----

----

**FORM      10-QSB**

| x      | QUARTERLY                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934  |
|--------|------------------------------------------------------------------------------------------------------------------|
|   | For                the quarterly period ended June 30, 2006.                                                     |
|   |                                                                                                             |
| o      | TRANSITION                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934 |
|   | For                the transition period from                ______________                                      |

**CYOP      Systems International, Inc.**

| Nevada                                         | 98-0222927                         |
|------------------------------------------------|------------------------------------|
| (State                or Other Jurisdiction of | (IRS                Employer       |
| Incorporation                or Organization)  | Identification                No.) |

| Unit                A                                   |                                                                                 |
|---------------------------------------------------------|--------------------------------------------------------------------------------------|
| 1022                6th                Street           |                                                                                 |
| Hermosa                Beach, CA                        | (310)                691-2585                                                        |
| (Address                of Principal Executive Offices) | (Issuer’s                Telephone Number, Including Area                Code) |

----

----

----

----

|                          |                                                                              | Page    |
|-------------------------------|-----------------------------------------------------------------------------------|---------|
|                          |                                                                              |    |
| PART                I.        | FINANCIAL                INFORMATION                                              | 1       |
|                          |                                                                              |    |
| Item                1.        | Financial                Statements                                               | 1       |
|                          |                                                                              |    |
| Item                2.        | Management’s                Discussion and Analysis of or Plan of Operation | 2       |
|                          |                                                                              |    |
| Item                3.        | Controls                and Procedures                                            | 4       |
|                          |                                                                              |    |
| PART                II        | OTHER                INFORMATION                                                  | 5       |
|                          |                                                                              |    |
| Item                1.        | Legal                Proceedings                                                  | 5       |
|                          |                                                                              |    |
| Item                2.        | Unregistered                Sales of Equity Securities and Use of Proceeds        | 5       |
|                          |                                                                              |    |
| Item                3.        | Default                Upon Senior Securities                                     | 5       |
|                          |                                                                              |    |
| Item                4.        | Submission                of Matters to a Vote of Security Holders                | 5       |
|                          |                                                                              |    |
| Item                5         | Other                Information                                                  | 5       |
|                          |                                                                              |    |
| Item                6.        | Exhibits                                                                          | 5       |
|                          |                                                                              |    |
| SIGNATURE                PAGE |                                                                              |  6 |
|                          |                                                                              |    |
| CERTIFICATIONS                |                                                                              |    |

----

**PART      I. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**CYOP      SYSTEMS INTERNATIONAL INCORPORATED**

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

**Index**

| Consolidated                Balance Sheets as of June 30, 2006                                                                                      | F-2 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----|
| Consolidated                Statements of Operations for the six months and three months ended                June                30, 2006 and 2005 | F-3 |
| Consolidated                Statements of Cash Flows for the six months ended June 30, 2006 and                2005                                 | F-4 |
| Notes                to the Consolidated Financial Statements                                                                                       | F-5 |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**  |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|
|                                                             |   |   |   |
| Consolidated                Balance Sheet                        |   |   |   |
| Unaudited                                                        |   |   |   |
| **(Expressed                in U.S. Dollars)**              |   |   |   |

|                                                                                                    |   | June                30, 2006 |       |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
| **ASSETS**                                                                                              |   |                         |       |
| **Current**                                                                                             |   |                         |       |
| Cash                and cash equivalents                                                                |   | $                            | 1,608      |   |
| Accounts                receivable                                                                      |   |                         | 711        |   |
| Prepaid                expenses and deposit                                                             |   |                         | 545,346    |   |
| Loan                receivable                                                                          |   |                         | 32,750     |   |
| **Total                current assets**                                                                 |   |                         | 580,415    |   |
| **Fixed                assets, net**                                                                    |   |                         | 86,865     |   |
| **Investment                in equity - method investee**                                               |   |                         | 1,594,186  |   |
| **Intangible                assets, net**                                                               |   |                         | —    |   |
| **Total                assets**                                                                         |   | $                            | 2,261,466  |   |
| **LIABILITIES**                                                                                         |   |                         |       |   |
| **Current**                                                                                             |   |                         |            |   |
| Accounts                payable and accrued liabilities                                                 |   | $                            | 459,021    |   |
| Demand                loans related party                                                               |   |                         | 1,315,112  |   |
| Player                funds on deposit                                                                  |   |                         | 46,974     |   |
| Short-term                loan                                                                          |   |                         | 212,725    |   |
| Convertible                debenture                                                                    |   |                         | 1,474,557  |   |
| Derivative                conversion liability                                                          |   |                         | —    |   |
| **Total                Liabilities**                                                                    |   |                         | 3,508,389  |   |
|                                                                                                    |   |                         |            |   |
| **STOCKHOLDERS'                DEFICIENCY**                                                             |   |                         |       |   |
| **Share                capital**                                                                        |   |                         |            |   |
| Authorized:                                                                                             |   |                         |       |   |
| 500,000,000                shares of common stock with a par value of $0.00002 per                share |   |                         |            |   |
| Issued,                allotted and outstanding:                                                        |   |                         |            |   |
| 333,429,702                shares of common stock (2004 - 181,103,355)                                  |   |                         | 6,669      |   |
| **Additional                paid-in capital**                                                           |   |                         | 4,778,610  |   |
| **Deficit                accumulated**                                                                  |   |                         | (6,032,202 | ) |
| **Total                stockholders' deficiency**                                                       |   |                         | (1,246,923 | ) |
| **Total                liabilities and stockholders' deficiency**                                       |   | $                            | 2,261,466  |   |

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

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED** |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Consolidated                Statements of Operations       |   |   |   |   |   |   |   |   |   |
| (Unaudited)                                                |   |   |   |   |   |   |   |   |   |
| **(Expressed                in U.S. Dollars)**             |   |   |   |   |   |   |   |   |   |

|                                                                    |   | For                the Three Months |          | For                the Six Months |   |
|-------------------------------------------------------------------------|--------|-------------------------------------|---------------|-----------------------------------|--------|
|                                                                    |   | Ended                June 30        |          | Ended                June 30      |   |
|                                                                    |   | 2006                                |          | 2005                              |   | 2006 |   | 2005 |   |
| **Revenues**                                                            |   |                                |          |                              |   |   |   |   |   |
| Service                fees                                             |   |                                | —       |                              |   | 1,876 |   |   | — |   |   | 4,309 |   |
| Sale                - Crediplay - related party (Note 6)                |   |                                | —       |                              |   | 238 |   |   | — |   |   | 373 |   |
| Banking                fees                                             |   |                                | —       |                              |   | 249 |   |   | — |   |   | 351 |   |
| **Total                Revenues**                                       |   |                                | —       |                              |   | 2,363 |   |   | — |   |   | 5,033 |   |
| Cost                of sales                                            |   |                                | (182          | )                                 |   | (28,330 | ) |   | (182 | ) |   | (36,405 | ) |
|                                                                    |   |                                |               |                              |   |  |   |   |  |   |   |  |   |
| **Gross                profit (loss)**                                  |   |                                | (182          | )                                 |   | (25,967 | ) |   | (182 | ) |   | (31,372 | ) |
|                                                                    |   |                                |          |                              |   |   |   |   |   |   |   |   |   |
| Sales                and Marketing expenses                             |   |                                | —  |                              |   | —  |   |   | (12,724 | ) |   | (56,460 | ) |
| Consultants                fees                                         |   |                                | (93,882       | )                                 |   | (126,500 | ) |   | (193,889 | ) |   | (1,003,232 | ) |
| Corporate                finance fees                                   |   |                                | (10,000       | )                                 |   | (849 | ) |   | (10,000 | ) |   | (142,156 | ) |
| General                and admin fees                                   |   |                                | (159,568      | )                                 |   | (42,553 | ) |   | (391,824 | ) |   | (112,957 | ) |
|                                                                    |   |                                |          |                              |   |   |   |   |   |   |   |   |   |
| **Operating                Loss**                                       |   |                                | (263,632      | )                                 |   | (195,869 | ) |   | (608,619 | ) |   | (1,346,177 | ) |
|                                                                    |   |                                |          |                              |   |   |   |   |   |   |   |   |   |
| **Other                income (loss)**                                  |   |                                |               |                              |   |  |   |   |  |   |   |  |   |
| Interest                income related party                            |   |                                | —  |                              |   | —  |   |   | —  |   |   | —  |   |
| Interest                expense                                         |   |                                | (65,371       | )                                 |   | (19,720 | ) |   | (128,252 | ) |   | (53,062 | ) |
| Equity                in losses of equity-method investee               |   |                                | (18,174       | )                                 |   | (15,880 | ) |   | (24,092 | ) |   | (30,839 | ) |
| Mark-to-market                adjustment                                |   |                                | 145,993       |                              |   | —  |   |   | 145,993 |   |   | —  |   |
|                                                                    |   |                                |          |                              |   |   |   |   |   |   |   |   |   |
| **Net                loss for the period**                              |   |                                | (201,184      | )                                 |   | (231,469 | ) |   | (614,970 | ) |   | (1,430,078 | ) |
|                                                                    |   |                                |          |                              |   |   |   |   |   |   |   |   |   |
| **Loss                per share**-                basic and diluted     |   |                                |               |                              |   |  |   |   |  |   |   |  |   |
| Loss                from operations                                     |   |                                | (0.001        | )                                 |   | (0.001 | ) |   | (0.002 | ) |   | (0.005 | ) |
|                                                                    |   |                                |               |                              |   |  |   |   |  |   |   |  |   |
| Net                loss                                                 |   |                                | (0.001        | )                                 |   | (0.001 | ) |   | (0.002 | ) |   | (0.005 | ) |
| **Weighted                average number of common shares outstanding** |   |                                | 333,498,160   |                              |   | 326,236,871 |   |   | 333,498,160 |   |   | 282,055,526 |   |

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

----

| **CYOP                      SYSTEMS INTERNATIONAL INCORPORATED** |   |   |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Consolidated                      Statements of Cash Flows       |   |   |   |   |   |
| (Unaudited)                                                      |   |   |   |   |   |
| **(Expressed                      in U.S. Dollars)**             |   |   |   |   |   |

|                                                                                                                        |   | 2006   |     | 2005   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|
| **Cash                      flows from (used in) operating activities**                                                     |   |   |     |   |   |
|      Net                      loss for the period                                                  |   | $      | (614,970 | )      | $      | (1,430,078 | ) |
|      Adjustments                      to reconcile net loss to net cash                            |   |   |     |   |   |   |   |
|           Used                      in operating activities:              |   |   |     |   |   |   |   |
|           -                      amortization of intangible assets        |   |   | 28,916   |   |   | 14,458 |   |
|           -                      depreciation of fixed assets             |   |   | 18,283   |   |   | 8,847 |   |
|           -                      imputed interest                         |   |   | 128,255  |   |   | — |   |
|           -                      share issuance for services              |   |   | —  |   |   | 899,307 |   |
|           -                      investment in equity interest            |   |   | 24,092   |   |   | 30,839 |   |
|           -                      accredited to convertible debenture      |   |   | (76,052  | )      |   | — |   |
|      Changes                      in assets and liabilities:                                       |   |   |     |   |   |   |   |
|           -                      accounts receivable                      |   |   | —  |   |   | (90,450 | ) |
|           -                      prepaid expenses                         |   |   | (71,828  | )      |   | (16,512 | ) |
|           -                      loan receivable                          |   |   | (32,750  | )      |   | — |   |
|           -                      accounts payable and accrued liabilities |   |   | 86,440   |   |   | (26,481 | ) |
|           -                      player funds on deposit                  |   |   | 886      |   |   | 865 |   |
|           -                      deferred revenue                         |   |   | -        |   |   | 373 |   |
|                                                                                                                        |   |   | (508,726 | )      |   | (608,832 | ) |
| **Cash                      flows from (used in) investing activities**                                                     |   |   |     |   |   |   |   |
|      Increase                      in due from a director                                          |   | $      | 153,945  |   | $      | 48,326 |   |
|      Purchase                      of fixed assets                                                 |   |   | (12,455  | )      |   | (39,115 | ) |
|                                                                                                                        |   |   | 141,490  |   |   | 9,211 |   |
| **Cash                      flows from financing activities**                                                               |   |   |     |   |   |   |   |
|      Shares                      issued                                                            |   | $      | —  |   | $      | 454,800 |   |
|      Proceeds                      from promissory note                                            |   |   | —  |   |   | 200,000 |   |
|      Proceeds                      from convertible debenture                                      |   |   | 150,000  |   |   | — |   |
|                           Proceeds from short-term loan                                                 |   |   | —  |   |   | (70,000 | ) |
|                                                                                                                        |   |   | 150,000  |   |   | 584,800 |   |
| **Foreign                      exchange gain (loss) on cash held in foreign                      currency**                 |   |   | —  |   |   | 30,327 |   |
| **Increase                      (decrease) in cash and cash equivalents**                                                   |   |   | (217,236 | )      |   | 15,506 |   |
|                                                                                                                        |   |   |     |   |   |   |   |
| **Cash,**beginning                      of period                                                                           |   |   | 218,844  |   |   | 7,337 |   |
| **Cash                      (deficiency)**,                      end of period                                              |   | $      | 1,608    |   | $      | 22,843 |   |
|                                                                                                                        |   |   |     |   |   |   |   |
| **Cash                      represented by:**                                                                               |   |   |     |   |   |   |   |
|      Cash                      on hand                                                             |   | $      | 1,312    |   | $      | 19,000 |   |
|      Cash                      with processors                                                     |   |   | 296      |   |   | 3,843 |   |
|                                                                                                                        |   | $      | 1,608    |   | $      | 22,843 |   |

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

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**  |
|------------------------------------------------------------------|
|                                                             |
| Notes                to Consolidated Financial Statements        |
| For                the six months ended June 30, 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                April 29, 2005 the Company incorporated Red Felt Software Ltd. under                the                laws of the United Kingdom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|         | The                Company, and its subsidiaries, is a provider of multimedia transactional                technology solutions and services for the entertainment industry.                The                Company’s range of products and services include financial transaction                platforms for on-line video games and integrated e-commerce transaction                technology for on-line merchants. These services are considered as                one                segment only based on internal organizational                structure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|         | 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 subsidiary CYOP Barbados                and                Red Felt Software, LTD. Significant inter- company accounts and                transactions have been eliminated. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2.**  | **Significant                Accounting Policies**(continued) |
|--------------|---------------------------------------------------------------|
|         |                                                          |   |
|         | **(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. |
|         |                                                          |   |
|         | **(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 basis |
|-----------------------------------------------|--------------------------------------------|
| Computer                hardware              | 30%                declining-balance basis |
| Computer                software              | 50%                declining-balance basis |
| Office                furniture and equipment | 20%                declining-balance basis |
| Leasehold                improvements         | 20%                straight-line basis     |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2.**  | **Significant                Accounting Policies**(continued) |
|--------------|---------------------------------------------------------------|
|         |                                                          |   |
|         | **(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 |
|         |                                                          |   |
|         | **(h)**                                                  | **Foreign                Currency Transactions** |
|         |                                                          |   |
|         |                                                          | The                Company, CYOP Barbados and Red Felt Software Ltd., 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                that                would create translation income or losses under other comprehensive                income. |
|         |                                                          |   |
|         | **(i)**                                                  | **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. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2.**  | **Significant                Accounting Policies**(continued) |
|--------------|---------------------------------------------------------------|
|         |                                                          |   |
|         | **(j)**                                                  | **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. |
|         |                                                          |   |
|         | **(k)**                                                  | **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. |
|         |                                                          |   |
|         | **(l)**                                                  | **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 June 30, 2006, the Company has not entered                into                any derivative contracts either to hedge existing risks or for speculative                purposes. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2.**  | **Significant                Accounting Policies**(continued) |
|--------------|---------------------------------------------------------------|
|         |                                                          |   |
|         | **(m)**                                                  | **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. |
|         |                                                          |   |
|         | **(n)**                                                  | **Stock-based                Compensation**  |
|         |                                                          |   |
|         |                                                          | On                December 2004 the Financial accounting Standards Board issued Financial                accounting Standard 123R “Share Based Payments” (“SFAS 123R”), which                superseded APB 25 and amended Statement of Financial accounting Standards                123 (“SFAS 123”), “ Accounting for Stock Based Compensation”. Pursuant to                SFAS 123R all compensation to employees must be valued using the                fair                value method for fiscal years ending after December 15, 2005. The                Company                has adopted SFAS 123R and does not believe such pronouncement will                have an                effect on it’s financial statements. |
|         |                                                          |   |
|         | **(o)**                                                  | **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                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. |
|         |                                                          |   |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2**. | **Significant                Accounting Policies**(continued) |
|--------|---------------------------------------------------------------|
|   |                                                          |   |
|   | **(p)**                                                  | **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. |
|   |                                                          |   |
|   |                                                          | 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. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **2.**  | **Significant                Accounting Policies**(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |   |
|         | 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, 2004, the Company’s equity-method investee approximate                ownership interest consisted of a 19.99% interest based on the outstanding                shares of Gaming Transactions, Inc. (OTC:GGTS). The Company does                not have                the ability to significantly influence GGTS. Summarized Balance Sheet                and                Operations information is as follows:                                                                                                                                                                                                      |   |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|         | The                Company acquired the investment in December 2004 and valued the investment                at $1,674,973. During the month of December 2004 the Company recorded                a                $6,688 loss based on the proportionate share of the investee’s loss which                resulted in a reduction in the carrying amount to $1,668,285 at December                31, 2004. During the period January 1, 2005 to June 30, 2006 the                Company                recorded a further loss of $74,099 reducing the carrying value to                $1,594,186.                                                   |   |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **4.** | **Fixed                assets**                 |   |       |    |                                      |   |                            |   |
|--------|-------------------------------------------------|--------|------------|---------|-------------------------------------------|--------|---------------------------------|--------|
|   |                                            |   |       |    | June                  30, 2006            |   |                            |   |
|   |                                            |   |  Cost |    | Accumulated                  depreciation |   | Net                  book Value |   |
|   | Audio                  and visual equipment     |   | $          | 21,558  |                                      | $      | 15,711                          |   | $ | 5,847 |   |
|   | Computer                  hardware              |   |       | 140,234 |                                      |   | 83,789                          |   |   | 56,445 |   |
|   | Computer                  software              |   |       | 30,700  |                                      |   | 7,941                           |   |   | 22,759 |   |
|   | Office                  furniture and equipment |   |       | 9,227   |                                      |   | 7,413                           |   |   | 1,814 |   |
|   | Total                                           |   | $          | 201,719 |                                      | $      | 114,854                         |   | $ | 86,865 |   |

| **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 has been collectively recorded as intellectual property                  with an expected useful life of 5                  years.                                                                                                                                                                                                                     |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **5.**  | **Intangible                Assets (continued)**                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | the                Skill-Bingo game software                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | the                website located at http://www.bigrbingo.com                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         | the                trademark “BiG’rBingo”                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         | the                BiG’rBingo customer deposits                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         | As                of June 30, 2006, due to market conditions, and a lack of adequate                capitalization to fund certain activities, the Company has 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 June 30,                2006,                this value was impaired and revalued at                nil. |

| **6.**  | **Loans**     |
|--------------|---------------|
|         |          |   |
|         | **(a)**  | **Demand                Loans Related Party** |

|                                                                  |                          |   | June                    30, 2006 |   |
|-----------------------------------------------------------------------|-----------------------------------------|--------|----------------------------------|--------|
| i.                    Interest bearing and unsecured at 5% per annum: |                                    |   |                             |

|                       - Andrea Carley - an officer                         |   | $      | 70,788    |   |
|--------------------------------------------------------------------------------------|--------|--------|-----------|--------|
|                       - Mitch White - an officer, director and stockholder |   |   | 984,447   |   |
|                       - Gordon Samson - a former director                  |   |   | 107,604   |   |
|                       - Patrick Smyth - a former director                  |   |   | 107,648   |   |
| Total                                                                                |   | $      | 1,270,487 |   |

| 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, an officer and a director of the Company, the option to convert                such portion of his outstanding shareholder loan (valued at June                30 at                $984,447) 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 August 16, no election has been                made                by Mr. White. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |          |                               |
|--------|---------------|------------------------------------|
|   | **(b)**  | **Short                term Loan** |

| i.                  Non-Interest bearing and unsecured |   |   | June                30, 2006 |   |
|--------------------------------------------------------|--------|--------|------------------------------|--------|

|                         - Jack Carley - related to a director and stockholder |   | $ | 44,625 |   |
|-------------------------------------------------------------------------------------------------------------|--------|---|--------|--------|
| Total                                                                                                       |   | $ | 44,625 |   |

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

|   |   |   | June                  30, 2006 |   |
|--------|--------|--------|--------------------------------|--------|

|    i.                  Interest at 10% per annum:                |   |   |    |   |
|----------------------------------------------------------------------------|--------|--------|---------|--------|
|                           - RedRuth Ventures |   |   | 212,725 |   |
| Total                                                                      |   | $      | 212,725 |   |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **6.**  | **Loans**(continued) |
|--------------|----------------------|
|         |                 |   |
|         | **(d)**              | **Convertible                debenture** |
|         |                 |   |
|         |                 | On                September 2, 2005, the Company executed a Convertible Debenture for                $650,000 with Cornell Capital Partners, LP, with a one (1) year term                and                accrues annual interest of twelve percent (12%). The Convertible                Debentures are also convertible at the holder’s option at a conversion                price equal to $0.055, which may be adjusted pursuant to the terms                of the                Convertible Debentures. The Convertible Debentures are secured by                substantially all the assets of the Company. The Convertible Debentures                also extinguished a May 4, 2005 note for $200,000 with Cornell Capital                Partners,LP “May 4 Note”. On execution of the May 4 Note, $60,000 was                advanced and $140,000 recorded as a receivable to be advanced on                filing a                new SB-2 registration statement. |
|         |                 |   |
|         |                 | As                at June 30, 2006, outstanding amounts on the May 4 Note was                $0.00. |
|         |                 |   |
|         |                 | On                December 15, 2005, the Company entered into a Securities Purchase                Agreement (“SPA”) with Cornell Capital LP. Pursuant to the Securities                Purchase Agreement, Cornell Capital Partners purchased secured convertible                debentures in the original principal amount of $1,350,000. The debentures                have a three-year term and accrue annual interest of 10%. The $700,000                under the secured convertible debenture was disbursed to the Company                upon                the execution of the Securities Purchase Agreement on December 15,                2005. A                second closing of $150,000 was disbursed to the Company 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 and June 15, 2009 respectively. 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 common stock of CYOP Systems by Cornell at                a price                per share equal to ninety percent (90%) of the lowest average volume                weighted average price, as quoted by Bloomberg, LP, for the thirty                (30)                trading days immediately preceding the conversion date. Cornell was                granted a security interest in certain of the Company’s assets pursuant to                an 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. |
|         |                 |   |
|         |                 | The                outstanding amount as of June 30, 2006 for this convertible debenture                is                $1,500,000. Pursuant to SFAS 133 the options were valued upon issuance                using black scholes at $30,949. Such amount has been bifurcated from                the                debt and allocated to deferred interest expense and is being amortized                over three years which is the term of the                debenture. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **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 -                nil). 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. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | 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 (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. |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                          |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **7.**  | **Sale                and License-back of Computer Software** (continued)                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         | 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                price                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|
|                   Retirement of loan due to the purchaser                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $      | 1,200,000 |   |
|                   Present value of $1,800,000 promissory note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |           |   |
|                   discounted at 7% per annum                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | 1,565,452 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | 2,765,452 |   |
| Software                development costs incurred in 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | (495,058  | ) |
| Deferred                gain 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $      | 2,270,394 |   |
| Recognized                gain                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   | (71,842   | ) |
| Deferred                gain 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $      | 2,198,552 |   |
| Recognized                gain in 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | (16,040   | ) |
| Deferred                gain in 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $      | 2,182,512 |   |
| Recognized                gain in 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | (8,690    | ) |
| Deferred                gain 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   | 2,173,822 |   |
| Recognized                gain in 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | (315      | ) |
| Deferred                gain 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   | 2,173,507 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |           |   |
| 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 view 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 nil, and credited the Company’s additional                paid-in capital for this amount. |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **8.**  | **Stockholders’                Equity (Deficit)**  |
|--------------|---------------------------------------------------------------|
|         |                                                          |   |
|         | **(a)**                                                  | **Issuance                of Common Shares** |
|         |                                                          |   |
|         |                                                          | During                2004, the Company issued 88,130,195 shares to Cornell Capital Partners                LP                including a corporate finance fee including 312,500 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 to Cornell, as of March 31, 2006 107,326,347 common                shares drawing down the escrow shares as well as new issuances to                Cornell                Capital Partners LP   with 68,458 common shares remaining in                escrow with Cornell Capital Partners LP.   |
|         |                                                          |   |
|         | **(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                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. |
|         |                                                          |   |
|         |                                                          | On                Feb 18, 2005, the Board of Directors of the Company approved and                filed the                “2005 Consultant Stock Plan” (“2005 Plan”). |
|         |                                                          |   |
|         | **(c)**                                                  | **Stock                Option** |
|         |                                                          |   |
|         |                                                          | There                were no stock options granted for the period ended June 30,                2006. |

| **9.**  | **Income                Taxes**                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|         | As                at June 30, 2006, the Company has non-capital losses and undepreciated                capital cost of approximately $4,092,000 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 2006 through 2010. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|         | (a)                                                                                                                                                                                                                                                                                                                                                                                                                        | The                tax effect of temporary differences that give rise to the Company’s                deferred tax assets are as follows: |

|                                                                                                          |   |   |       |   |   |     |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|----------|--------|
|                                                                                                          |   |   | 2006       |   |   | 2005     |   |
| Undepreciated                capital cost of capital assets over their net book value                         |   | $      | 30,000     |   | $      | 19,000   |   |
|                                                                                                          |   |   |       |   |   |     |   |
| Estimated                tax loss carryforward                                                                |   |   | 1,000,000  |   |   | 715,000  |   |
| Less:                valuation allowance                                                                      |   |   | (1,030,000 | )      |   | (734,000 |   |
|                                                                                                          |   |   | —    |   |   | —  |   |
| The                valuation allowance reflects the realization of the tax assets is                unlikely. |   |   |            |   |   |          |   |

----

| **CYOP                SYSTEMS INTERNATIONAL INCORPORATED**                                |
|------------------------------------------------------------------------------------------------|
|                                                                                           |
| Notes                to Consolidated Financial Statements                                      |
| For                the three months and six months ended June 30, 2006 and                2005 |
| **(Expressed                in U.S. dollars)**                                            |

| **10.**  | **Related                Party Transactions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|          | Related                party transactions not disclosed elsewhere in the consolidated financial                statements are as follows:                                                                                                                                                                                                                                                                                                                                                                            |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|          | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The                Company to June 30, 2006 has accrued interest of $29,371 at an interest                rate of 5% per annum on current loans totaling $1,315,112 from directors                of the Company. |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|          | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 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. This has been                recorded as an equity investment and is booked as $1,594,186 as of                June                30, 2006. |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| **11.**  | **Geographic                Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|          | All                the Company’s operations and fixed assets are located in the United                States.                                                                                                                                                                                                                                                                                                                                                                                                  |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **12.**       | **Derivative                Option Liability**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|          | On                December 15, 2005, the Company entered into a convertible debt instrument                which contained options to settle the debt by issuance of the Company’s                common stock at the option of the holder. Pursuant to SFAS 133                (“Accounting for Derivative Instruments and Hedging Activities”) the                Company determined the value of such instruments at $30,949 and bifurcated                the amount from the debt instrument. |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|          | Pursuant                to SFAS 133, the Company valued the options at June 30, 2006, with                a value                being calculated at nil. The Company recorded other income of $145,993                in                the period ended June 30, 2006.                                                                                                                                                                                                                                             |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

**Item      2. Management’s Discussion and Analysis or Plan of      Operation**

|   | • |   | our                ability to fund future growth; |
|--------|---------|--------|---------------------------------------------------|
|   | • |   | our                ability to become profitable;  |

|   | • |   | the                volatility of the price of our Common Stock;          |
|--------|---------|--------|--------------------------------------------------------------------------|
|   | • |   | market                demand for and market acceptance for our products; |

|   | • |   | our                ability to protect our intellectual property rights; |
|--------|---------|--------|-------------------------------------------------------------------------|
|   | • |   | new                regulation and legislation;                          |

|   | • |   | trends                for the continued growth of our business and other businesses we                may                acquire;                                |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • |   | our                ability to successfully market existing products and services and                develop                and market new products and services; |

|   | • |   | our                ability to expand our market for existing products and services;                                                                                   |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • |   | the                effects of our accounting policies and general changes in accounting                principles generally accepted in the United States of America; |

|   | • |   | General                economic conditions of the telecommunications market, including the                new                and evolving market for next-generation communications solutions;                and |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • |   | other                risks and uncertainties disclosed in our Annual Report.                                                                                                                                      |

**Liquidity      and Capital Resources**

----

**Results      of operations for the six months ended June 30, 2006 as compared to the six      months ended June 30, 2005.**

General      and Administrative expenses

**Results      of operations for the quarter ended June 30, 2006 as compared to the quarter      ended June 30, 2005. **

----

**Item      3: Controls and Procedures**

----

**PART      II-OTHER INFORMATION**

**Item      1. Legal Proceedings**

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

**Item      3. Defaults Upon Senior Securities**

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

**Item      5. Other Information**

**Item        6. Exhibits **

----

**SIGNATURE**

**CYOP      SYSTEMS INTERNATIONAL, INC.**

|                                      |                                                                                         |                           |
|-------------------------------------------|----------------------------------------------------------------------------------------------|--------------------------------|
| Date: August                18, 2006 | By:                                                                                | /s/                Mitch White |
|                                      | Mitch                White                                                                   |
|                                      | Chief                Executive Officer and Chairman of the Board of                Directors |

|                                         |                                                          |                                                  |
|----------------------------------------------|---------------------------------------------------------------|-------------------------------------------------------|
| Date: August                    18,2006 | By:                                                 | /s/                    Canon                    Byran |
|                                         | Canon                    Byran                                |
|                                         | Chief                    Financial                    Officer |

----

**EXHIBIT          INDEX**

| 3.1.1   | Articles                    of Incorporation. (Incorporated by reference to Exhibit 3.1 to                    the                    Company’s Registration Statement on Form SB-2 filed with the Securities                    and Exchange Commission on October 30,                    2001) |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.1.2   | Certificate                    of Amendment to Articles of Incorporation. (Incorporated by reference                    to                    Exhibit 3.2 to the Company’s Registration Statement on Form SB-2 filed                    with the Securities and Exchange Commission on October 30,                    2001) |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.1.3   | Certificate                    of Amendment to Articles of Incorporation. (Incorporated by reference                    to                    Exhibit 99.3 to the Company’s Form 8-K filed with the Securities and                    Exchange Commission on October 8,                    2003) |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.1.4   | Bylaws.                    (Incorporated by reference to Exhibit 3.3 to the Company’s Registration                    Statement on Form SB-2 filed with the Securities and Exchange                    Commission                    on October 30, 2001) |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |                      10.1 | Second                    Amendment to Asset Purchase Agreement dated June 26, 2006 by                    and between                    the Company and FB Software, Ltd. Filed                    herewith. |
|--|--------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |                      31.1 | Rule                    13a-14(a)/15d-14(a) Certification by the Company’s Chief Executive                    Officer. Filed herewith. |
|--|--------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|

|  |                      31.2 | Rule                    13a-14(a)/15d-14(a) Certification by the Company’s Principal Financial                    Officer. Filed herewith. |
|--|--------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|  |                      32.1 | Section                    1350 Certification by the Company’s Chief Executive Officer and Principal                    Financial Officer. Filed herewith. |
|--|--------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |                      32.2 | Section                    1350 Certification by the Company’s Principal Financial Officer. Filed                    herewith. |
|--|--------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

----