Cyop Systems International (CYOS) 10QSB 2005 Q1 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

  x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2005

Commission file Number: 0-32355

CYOP SYSTEMS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or organization)

98-0222927
(I.R.S. Employer Identification Number)

Unit A
149 South Reeves Drive
Beverly Hills, California
90212
(Address of principal executive offices)

(310) 248-4860
(Issuer's telephone number)

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: 333,498,160 common shares as at March 31, 2005

Transitional Small Business Disclosure Format (check one): Yes ¨  No x  

CYOP SYSTEMS INTERNATIONAL INCORORATED

INDEX

PART 1.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheet as of March 31, 2005 and December 31, 2004	4
		Consolidated Statements of Changes in Stockholders' Deficiency for the period ended March 31, 2005	5
		Consolidated Statement of Operations for the period ended March 31, 2005	8
		Consolidated Statements of Cash Flows for the period ended March 31, 2005	9
		Notes to Consolidated Financial Statements	10
	Item 2.	Management Discussion and Analysis	24
	Item 3.	Controls and Procedures	27
PART II.	OTHER INFORMATION		27
	Item 1.	Legal Proceedings	27
	Item 2.	Changes in Securities	27
	Item 3.	Defaults Upon Senior Securities	27
	Item 4.	Submission of Matters to a Vote of Security Holders	27
	Item 5.	Other Information	27
	Item 6.	Exhibits and Reports on Form 8K	27
	SIGNATURES		28

1

PART I
FINANCIAL INFORMATION

Item 1.        Financial Statements

2

CYOP SYSTEMS INTERNATIONAL
INCORPORATED

Consolidated Financial Statements
(Expressed in U.S. Dollars)

March 31, 2005

Index

3

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Consolidated Balance Sheets
Unaudited
(Expressed in U.S. Dollars)

		March 31,2005			December, 31, 2004
ASSETS
Current
Cash and cash equivalents	$	143,465		$	7,337
Accounts receivable		238			50,058
Prepaid expenses and deposit		2,440			2,440
Total current assets		146,143			59,835
Fixed assets		50.741			54,568
Investment in equity – method investee		1,653,327			1,668,285
Intangible assets		50,604			57,833
Total assets	$	1,900,815		$	1,840,521
LIABILITIES
Current
Demand loans related party	$	1,289,742		$	1,289,620
Accounts payable and accrued liabilities		260,829			288,785
Convertible debenture		-			70,000
Player funds on deposit		44,339			44,158
Short-term loan		212,725			212,725
Promissory note		160,000			100,000
Total current liabilities		1,967,635			2,005,288
Deferred revenue		2,173,687			2,173,822
Total Liabilities		4,141,322			4,179,110
Nature and continuance of operations
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:
306,612,485 shares of common stock (2004 - 181,103,355)		6,135			3,623
Additional paid-in capital		2,357,148			1,062,970
Deficit accumulated		(4,603,790	)		(3,405,182	)
Total stockholders' deficiency		(2,240,507	)		(2,338,589	)
Total liabilities and stockholders' deficiency	$	1,900,815		$	1,840,521

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

4

CYOP SYSTEMS INTERNATIONAL INCORPORATED
Consolidated Statements of Stockholders' Deficiency
Three Months ended March 2005	Page 1of 3
(Unaudited)
(Expressed in U.S. Dollars)

											Accumulated
						Compre-					other		Total
					Additional	hensive					compre-		Stock-
	Common stock				paid-in	income		Deficit			hensive		Holders'
	Shares		Amount		Capital	(loss)		accumulated			income		(deficiency)
Balance, December 31, 2004	181,103,355		3,623		1,062,970			(3,405,182	)		-		(2,338,589	)
Shares issued to Cornell Capital at $0.0033 per
share on January 12, 2005	6,896,552		138		22,621								22,759
Shares issued to Cornell Capital at $0.0022 per	5,681,818		114		12,386								12,500
share on January 14 2005 from escrow
Shares issued to Cornell Capital at $0.003 per	6,896,552		138		20,552								20,690
share on January 18, 2005
Shares issued to Cornell Capital at $0.002 per	5,882,353		118		11,647								11,765
share on January 21, 2005
Shares issued to Cornell Capital at $0.0024 per	5,000,000		100		11,900								12,000
share on January 24, 2005 from escrow
Shares issued to Cornell Capital at $0.0029 per share	5,882,353		118		16,941								17,059
on January 26, 2005
Shares issued to Cornell Capital at $0.0031 per share	8,691,795		174		26,771								26,945
on January 31, 2005
Balance	226,034,778	$	4,523	$	1,185,788		$	(3,405,182	)	$	-	$	(2,214,871	)

Theaccompanying notes are anintegral part of thesefinancialstatements.

5

CYOP SYSTEMS INTERNATIONAL INCORPORATED
Consolidated Statements of Stockholders' Deficiency
Three Months ended March 2005	Page 2 of 3
(Unaudited)
(Expressed in U.S. Dollars)

											Accumulated
						Compre-					other		Total
					Additional	hensive					compre-		Stock-
	Common stock				paid-in	income		Deficit			hensive		Holders'
	Shares		Amount		Capital	(loss)		accumulated			income		(deficiency)
Balance, forward	226,034,778		4,523		1,185,788			(3,405,182	)		-		(2,214,871	)
Shares issued to Cornell Capital at $0.0031 per	4,081,633		82		12,571								12,653
share on January 31, 2005 from escrow
Shares issued to Cornell Capital at $0.0036 per	3,194,888		64		11,438								11,502
share on February 7, 2005 from escrow
Shares issued to Cornell Capital at $0.0072 per	3,494,125		70		24,930								25,000
share on February 11, 2005
Shares issued to Cornell Capital at $0.0058 per	3,135,907		63		18,125								18,188
share on February 14, 2005
Shares issued to Cornell Capital at $0.0058 per	1,757,469		35		10,157								10,192
share on February 14, 2005 from escrow
Shares issued to Cornell Capital at $0.0158 per share	4,081,633		82		64,407								64,489
on February 25, 2005
Shares issued to Cornell Capital at $0.0169 per share	671,592		13		11,336								11,349
on February 28, 2005 from escrow
Shares issued for services at $0.0187 per share	30,000,000		600		560,400								561,000
On February 28, 2005
Balance,	276,452,025	$	5,532	$	1,899,152		$	(3,405,182	)	$	-	$	(1,500,498	)

Theaccompanying notes are anintegral part of thesefinancialstatements.

6

CYOP SYSTEMS INTERNATIONAL INCORPORATED
Consolidated Statements of Stockholders' Deficiency
Three Months ended March 2005	Page 3of 3
(Unaudited)
(Expressed in U.S. Dollars)

											Accumulated
						Compre-					other		Total
					Additional	hensive					compre-		Stock-
	Common stock				paid-in	income		Deficit			hensive		Holders'
	Shares		Amount		Capital	(loss)		accumulated			income		(deficiency)
Balance, forward	276,452,025		5,532		1,899,152			(3,405,182	)		-		(1,500,498	)
Shares issued to Cornell Capital at $0.0165 per share	606,061		12		9,988								10,000
on March 7, 2005 from escrow
Shares issued to Cornell Capital at $0.0184 per share	4,958,677		99		91,139								91,238
on March 14, 2005 from escrow
Shares issued to Cornell Capital at $0.014 per	4,477,612		90		62,595								62,685
share on March 21, 2005
Shares issued to Cornell Capital at $0.0142 per	5,118,110		102		72,574								72,676
share on March 28, 2005
Shares issued to Cornell Capital at $0.0148 per	15,000,000		300		221,700								222,000
share on February 14, 2005 from escrow
Net loss for the period								(1,198,608	)				(1,198,608	)
Balance, March 31, 2005	306,612,485	$	6,135	$	2,357,148		$	(4,603,790	)	$	-	$	(2,240,507	)

Theaccompanying notes are anintegral part of thesefinancialstatements.

7

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Consolidated Statements of Operations
Three months ended March 31, 2005 and 2004
(Expressed in U.S. Dollars)

		2005			2004
Revenue
Sales – Crediplay	$	135		$	4,060
Service fees		2,433			7,338
Banking fees		102			192
Ad sales		-			-
		2,670			11,590
Cost of sales		8,075			13,115
		(5,405	)		(1,525	)
Sales and marketing expenses		(56,460	)		5,050
Consultants fees		(876,732	)		(88,000	)
Corporate Finance fees		(141,307	)		(262,500	)
General and Admin fees		(70,404	)		(96,521	)
Salaries and benefits		-			(8,043	)
Operating loss		(1,150,308	)		(451,539	)
Other income (loss)
Interest income related party		-			27,951
Interest Expense		(33,342	)		(2,838	)
Equity in losses of equity-method investee		(14,958	)		-
Net loss for the year	$	(1,198,608	)	$	(426,426	)
Loss per share –basic and diluted
Loss from operations	$	(0.005	)	$	(0.000	)
Net loss	$	(0.005	)	$	(0.000	)
Weighted average number of common
shares outstanding -basic and diluted		237,385,334			148,617,366

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

8

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004
(Expressed in U.S. Dollars)

		2005			2004
Cash flows from (used in) operating activities
Net loss for the year	$	(1,198,608	)	$	(426,426	)
Adjustments to reconcile net loss to net cash
Used in operating activities:
- amortization of intangible assets		7,229			7,229
- depreciation of fixed assets		3,827			5,186
- imputed interest on related party loan		-			24,439
- shares issuance for services		899,307			258,490
- investment in equity interest		14,958
- accredited to convertible debenture		-			1,284
Changes in assets and liabilities:
- accounts receivable		49,821			-
- interest receivable		-			(15,039	)
- note receivable related party		-			(5,574	)
- prepaid expenses and deposit		-			2,500
- accounts payable and accrued liabilities		(27,956	)		(31,649	)
- player funds on deposit		180			(8,250	)
- deferred revenue		135			(4,060	)
		(251,107	)		(191,871	)
Cash flows from (used in) investing activities
Proceeds from disposal of fixed assets		-			-
Increase in software development costs		-			-
Purchase of investments		-			-
Purchase of fixed assets		-			-
		-			-
Cash flows from (used in) financing activities
Shares issued		385,000			-
Increase in due from director		122			66,340
Proceeds from promissory note		60,000			-
Proceeds from convertible debenture		(70,000	)		125,000
		375,122			191,340
Increase in cash and cash equivalents		124,015			(531	)
Effect of exchange rate on cash		12,113			-
Cash and cash equivalents,beginning of year		7,337			9,057
Cash and cash equivalents, end of year	$	143,465		$	8,526
Cash and cash equivalents represented by:
Cash	$	139,718		$
Cash with processors		3,747
	$	143,465		$	8,526

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

SUPPLEMENTAL CASH FLOW INFORMATION

On December 1, 2004 the Company assigned a discounted promissory note valued at $1,605,986 to a related party company in consideration of 25 million common shares of that company. The common shares acquired are held as an equity interest investment.

9

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

1.	Nature and Continuance of Operations
	The Company was incorporated on October 29, 1999 in as Triple 8 Development Corporation under the laws of the State of Nevada to engage in any lawful business or activity for which corporations may be organized under the laws of the State of Nevada. The Company changed its name to CYOP Systems International Incorporated on October 30, 2000. On November 3, 2000, the Company acquired 100% of the issued and outstanding shares of CYOP Systems Inc., Barbados (“CYOP Barbados”). This transaction was accounted for as a reverse acquisition and a recapitalization.
	CYOP Barbados was incorporated under the laws of Barbados on June 20, 2000. On August 31, 2000, CYOP Barbados acquired 100% of the issued and outstanding shares of Moshpit Entertainment Inc., Canada (“Moshpit”), a company incorporated under the laws British Columbia, Canada. CYOP Barbados sold 100% of the issued and outstanding shares of Moshpit by an agreement dated April 1, 2002 to a former stockholder and the sole director
	The Company, and its subsidiary, 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.
	In fiscal year 2003, the company completed a stock split, which five (5) new shares were exchanged for every one (1) old share. The consolidated financial statements have been restated to reflect the stock split.
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. Significant inter-company accounts and transactions have been eliminated.

10

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(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

11

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(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)	Advertising and Promotion
		The Company expenses advertising and promotion costs as incurred. Total advertising and promotion costs charged to expenses for the year ended December 31, 2004 amounted to $280.00 (not classified as a separate item) and (2003 - $129,804).
	(i)	Foreign Currency Transactions
		The Company and CYOP Barbados maintain their accounting records in the reporting currency. Foreign currency transactions are translated into their reporting currency in the following manner. At the transaction date, each asset, liability, revenue and expense is translated into the reporting currency by the use of the exchange rate in effect at that date. The resulting foreign exchange gains and losses are included in operations. The Company does not have any assets or liabilities in foreign countries or foreign denominations or would created translation income or losses under other comprehensive income.
	(j)	Income Taxes
		The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The effect on deferred income tax assets and liabilities of a change in income tax rates is included in the period that includes the enactment date.

12

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

2.	Significant Accounting Policies(continued)
	(k)	Long-Lived Assets Impairment
		Effective January 1, 2002, certain long-term assets of the Company are reviewed when changes in circumstances require consideration as to whether their carrying value has become impaired pursuant to guidance established in Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. If impairment is deemed to exist, the assets will be written down to fair value. Prior to January 1, 2002, the Company evaluated long-term assets of the Company in accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The adoption of SFAS No. 144 did not have a material effect on the consolidated financial statements
	(l)	Financial Instruments and Concentration of Risks
		Fair value of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgement, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
		The carrying value of cash and cash equivalents, interest receivable, note receivable, demand loans, accounts payable and accrued liabilities, player funds on deposit and short-term loans approximate their fair values because of the short-term maturity of these instruments.
		Financial instruments that potentially subject the Company to concentration of credit risk consist of interest receivable and note receivable, the balances of which are stated on the balance sheet. The Company performs ongoing credit evaluations of its debtors and maintains allowances for possible losses with, when realized, have been within the range of management’s expectations. The Company places its cash in high credit quality financial institutions. The Company does not require collateral or other security to support financial instruments subject to credit risk.
	(m)	Accounting for Derivative Instruments and Hedging Activities
		The Financial Accounting Standards Board (“FASB”) issued SFAS No. 133Accounting 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

13

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

2.	Significant Accounting Policies(continued)
		hedged asset or liability that are attributable to the hedged risk or (ii) the designated as a hedging instrument, the gain or loss is recognized in income in the period of change. As at December 31, 2004, the Company has not entered into any derivative contracts either to hedge existing risks or for speculative purposes.
	(n)	Net Income (Loss) Per Share
		Basic net income (loss) per share are computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options and other dilutive securities.
	(o)	Stock-based Compensation
		The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-based Compensation". SFAS 123 encourages, but does not require, companies to adopt a fair value based method for determining expense related to stock-based compensation. The Company accounts for stock-based compensation issued to employees and directors using the intrinsic value method as prescribed under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations.
	(p)	Goodwill and Other Intangible assets
		Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. This statement requires that intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized over 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.

14

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

2.	Significant Accounting Policies(continued)
	(q)	New Accounting Pronouncements
		In January 2003, the Financial Accounting Standard Board issued FASB Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (ARB) No. 51.This interpretation addressed the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interest. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs in existence prior to January 31, 2003, outlines consolidation requirements for VIEs created after January 31, 2003. The company has reviewed its major commercial relationship and its overall economic interests with other companies consisting of related parties, vendors, loan creditors and other suppliers to determine the extent of its variable economic interest in these parties. The review has not resulted in a determination that the Company would be judged to be the primary economic beneficiary in any material relationships, or that any material entities would be judged to be Variable Interest Entities of the Company.
		In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative
		Instruments and Hedging Activities". This Statement is effective for contracts entered into or modified after June 30, 2003. We do not expect the implementation of SFAS No. 149 to have a material impact on our consolidated financial statements.
		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.

15

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(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 has 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 March 31, 2005 the Company recorded a further loss of $14,958 reducing the carrying value to $1,653,327.

16

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

4. Fixed assets

		March 31, 2005
				Accumulated		Net book
		Cost		depreciation		Value
Audio and visual equipment	$	21,558	$	13,855	$	7,703
Computer hardware		96,864		56,216		40,648
Computer software		3,088		3,088		-
Office furniture and equipment		9,227		6,837		2,390
Total	$	130,737	$	79,996	$	50,741
		December 31, 2004
				Accumulated		Net book
		Cost		depreciation		Value
Audio and visual equipment	$	21,558	$	13,450	$	8,108
Computer hardware		96,864		52,920		43,944
Computer software		3,088		3,088		-
Office furniture and equipment		9,227		6,711		2,516
Total	$	130,737	$	76,169	$	54,568

	For the three months ended March 31, 2005, depreciation expenses charged to cost of service, software development costs and general and administrative expenses were $3,827 (2004 - $5,186).
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.

17

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

5.	Intangible Assets (continued) the Skill-Bingo game software the website located athttp://www.bigrbingo.com the trademark “BiG’rBingo” the BiG’rBingo customer deposits
	The changes in the carrying amount of intellectual property as follows:

		2005			2004
Balance, beginning of year	$	57,833		$	86,749
Accumulated amortization		( 7,229	)		(28,916	)
Balance, end of year	$	50,604		$	57,833

6.	Loans
	(a)	Demand Loans Related Party

			March 31		December 31
			2005		2004
i.	Interest bearing and unsecured at 5% per annum:
-	Andrea Carley – an officer	$	35,030	$	25,156
-	Mitch White – a director and stockholder		1,056,757		1,054,726
-	Gordon Samson – a director		76,822		104,457
-	Patrick Smyth – a director		76,508		60,656
Total		$	1,245,117	$	1,244,995

(b) Short term Loan

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

(c) Short-term Loan Related Party

			December 31		December 31
			2004		2003
i.	Interest at 10% per annum:
-	RedRuth Ventures		212,725		212,725
Total		$	212,725	$	212,725

18

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

	(d)	Convertible debenture
		In connection with the standby equity distribution agreement as filed on March 1, 2004, the Company issued in January 2004 to the Investor $125,000 of convertible debentures that are convertible into shares of common stock at a discounted market price. The convertible debentures are secured by all of Company’s assets, interest bearing at 5% per annum and matured two years from the date of issuance. The Company has the right to redeem the debenture upon 30 days notice for 120% of the amount plus accrued interest. Upon such redemption, the Company will issue the investor a warrant to purchase 50,000 shares of common stock at an exercise price of $0.036 per share for every $100,000 of debentures that were redeemed.
		Upon the issuance of the notes, the net proceeds ($125,000) received were allocated between the liability and equity components of the notes.
		The outstanding amount as at March 31, 2005 is $0.00
	(e)	Promissory Notes
		On April 8, 2004 the Company executed a Promissory Note (the “Note”) with the Holder, Cornell Capital Partners, LP for $50,000.00. The Note is secured pursuant to the prior Security Agreement dated January 28, 2004 between the Holder and the Company. The Holder is entitled to interest at the rate of twenty four percent (24%) per annum or the highest permitted by applicable law, if lower.
		On December 13, 2004 the Company executed a Promissory Note (2) (the “Note 2”) with the Holder, Cornell Capital Partners, LP for $50,000. An issuance of 50,000,000 common shares was also completed at that time in security. The Holder is entitled to interest at the rate of twelve per cent (12%) per annum.
		Both notes (the “Note”) and (the “Note 2”) were retired as at March 31, 2005. During the period new notes (the “Note 3”) for $125,000 and (the “Note 4”) for $250,000 were executed and funds advanced from Cornell Capital, LP.
		As at March 31, 2005 outstanding amounts on (the “Note 3”) and (the “Note 4”) was $160,000.
7.	Sale and License-back of Computer Software
		On December 14, 2001, the Company sold computer software identified as Crediplay System to the sole director and a major stockholder and creditor of the Company for $3,000,000. The purchase price was settled by retiring $1,200,000 of debt owed to the purchaser and a promissory note for $1,800,000. The promissory note bears interest at 5% per annum with maturity on December 14, 2010. The promissory note is secured through a first priority lien and security interest in the Crediplay System and amount

19

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

due to Mr. Mitch White (the “Purchaser”) totalling $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.

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.

20

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

7.	Sale and License-back of Computer Software(continued)
	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		(135	)
Deferred gain 2005		2,173,687

	The deferred gain will continue to be amortized in proportion to the licensing fees payable over the term of the agreement.
8.	Stockholders’ Equity (Deficit)
	(a)	Issuance of Common Shares
		During 2004, the Company issued 88,130,195 shares to Cornell Capital LLP including a corporate finance fee 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 March 31, 2005 137,500,000 common shares to Cornell Capital, LP with 26,885,675 in escrow with Cornell Capital, LP.

21

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

8.	Stockholders’ Equity (Deficit)(continued)
	(b)	2003 Consultant Stock Plan
		On October 21, 2003, the Board of Directors of the Company approved and adopted “2003 Consultant Stock Plan” (“2003 Plan”). Pursuant to the 2003 Plan, it is a ten (10) year plan to grant common shares or right to received common shares by consultants (per individual agreement) to a maximum 2,500,000 shares (restated for the company’s stock split). The allocated number of shares includes an indeterminate number of additional shares that may be issued to adjust the number of shares issued pursuant to the stock plan described herein as the result of any future stock split, stock dividend or similar adjustment of the registrant's outstanding common stock.
		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 March 31, 2005
9.	Income Taxes
	As at March 31, 2005 the Company has non-capital losses and undepreciated capital cost of approximately $3,400,000 and $80,000, 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:

		2005			2004
Undepreciated capital cost of capital assets
over their net book value	$	30,000		$	19,000
Estimated tax loss carryforward		1,000,000			715,00
Less: valuation allowance		(1,030,000	)		(734,000	)
		-			-
The valuation allowance reflects the realization of the tax assets is unlikely.

22

CYOP SYSTEMS INTERNATIONAL INCORPORATED

Notes to Consolidated Financial Statements
For the three months ended March 31, 2005 and 2004
(Expressed in U.S. dollars)

10.	Related Party Transactions
	Related party transactions not disclosed elsewhere in the consolidated financial statements are as follows:
	(a)	During the fiscal year 2004, the Company accrued imputed interest of $72,257 at an interest rate of 10% per annum on interest-free loan totaling $1,242,575 from directors of the Company to September 30, 2004. At October 1, 2004 these loans started to accrue interest at 5% per annum. Interest during the period January 1, 2005 to March 31, 2005 on Directors loans totaled $20,768.
	(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. A director and shareholder of the Company is also a major shareholder of the assignee. This has been recorded as an equity investment of $1,674,643.
11.	Geographic Information
	All the Company’s operations and fixed assets are located in the United States.

23

Item 2.                  MANAGEMENT'S DISCUSSION AND ANALYSIS

The following management's discussion and analysis of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this quarterly report for the three months ended March 31, 2005. This quarterly report contains certain forward-looking statements and the Company's future operation results could differ materially from those discussed herein.

We were incorporated on October 29, 1999 under the laws of the State of Nevada as Triple 8 Development Corporation to engage in any lawful corporate purpose. We changed our name to CYOP Systems International Incorporated on October 30, 2000.

We have not been involved in any bankruptcy, receivership or similar proceedings.

We have been primarily focused on developing our product for market launch. Management has financed most of our operations to date. Management will continue to fund our operations through shareholders loans until our equity financing is closed. We will satisfy cash requirements solely from funds loaned by management or family and friends or private investors until this time. However, management is not under any contractual obligation to provide continued funding. We will spend approximately $1/2 million in the next 12 months to maintain current operations at our current expenditure rate; not including any marketing initiatives or expansion plans. Additional funds in the amount of $1.5 million will be expended for a complete launch of the Crediplay system including a full marketing budget. Executive and key personnel have executed management contracts and to ensure retention of executive and key personnel the Company will be paying fees and salaries or accruing them as necessary for 2005.

We anticipate contracting additional human resources as required during the next 12 months. We not expect to acquire physical assets or significant equipment in the next 12 months by leasing or purchasing in order to fulfill certain agreements . We will not be performing any significant research and development in the next 12 months as our pay for play software is complete and tested.

We launched our first pay-for-play online video game, Urban Mercenary in February 2001. In March 2001, the Company secured the Canadian Imperial Bank of Commerce as the Company's merchant account processor. Merchant processors now include Banner Bank.

In September 2002, we launched a suite of free and “pay for play” games including card, strategy, arcade, sports and multiplayer games, terminating our licensing contract with Bingo.com. These games are licensed from third-party’s and the company continues to talk to and discuss arrangements with third party game developers to ensure leading edge games are available on the proprietary sitewww.skillarcade.com for our members.

In order for our Company to expand it's operations and realize profits from pay for play online video gaming we are actively signing up affiliate company’s and pursuing strategic acquisitions and partnerships that bring internet traffic and more games to be integrated into our existing suite of games. Until we increase our Company's exposure and attract players to our website and/or complete strategic acquisitions and partnerships we cannot expect large volumes of players for our online pay for play video game. Revenues will be derived from licensing fees from third parties that already have an established community and significant traffic to their web sites and from ad-serving.

24

Liquidity and Capital Resources

The Company does not yet have an adequate source of reliable, long-term revenue to fund operations. As a result, the Company is reliant on outside sources of capital funding. There can be no assurances that the Company will in the future achieve a consistent and reliable revenue stream adequate to support continued operations. The Company has secured a source of capital funding, as an equity funding with regulatory clearance of the SB-2 registration statement granted with the August 12, 2004 filing of the SB-2/A.

The Company had cash and cash equivalents of $143,465 at March 31, 2005 and a working capital deficit of $(1,821,492) with the deficiency arising primarily from $1,502,467 in loans from directors and accrued compensation for executives, compared to a working capital deficit of ($1,370,949) at March 31, 2004 to satisfy requirements for operations for the same period ending March 31, 2004. This reflects the continued commitment by management with an increase of advancing shareholder loans to cover the cost of operations.

During the three month period ended March 31, 2005, the Company used cash of $251,107 in operating activities compared to using $191,871 in the prior period ended March 31, 2004. This is a reflection of primarily three things; significant legal expenses and corporate finance fees incurred in connection with the equity financing being undertaken and consulting fees now being accrued if not paid.

Net cash provided by financing activities for the three month period ending March 31, 2005 was $375,122 for the period originating from common shares purchased by Cornell Capital, LP, a further promissory note from Cornell Capital, LP and settlement of their convertible debenture which compares to $191,340 in net cash provided to the Company for the same period in 2004.

Our future capital requirements will depend on a number of factors, including costs associated with development of our Web portal, the success and acceptance of our new games and the possible partnerships and/or acquisition of complementary businesses, products and technologies. We have sufficient cash and cash equivalents on hand to conduct our operations through the second quarter of 2005.

As disclosed herein the Company concluded an underwriting in the first quarter of 2004 with Cornell Capital LLP and the associated SB-2 was filed on March 1, 2004 and as amended on May 6, 2004, June 22, 2004, and August 5, 11, 12 and 16, 2004 on Edgar.

The Company’s consolidated financial statements have been prepared on a continuing operation basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

Results of operations for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.

Revenue

For the quarter ended March 31, 2005 the Company generated revenue of $2,670, from operations. The same quarter period ending March 31, 2004 generated revenues of $11,590. Current revenues are now from a wide variety of affiliates and the company’s proprietary URL.

25

Cost of Sales

Cost of Sales for the three-month period ended March 31, 2005 was $8,075 and for the same three-month period ended March 31, 2004 $13,115 all with various third parties marketing companies. This cost of sales is primarily sales and marketing expenses for co-brand advertising and keyword buys for our site and participation in trade shows.

We expect to continue to incur sales and marketing expenses to further our efforts to increase traffic to our Web portal and develop licensee opportunities with gaming portals. These costs will include commissions, salaries, advertising, and other promotional expenses intended to increase traffic to licensees and improve revenue and translation costs. There can be no assurances that these expenditures will result in increased traffic or significant new revenue sources.

General and Administrative expenses

General and administrative expenses consist primarily of, legal and audit professional fees, insurance and other general corporate and office expenses, for the three-month period ending March 31, 2005 of $70,404. General and administrative expenses decreased by $26,117 for the three-month period ended March 31, 2004 from $96,521 for the same period ended March 31, 2004. This decrease is primarily due to cost cutting measures related to overhead.

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

Consultants Fees

Consultant fees consist of the company’s contract labour primarily hi-tech services and management. Of the total $876,732 expense in the period $783,000 is attributed to S-8 stock issuances from the 2005 stock option plan as filed on February 24, 2005 on Form S-8. The balance is made of $38,500 accrued compensation and $55,200 in actual cash expenses.

Interest Expenses

Interest expenses of $33,342 is a reflection of accrued interest on shareholder and related party loans and compared to 2004 of $2,838 is a materially higher expense. This is a reflection of interest expense being accrued on shareholder loans and related party loans at a market rate.

"CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical matters, the matters discussed in this Form 10-QSB are forward-looking statements based on current expectations and involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements under the following heading: "Managements Discussion and Analysis or Plan of Operations" the timing and expected profitable results of sales and the need for additional financing.

26

Item 3.                   Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports required to be filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II
OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS None
Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS None
Item 3.	DEFAULTS UPON SENIOR SECURITIES None
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
Item 5.	OTHER INFORMATION None
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K

27

(a)	Exhibits
	Exhibit 31.1 Rule 13(a) – 14(a)/15(d) – 14(a) Certification of Chief Executive Officer
	Exhibit 31.2 Rule 13(a) – 14(a)/15(d) – 14(a) Certification of Chief Financial Officer
	Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
	Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
(b)	Reports on Form 8-K On February 18, 2005 The Company filed a report on Form 8-K, Item 4 describing the change in auditors.
(c)	On March 8, 2005 The Company filed a report on Form 8-K, Item 5.02 describing the appointment of an independent director and audit committee member.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CYOP SYSTEMS INTERNATIONAL INCORPORATED
Dated: April 29, 2005	Per:	/s/ Mitch White
		Mitch White CEO, and Director

28