000





**Compensation
      Of Directors**




Directors
      currently do not receive cash compensation for their services as members of
      the
      Board of Directors, although members are reimbursed for expenses in connection
      with attendance at Board of Directors meetings and specific business meetings.
      Directors are eligible to participate in our stock option plans. Option grants
      to directors are at the discretion of the Board of Directors. Compensation
      received by officers, directors, and management personnel will be determined
      from time to time by our Board of Directors. Officers, directors, and management
      personnel will be reimbursed for any out-of-pocket expenses incurred on our
      behalf.





The
      following director compensation disclosure reflects all compensation awarded
      to,
      earned by or paid to the directors below for the fiscal year ended December
      31,
      2006.





**DIRECTOR
                COMPENSATION**Name
            
            Fees
                Earned or Paid in Cash ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compen-sation
              ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation
                Earnings
              ($)
            
            All
                Other Compen-sation ($)
            
            Total
                ($)Patrick
                Smyth
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Randy
                Peterson
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Jorge
                Andrade
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Mitch
                White, former director
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




**Employment
      Agreements** .





In
      November 2006, CYOP entered into a management contract with Patrick Smyth.
      This
      contract can be terminated upon one year’s prior written notice unless there is
      a change of control. In the event of a change of control, then Mr. Smyth’s
      contract can be terminated only after two years following such change of
      control. The following table describes the annual compensation provided under
      the contract.





31




Name:
            
            Base
                Compensation:
            
            Bonus
                Compensation:Patrick
                Smyth
            
            $
            120,000
            
            
            Up
                to 120% of base compensation





If
      Patrick Smyth is terminated other than for cause or disability or in violation
      of the change of control, then Patrick Smyth shall be entitled to be paid 200%
      of such base compensation, plus 200% of such annual incentive bonus.





Name:
            
            Base
                Compensation:
            
            Bonus
                Compensation:Canon
                Bryan
            
            $
            75/hour
            
            
            1,000,000
                common share options




In
      January 2006, we entered into a management contract with Mr. Bryan. The contract
      can be terminated upon prior written notice.   Mr. Bryan’s contract
      stipulates that he is to remunerated at the rate of $75/hour for the time he
      spends on CYOP, plus all reasonable expenses incurred on behalf of the Company.
        During 2006, Mr. Bryan received cash for the contractual amounts accrued.
      We will continue to accrue and/or pay compensation as necessary.




**Options/SAR
      Grants or Exercises and Long Term Incentive Plan**





There
      are
      no stock option grants, Stock Appreciation Rights (SAR’s) grants, options/SAR
      exercises or Long Term Incentive Plans (LTIP’s) awarded to the named executive
      officers in the last three financial years.





**Defined
      benefit of actuarial plan**





The
      Company does not have a defined benefit or actuarial plan in place.





Item
      11.
      Security Ownership of Certain Beneficial Owners and Management





**Security
      Ownership Of Certain Beneficial Owners And Management**




The
      table below sets forth information with respect to the beneficial ownership
      of
      our common stock as of April 16, 2007 for (i) any person who we know is the
      beneficial owner of more than 5% of our outstanding common stock; (ii) each
      of
      our directors or those nominated to be directors, and executive officers; and
      (iii) all of our directors and executive officers as a group. Except as
      otherwise noted in the footnotes below, the entity, individual Director or
      Executive Officer has sole voting power an investment power over such
      securities.





We
      have
      determined beneficial ownership in accordance with the rules of the Securities
      and Exchange Commission. Except as otherwise indicated, we believe that the
      beneficial owners listed below, based on the information furnished by these
      owners, have sole investment and voting power with respect to the securities
      indicated as beneficially owned by them, subject to applicable community
      property laws.




**SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS****Amount
                and****Nature
                of****Name
                and Address**
            
            **Beneficial**
            
            **Percentage****Title
                of Class**
            
            **of
                Beneficial Owner**
            
            **Ownership**
            
            **of
                Class****(1)**Common
            
            
            Mitch
                White(2)(3)
            
            
            76,100,000
            
            
            18.8
            %5469
                Wildwood CrescentTsawwassen,
                B.C. V4M 359




(1)
      Applicable percentage of ownership is based on 366,731,439 shares of common
      stock outstanding as of April 16, 2007 for each stockholder. Beneficial
      ownership is determined in accordance with the rules of the SEC and generally
      includes voting of investment power with respect to securities and securities
      owned by or for, among others, the spouse and/or minor children of an individual
      and any other relative who has the same home as such individual. Shares of
      common stock subject to securities exercisable or convertible into shares of
      common stock that are currently exercisable or exercisable within 60 days of
      April 16, 2007 are deemed to be beneficially owned by the person holding such
      options for the purpose of computing the percentage of ownership of such
      persons, but are not treated as outstanding for the purpose of computing the
      percentage ownership of any other person.




32




(2)
      Includes 49,100,000 shares held by Pacific Rim Consulting. The address of
      Pacific Rim Consulting is 3076 Sir Francis Drake Highway, Box 3463 Road Town,
      Tortola, B.V.I. Mitch White is the person with voting and investment power
      of
      shares held by Pacific Rim Consulting.




(3)
      Includes 20,000,000 shares held by Greenday, Inc. The address for Greenday,
      Inc.
      is 3076 Sir Francis Drake Highway, Box 3463 Road Town, Tortola, B.V.I. Mitch
      White is the person with voting and investment power of shares held by Greenday,
      Inc.





**SECURITY
                OWNERSHIP OF MANAGEMENT****Title
                of Class**
            
            **Name
                and Address**
              **of
                Beneficial Owner**
            
            **Amount
                and**
              **Nature
                of**
              **Beneficial**
              **Ownership**
            
            **Percentage**
              **of
                Class****(1)**Common
            
            
            Patrick
                Smyth(2)
              2520
                SW 22ND ST # 2-370
              Miami,
                FL 33145-3438
              USA
            
            
            2,400,000
            
            
            *Common
            
            
            Canon
                Bryan(2)
              1111
                West Hastings Street, Suite 320
              Vancouver,
                Canada
              V6E
                2J3
            
            
            nil
            
            
            *Common
            
            
            Randy
                Peterson
              40420
                Thunderbird Ridge
              Garibaldi
                Highlands, B.C.
              V0N
                1T0
              CANADA
            
            
            nil
            
            
            *Common
            
            
            Jorge
                Andrade
              2970
                S. Greenville Street, Unit “E”
              Santa
                Ana, CA 92704
            
            
            nil
            
            
            *All
                directors and executive
              officers,
                as a group (4 persons)
            
            
            2,400,000
            
            
            *







*
      Less
      than 1%.




33




(1)
            Applicable
                percentage of ownership is based on 366,731,439 shares of common
                stock
                outstanding as of April 16, 2007 for each stockholder. Beneficial
                ownership is determined in accordance with the rules of the SEC and
                generally includes voting of investment power with respect to securities
                and securities owned by or for, among others, the spouse and/or minor
                children of an individual and any other relative who has the same
                home as
                such individual. Shares of common stock subject to securities exercisable
                or convertible into shares of common stock that are currently exercisable
                or exercisable within 60 days of April 16, 2007 are deemed to be
                beneficially owned by the person holding such options for the purpose
                of
                computing the percentage of ownership of such persons, but are not
                treated
                as outstanding for the purpose of computing the percentage ownership
                of
                any other person.(2)
            Mssrs.
                Smyth, Bryan and others are owed shares that are reserved for issuance
                as
                part of the 2006 Consultants Stock Plan. These are not yet issued.
                These
                reserved shares are not included in the number of shares they control
                in
                this table, and throughout this report. The reserves shares are also
                not
                included in the total shares outstanding of 366,731,439, as
                above.




Item
      12.
      Certain Relationships and Related Transactions, and Director
      Independence




Described
      below are certain transactions or series of transactions between us and our
      executive officers, directors and the beneficial owners of 5% or more of our
      common stock, on an as converted basis, and certain persons affiliated with
      or
      related to these persons, including family members, in which they had or will
      have a direct or indirect material interest in an amount that exceeds the lesser
      of $120,000 or 1% of the average of our total assets as of year-end for the
      last
      three completed fiscal years, other than compensation arrangements that are
      otherwise required to be described under “Executive Compensation.”





Mr.
      Peterson and Mr. Andrade are the Company's independent directors as defined
      under Nasdaq Rule 4200(a)(14).




(1)
      Our former Chairman and Chief Executive Officer, Mr. Mitch White, has been
      the
      primary source of funding. Mr. White has directly advanced proceeds or services
      with a value of $1,176,058 to CYOP, including accrued interest. These loans
      are
      not secured by any of the assets of CYOP or its subsidiaries and have no
      specified terms of maturity or any other terms.




(2)
      During the fiscal year 2004, we accrued imputed interest of $72,257 at an
      interest rate of 10% per annum on interest-free loans totaling $1,242,575 from
      our directors to September 30, 2004 and 5% from October 1, 2004 to December
      31,
      2004, and to the present. These loans have no specified term of maturity or
      any
      other terms. During the fiscal year 2006, we accrued interest of $62,927 on
      these loans which totaled $1,578,325 at December 31, 2006. We also accrued
      $21,273 of interest on a loan to RedRuth Ventures which is owned by a former
      officer.




34




(3)
      On December 1, 2004, by agreement of both parties, CYOP assigned a $1,800,000
      promissory note, dated December 1, 2001, and maturing December 14, 2010, to
      an
      affiliated company, Gaming Transactions, Inc., in consideration for 25 million
      restricted shares of Gaming Transactions, Inc.’s common stock. Our former Chief
      Executive Officer, former director and current shareholder, Mitch White, is
      a
      major shareholder of Gaming Transactions, Inc. This transaction was recorded
      as
      an equity investment of $1,674,643.




(4)
      CYOP has received the following loans from the following related parties:




**(a)
      Demand Loans Related Party**




**December****31,**
            
            **December****31,**Interest
                bearing and unsecured at 5% per annum:
            
            **2006**
            
            **2005**Andrea
                Carley - a former officer
            
            $
            122,881
            
            $
            44,671Mitch
                White - a former director and officer
            
            
            1,176,058
            
            
            869,044Gordon
                Samson - former director and officer
            
            
            110,311
            
            
            110,109Patrick
                Smyth - an officer
            
            
            169,075
            
            
            92,718$
            1,578,325
            
            $
            1,116,542




**(b)
      Short term Loan**





**December****31,**
            
            **December****31,**Non-Interest
                bearing and unsecured:
            
            **2006**
            
            **2005**Jack
                Carley - related to a former officer, director and current stockholder
            
            $
            44,625
            
            $
            44,625$
            44,625
            
            $
            44,625






**(c)
      Short-term Loan Related Party**




**December****31,**
            
            **December****31,**Interest
                at 10% per annum:
            
            **2006**
            
            **2005**RedRuth
                Ventures
            
            $
            212,725
            
            $
            212,725$
            212,725
            
            $
            212,725





We
      have
      no policy with respect to entering into transactions with members of management
      or affiliated companies. Any non-arm's length transaction we consider will
      be
      reviewed and voted on by disinterested members of our board of
      directors.





35





Item
      13.
      Exhibits




**EXHIBIT**
              **NO.**
            
            **DESCRIPTION**
            
            **LOCATION**3.1
            
            Articles
                of Incorporation
            
            Incorporated
                by reference to Exhibit 3.1 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on October
                30, 20013.2
            
            Certificate
                of Amendment to Articles of Incorporation
            
            Incorporated
                by reference to Exhibit 3.2 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on October
                30, 20013.3
            
            Certificate
                of Amendment to Articles of Incorporation
            
            Incorporated
                by reference to Exhibit 99.3 to CYOP’s Form 8-K filed with the
                Securities and Exchange Commission on October 8,
                20033.4
            
            Bylaws
            
            Incorporated
                by reference to Exhibit 3.3 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on October
                30, 200110.1
            
            Share
                Purchase Agreement between CYOP Systems, Inc. (Vendors), a
                wholly-owned subsidiary of CYOP, and Steve White (Purchaser) dated as
                of April 1, 2002
            
            Incorporated
                by reference to Exhibit 1.1 to CYOP’s Form 8-K filed with the
                Securities and Exchange Commission on August 20,
                200210.2
            
            Software
                Acquisition Agreement between CYOP Systems, Inc. (Vendor), a
                wholly-owned subsidiary of CYOP, and Mitch White (Purchaser) dated as
                of December 14, 2001
            
            Incorporated
                by reference to Exhibit 1.1 to CYOP’s Form 8-K filed with the
                Securities and Exchange Commission on April 15,
                200210.3
            
            Marketing
                Development & Distribution Agreement between CYOP (Marketer) and
                Mitch White (Vendor) dated as of December 14, 2001
            
            Incorporated
                by reference to Exhibit 1.2 to CYOP’s Form 8-K filed with the
                Securities and Exchange Commission on April 15,
                200210.4
            
            Share
                Purchase Agreement
            
            Incorporated
                by reference to Exhibit 10.1 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on October
                30, 2001





36




**EXHIBIT
                NO.**
            
            **DESCRIPTION**
            
            **LOCATION**10.5
            
            Software
                License Agreement
            
            Incorporated
                by reference to Exhibit 10.2 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on October
                30, 200110.6
            
            2003
                Consultant Stock Plan
            
            Incorporated
                by reference to Exhibit 4 to CYOP’s Registration Statement on Form
                S-8 filed with the Securities and Exchange Commission on October
                29, 200310.7
            
            Management
                Agreement dated as of January 2003 between CYOP and Mitch
                White
            
            Incorporated
                by reference to Exhibit 10.7 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on March
                1, 200410.8
            
            Management
                Agreement dated as of January 2003 between CYOP and Patrick
                Smyth
            
            Incorporated
                by reference to Exhibit 10.9 to CYOP’s Registration Statement on Form
                SB-2 filed with the Securities and Exchange Commission on March
                1, 200410.9
            
            Securities
                Purchase Agreement dated as of December 15, 2005 between CYOP and
                Cornell Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.10
            
            Secured
                Convertible Debenture 001 dated as of December 15, 2005 for the
                benefit of Cornell Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.11
            
            Secured
                Convertible Debenture 002 dated as of December 15, 2005 for the
                benefit of Cornell Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.12
            
            Amended
                and Restated Security Agreement dated as of December 15, 2005 by and
                between CYOP and Cornell Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and incorporated
                by reference




37




**EXHIBIT
                NO.**
            
            **DESCRIPTION**
            
            **LOCATION**10.13
            
            Warrant
                dated as of December 15, 2005 by and between CYOP and Cornell Capital
                Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.14
            
            Warrant
                dated as of December 15, 2005 by and between CYOP and Cornell Capital
                Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.15
            
            Escrow
                Agreement dated as of December 15, 2005 between CYOP and Cornell
                Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.16
            
            Investor
                Registration Rights Agreement dated as of December 15, 2005 between
                CYOP and Cornell Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and
                incorporated by reference10.17
            
            Termination
                Agreement dated as of December 15, 2005 between CYOP and Cornell
                Capital Partners, L.P.
            
            Filed
                as an exhibit to the Company’s 8-K on December 22, 2005 and incorporated
                by reference10.18
            
            Asset
                Purchase Agreement, dated as of November 16, 2005, between the
                Registrant and FutureBet Systems, Inc.
            
            Filed
                as an exhibit to the Company’s 8-K on January 5, 2006 and
                incorporated by reference10.19
            
            Amendment
                to Asset Purchase Agreement, dated as of May 9, 2006, between the
                Registrant, Future Bet Systems, Inc. and FutureBet Software,
                Ltd.
            
            Filed
                as an exhibit to the Company’s Form 10-KSB on May 17, 2006 and
                incorporated by reference10.20
            
            2006
                Equity Incentive Plan
            
            Filed
                as an exhibit to the Company’s registration statement on Form S-8 on
                September 1, 2006 and incorporated by reference10.21
            
            Professional
                Services Agreement between the Company and Canon Bryan dated January
                12,
                2006
            
            Filed
                as an exhibit to the Company’s registration statement on Form SB-2 on
                February 14, 2007 and incorporated by reference10.22
            
            Management
                Agreement by and between the Company and Patrick Smyth dated December
                3,
                2006
            
            Filed
                as an exhibit to the Company’s registration statement on Form SB-2 on
                February 14, 2007 and incorporated by reference14.1
            
            Code
                of Ethics
            
            Filed
                as an exhibit to the Company’s Registration Statement on Form SB-2 on
                March 17, 2006 and incorporated by reference21.1
            
            Subsidiaries
                of Company
            
            Filed
                as an exhibit to the Company’s Registration Statement on Form SB-2 on
                March 17, 2006 and incorporated by reference31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Company's Chief Executive
                Officer
            
            Filed
                herewith31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Company's Chief Financial
                Officer
            
            Filed
                herewith32.1
            
            Section
                1350 Certification of the Company's Chief Executive
                Officer
            
            Filed
                herewith32.2
            
            Section
                1350 Certification of the Company's Chief Financial
                Officer
            
            Filed
                herewith





38




Item
      14.
      Principal Accounting Fees and Services





The
      following table sets forth the fees billed to the Company for professional
      services rendered by the Company's principal accountant, for the year ended
      December 31, 2005 and December 31, 2006:




**Services**
                
                **2006**
                
                **2005**Audit
                    fees
                
                
                74,962
                
                
                71,513Audit
                    related fees
                
                
                20,700
                
                
                12,500Tax
                    fees
                
                
                —
                
                
                —All
                    other fees
                
                
                —
                
                
                —Total
                    fees
                
                
                95,662
                
                
                84,013





Audit
      fees consist of fees for the audit of the Company's annual financial statements
      or services that are normally provided in connection with the statutory and
      regulatory filings. Audit related fees consisted of reviews of the Company’s
      quarterly filings.





Tax
      fees
      included tax planning and various taxation matters.




Other
        services provided by the Company's principal accountant, other than audit,
        audit-related and tax services, included advisory services associated with
        accounting software applications and filings with the
        SEC.


39




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**CYOP
                SYSTEMS INTERNATIONAL, INCORPORATED**Dated:April
                17, 2007
            By:
            /s/ Patrick
                SmythPatrick
                Smyth, Chairman and CEO




In
      accordance with the Exchange Act, this report has been signed below by the
      following person on behalf of the Registrant and in the capacities and on the
      dates indicated.




**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/*Patrick
                Smyth*
            
            Chief
                Executive Officer (Principal Executive
            
            April
                17, 2007Patrick
                Smyth
            
            Officer),
                and Chairman of the Board of Directors/s/*Canon
                Bryan*
            
            Chief
                Financial Officer,
            
            April
                17, 2007Canon
                Bryan
            
            Principal
                Financial Officer, Secretary and Treasurer/s/*Randall
                Peterson*
            
            Director
            
            April
                17, 2007Randall
                Peterson/s/*Jorge
                Andrade, Jr.*
            
            Director
            
            April
                17, 2007Jorge
                Andrade, Jr.





40