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23 August 2007

John Racine
President & CEO
Catuity Inc.
300 Preston Blvd.
Suite 302
Charlottesville, VA 22901
USA
 
RE: Letter of Intent to Acquire Loyalty Magic
 
Dear John,
 
1
Acquisition and Service Agreement

This Letter of Intent records the intention of Wishlist Holdings Ltd (“Wishlist
Holdings”) in relation to the proposed acquisition by Wishlist Holdings of all
of the shares on issue in Loyalty Magic Pty Ltd (“Loyalty Magic”)
(“Acquisition”). Loyalty Magic is a wholly owned subsidiary of Catuity Inc.

The parties acknowledge that at the time this Letter of Intent is signed, a
Liquidation Agreement between Catuity Inc., Loyalty Magic, Chip Application
Technologies Pty Limited, CIT Cards Australia Pty Limited, Gottbetter Capital
Master, Ltd. and Bridgepointe Master Fund Ltd. (“Liquidation Agreement”) will
have been entered into or will be about to be entered into. Pursuant to this
Liquidation Agreement, Gottbetter Capital Master, Ltd. and Bridgepointe Master
Fund Ltd. (collectively, “Bond Holders”) will be required to use their best
endeavours to sell all of the issued shares in Loyalty Magic and this
Liquidation Agreement will provide the Bond Holders with the ability to sell all
of the issued shares in Loyalty Magic.

If, however, the Liquidation Agreement is not entered into, the parties
acknowledge and agree that Catuity Inc. will remain entitled to sell all of the
issued shares in Loyalty Magic.
 
2
Structure of Acquisition

 

 
(a)
Subject to certain conditions precedent and the terms and conditions of this
Letter of Intent, Wishlist Holdings agrees to acquire and each of the Bond
Holders agree to sell all of the shares on issue in Loyalty Magic.

 

 
(b)
This Letter of Intent records the basic terms of the agreement of the parties in
relation to the Acquisition. The parties agree to execute a definitive written
purchase agreement in relation to the Acquisition (“Purchase Agreement”) in
accordance with the terms of this Letter of Intent.

 

 
(c)
Prior to the execution of a Purchase Agreement, which will supersede this Letter
of Intent, Catuity Inc., Loyalty Magic and each of the Bond Holders agree to
permit Wishlist Holdings to undertake due diligence in respect of Loyalty Magic
on an exclusive basis.

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3
Purchase Price

 

 
(a)
During the course of Wishlist Holdings’ due diligence investigations, the
forecast earnings of Loyalty Magic before interest, tax, depreciation and
amortisation (“EBITDA”) in respect of the full financial year ending 30 June
2008 (“FY08”) will be determined in accordance with Australian generally
accepted accounting principles.

 

 
(b)
The determination of EBITDA for the purposes of this Letter of Intent including
without limitation the calculation of the purchase price of the Acquisition
(“Purchase Price”) will be made in good faith by Wishlist Holdings and its
auditors, after taking into account the view of Catuity Inc. and/or Loyalty
Magic and after due consideration and analysis of Loyalty Magic’s client
contracts in existence, new client commitments as reflected in the “pipeline”
and supported by past evidence of signings and existing letters of intent from
clients.

 

 
(c)
Subject to the satisfaction or waiver of each of the conditions precedent set
out in paragraph 4 of this Letter of Intent, the terms of paragraph 3(d) and the
adjustment in paragraph 3(e), Wishlist Holdings will offer to pay as the
Purchase Price:

 

 
(i)
if the forecast EBITDA of Loyalty Magic in respect of FY08 is greater than or
equal to AUD$847,400 (ie. 95% of AUD$892,000), the sum of AUD$4,500,000 less the
Option Fee on the completion of the Acquisition (“Completion”);

 

 
(ii)
if the forecast EBITDA of Loyalty Magic in respect of FY08 is greater than or
equal to AUD$650,000 and less than AUD$847,400, the sum of AUD$4,200,000 less
the Option Fee on Completion.

 

 
(d)
It is currently contemplated that the Purchase Price will be paid in cash to the
party which is entitled to sell all of the issued shares in Loyalty Magic (being
the Bond Holders or Catuity Inc.) and that, on Completion, Wishlist Holdings
will pay to the party which is entitled to sell all of the issued shares in
Loyalty Magic (being the Bond Holders or Catuity Inc.) the amount set out in
paragraph 3(c)(i) or 3(c)(ii) (whichever is applicable).

 

 
(e)
At the close of the transaction, Loyalty Magic will have a minimum of AUD
$140,000 in net working capital at Completion. Net working capital is defined as
current assets less current liabilities. The Purchase Price will be adjusted for
any difference between the amount of net working capital determined in
accordance with this paragraph 3(e), and the actual amount of Loyalty Magic’s
net working capital at Completion, and only if the actual amount of net working
capital is lower than AUD $140,000.

 
4
Conditions Precedent of Offer and Agreement

 

 
(a)
Wishlist Holdings’ offer and agreement to acquire all of the shares on issue in
Loyalty Magic is conditional upon:

 

 
(i)
Wishlist Holdings completing legal, commercial, technical and product audit and
financial due diligence investigations in relation to Loyalty Magic and the
business operated by Loyalty Magic (or any of its subsidiaries or affiliates) as
is set out on Loyalty Magic’s website at www.loyalty-magic.com (“Business”) to
the satisfaction of Wishlist Holdings and its advisers.

 

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(ii)
Catuity Inc., Loyalty Magic, each of the Bond Holders and their respective
directors, employees, representatives and advisers providing reasonable
co-operation to Wishlist Holdings in relation to its due diligence
investigations and providing Wishlist Holdings and its directors, employees,
representatives and advisers with access to information in relation to Loyalty
Magic and reasonable access to senior management of Loyalty Magic.

 

 
(iii)
There being employment contracts in place between Loyalty Magic and each
employee of Loyalty Magic that Wishlist Holdings determines is essential to the
continued success of the Business, which are on terms reasonably acceptable to
Wishlist Holdings, it being acknowledged that on Completion Loyalty Magic will
assume responsibility for Graham McStay’s employment contract and all of his
accrued entitlements, save and except that the notice period applicable in
respect of that contract in the event of its termination will be amended to
correspond with the notice periods which currently apply in the event of the
termination of the employment contracts of Wishlist Holdings’ executives.

 

 
(iv)
Wishlist Holdings receiving from the key customers of Loyalty Magic (being
Amcal, API, EFS and others including without limitation potential prospective
clients of the Business at Wishlist Holdings’ request) confirmation that they do
not intend to terminate their contracts with Loyalty Magic or alter their
intention to enter into contracts with Loyalty Magic merely because Wishlist
Holdings is to make the Acquisition and will operate the Business
post-Completion through face to face meetings which Wishlist Holdings intends to
have with those key customers (such meetings only to be held in the presence of
a representative of Loyalty Magic).

 

 
(v)
None of Catuity Inc, Loyalty Magic, any of the Bond Holders or any of their
respective directors, employees or advisers providing any other party with any
information concerning the Business or allowing any other party to conduct any
form of due diligence in respect of the Business during the exclusivity period
referred to in paragraph 9 of this Letter of Intent.

 

 
(vi)
Loyalty Magic’s forecast EBITDA for FY08 being greater than or equal to
AUD$650,000.

 
5
Purchase Agreement

 

 
(a)
The parties agree to negotiate in good faith to enter into the Purchase
Agreement, which will supersede this Letter of Intent. The Purchase Agreement
will include the following principal terms and such other terms as the parties
and their legal advisers consider appropriate to a transaction of the kind
envisaged by this Letter of Intent:

 

 
(i)
Between the date of the Purchase Agreement and Completion:

 

 
(A)
the Business must be conducted in the usual course;

 

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(B)
none of Catuity Inc., Loyalty Magic or any of the Bond Holders must take any
action which interferes with or impedes or otherwise adversely affects the
ordinary conduct of the Business; and

 

 
(C)
any material transactions or actions taken in relation to the Business must be
approved by Wishlist Holdings.

 

 
(ii)
Completion will be conditional on the conditions precedent set out in paragraphs
4(a)(i) to 4(a)(iv) inclusive of this Letter of Intent.

 

 
(b)
The parties acknowledge that any foreclosure undertaken by the Bond Holders in
respect of Catuity Inc. prior to Completion will not affect Completion as:

 

 
(i)
Catuity Inc. and each of the Bond Holders agree to the sale of all of the shares
on issue in Loyalty Magic, subject to certain conditions precedent and the terms
and conditions of this Letter of Intent; and

 

 
(ii)
the security held by the Bond Holders over the Loyalty Magic shares will be
released at Completion.

 
6
Notification of Material Adverse Changes

 
Catuity Inc., Loyalty Magic and the Bond Holders must promptly notify Wishlist
Holdings about any circumstance reasonably likely to:
 

 
(a)
materially adversely change the financial position, operations, profitability or
prospects of the Business or the value of the assets of Loyalty Magic; or

 

 
(b)
require substantial capital expenditure,

 
and upon receipt of such notice, Wishlist Holdings may immediately terminate
this Letter of Intent or the Purchase Agreement (as the case may be) by written
notice to Catuity Inc., Loyalty Magic and the Bond Holders and in such
circumstances, Wishlist Holdings will be entitled to the Option Fee. If Wishlist
Holdings does not elect to terminate this Letter of Intent or the Purchase
Agreement (as the case may be) then an appropriate adjustment will be made to
the Purchase Price as agreed between the parties or, failing agreement, as
determined by an independent accountant, whose determination will be final and
binding upon the parties.
 
7
Co-operation

 
The parties will use their best endeavours to observe the following timeframe:
 

 
(a)
execution of the Purchase Agreement to occur before 15 September 2007; and

 

 
(b)
Completion to occur before 30 September 2007.

 
Wishlist Holdings agrees to use its best endeavours to observe the above
timeframe provided that Catuity Inc., Loyalty Magic and each of the Bond Holders
cooperate with Wishlist Holdings and provide Wishlist Holdings with such
reasonable information, documents, and access to information, as Wishlist
Holdings may deem desirable in order to conduct “due diligence” reviews in
normal commercial scope and means.
 
 

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8
Fees and Expenses

 
Except as specified in this Letter of Intent, each party will be responsible for
its own expenses and those of its agents, auditors, attorneys and consultants
incurred in connection with this letter and the Acquisition. Each party shall
hold the other harmless from any claims of brokers, finders, agents, advisers
and consultants.
 
9
Exclusivity and Wishlist Holdings’ Option

 

 
(a)
In due consideration of the value of an exclusive purchase opportunity, Wishlist
Holdings agrees to pay the sum of AUD$250,000 (“Option Fee”) to acquire an
option to undertake the Acquisition (“Option”). The Option may be exercised by
Wishlist Holdings in writing at any time but no later than 30 September 2007
(“Option Expiration Date”). If Wishlist Holdings exercises the Option, the
parties commit to undertaking the Acquisition on the terms of this Letter of
Intent. The Option Fee is payable within 5 business days of Wishlist Holdings
receiving this Letter of Intent signed by Catuity Inc., Loyalty Magic and each
of the Bond Holders to Loyalty Magic’s solicitor, Arnold Bloch Leibler of
Melbourne (“Stakeholder”) for the Stakeholder to hold in trust.

 

 
(b)
In granting the Option and receiving the Option Fee, Catuity Inc., Loyalty
Magic, each of the Bond Holders and their respective directors, officers and
advisers agree to negotiate exclusively with Wishlist Holdings, and not to enter
into any discussions, arrangements, agreements or any contracts with any other
party, in relation to the Business or the Acquisition or the sale of any of
Loyalty Magic’s assets (other than sales of inventory in the ordinary course of
business), from the date of this Letter of Intent until the date on which the
Purchase Agreement is executed or the Option Expiration Date, whichever is
earlier. Save to the extent that legal obligations to their shareholders or
creditors require otherwise, prior to this date, none of Catuity Inc., Loyalty
Magic or any of the Bond Holders will directly or indirectly, through any
director, employee or representative or otherwise, solicit or entertain offers
from, negotiate with or in any manner encourage, discuss, accept, or consider
any proposal of any other person relating to the acquisition of the Business or
assets of Loyalty Magic or the shares in Loyalty Magic in whole or in part,
whether directly or indirectly, through purchase, merger, consolidation, or
otherwise (other than sales of inventory in the ordinary course of business).
Catuity Inc., Loyalty Magic and each of the Bond Holders each undertake to
immediately notify Wishlist Holdings of any contact between Catuity Inc. or
Loyalty Magic or any of the Bond Holders or any of their respective directors,
employees or representatives and any other person regarding any such offer or
proposal or any related inquiry and upon receipt of such notice, Wishlist
Holdings may immediately terminate this Letter of Intent.

 

 
(c)
Subject to paragraph 6, the party which is entitled to sell all of the issued
shares in Loyalty Magic (being the Bond Holders or Catuity Inc.) will be
entitled to the Option Fee if:

 
 

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(i)
Completion occurs; or

 

 
(ii)
Completion does not occur and:

 

 
(A)
Loyalty Magic’s forecast EBITDA in respect of FY08 is greater than or equal to
AUD$650,000; and

 

 
(B)
none of Catuity Inc., Loyalty Magic or any of the Bond Holders are in breach of
the terms of this Letter of Intent or the Purchase Agreement (as the case may
be) in a material respect; and

 

 
(C)
none of Catuity Inc., Loyalty Magic or any of the Bond Holders or any of their
respective directors, employees or representatives have, directly or indirectly,
engaged in any of the activities referred to in paragraph 9(b).

 

 
(d)
Subject to paragraph 6, Wishlist Holdings will be entitled to the Option Fee if
Completion does not occur and:

 

 
(i)
Loyalty Magic’s forecast EBITDA in respect of FY08 is less than AUD$650,000; or

 

 
(ii)
Catuity Inc., Loyalty Magic or any of the Bond Holders are in breach of the
terms of this Letter of Intent or the Purchase Agreement (as the case may be) in
a material respect; or

 

 
(iii)
Catuity Inc. and/or Loyalty Magic and/or any of the Bond Holders and/or any of
their respective directors, employees or representatives directly or indirectly
engage in any of the activities referred to in paragraph 9(b) and their
respective legal obligations to their shareholders or creditors require either
or both of them to do so.

 
10
Confidentiality and public announcements

 

 
(a)
The content of this Letter of Intent and the fact that Wishlist Holdings is
interested in the Acquisition are confidential and will remain confidential
until expressly agreed otherwise by the parties. None of Wishlist Holdings,
Catuity Inc. Loyalty Magic, any of the Bond Holders or any of their respective
directors, agents, employees or representatives shall make any disclosure or
announcement concerning the content of this Letter of Intent or the existence of
the proposed transaction, its terms, the proposals contained herein, or the
terms of any definitive agreements, without the prior written consent of the
other party or as required by law (including the rules of the SEC or any
relevant stock market exchange in the U.S. or Australia), and such information
shall only be disclosed to third parties (including employees) on a
“need-to-know” basis.

 

 
(b)
The parties agree that the provisions of this paragraph shall remain in effect
for two years following the termination of this Letter of Intent should the
anticipated transaction not be completed.

 

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11
Present Intent 

 
This Letter of Intent is intended to constitute legal relations between the
parties and to be formally binding upon the parties.
 
12
No other statements.

 
The parties agree that as of this date there are no oral or written
representations, agreements or understandings concerning the subject matter of
this Letter of Intent or the Acquisition contemplated herein.
 
Please return a copy of this Letter of Intent countersigned by an authorized
representative of each of Catuity Inc., Loyalty Magic, Gottbetter Capital
Master, Ltd. and Bridgepointe Master Fund Ltd. indicating Catuity Inc.’s,
Loyalty Magic’s, Gottbetter Capital Master, Ltd.’s and Bridgepointe Master Fund
Ltd.’s confirmation of their interest in the terms set forth herein and
agreement to the provisions hereof.
 
The parties may execute separate copies of this letter, but both shall be deemed
the same document. The offer contained in this Letter of Intent shall remain
open until 24 August 2007. If not signed by an authorized officer or
representative of each of Catuity Inc., Loyalty Magic, Gottbetter Capital
Master, Ltd. and Bridgepointe Master Fund Ltd. and returned by such date, then
it will expire without further action.
 
We look forward to proceeding in an effort to finalize a definitive agreement
that is mutually acceptable, both in structure and price.
 
Best regards,
 

Adrian Finlayson
Huy Truong
 
CEO
 
Chairman
 

Wishlist Holdings Ltd  
 
ACKNOWLEDGED AND AGREED THIS
day of August 2007:
 

CATUITY INC.        
By:
                 
 
   
Name of Authorised Director
 

 

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LOYALTY MAGIC PTY LTD        
By:
                 
 
   
Name of Authorised Director
 

 

GOTTBETTER CAPITAL MASTER, LTD.        
By:
                 
 
   
Name of Authorised Director
 

 
BRIDGEPOINTE MASTER FUND LTD.
       
By:
                 
 
   
Name of Authorised Director
 

 

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