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2006
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-KSB
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 000-30045
 CATUITY INC.
  DELAWARE
    
    38-3518829(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)300 Preston Ave., Ste. 302, Charlottesville, VA
    
    22902(Address of principal executive offices)
    
    (Zip code)
  
 
 þ o
 o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### Table of Contents



CATUITY INC.
FORM 10-KSB
For the Year Ended December 31, 2006
TABLE OF CONTENTS
 PagePART I
    
    
    3Item 1. Description of Business
    
    
    3Item 2. Description of Property
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8PART II
    
    
    8Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    8Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    9Item 7. Financial Statements
    
    
    21Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    42Item 8A. Controls and Procedures
    
    
    42PART III
    
    
    42Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act
    
    
    42Item 10. Executive Compensation
    
    
    45Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    47Item 12. Certain Relationships and Related Transactions, and Director Independence
    
    
    48Item 13. Exhibits
    
    
    48Item 14. Principal Accountant Fees and Services
    
    
    51Consent of BDO Seidman, LLP302 Certification of Chief Executive Officer302 Certification of Chief Financial OfficerSection 906 Certification
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FORWARD LOOKING INFORMATION
  As used in this Annual Report on form 10-KSB, Company, us, we, our and similar terms means
Catuity, Inc. a Delaware corporation.
  
 PART I
 The Companys annual report on Form 10-KSB , quarterly reports on Form 10-QSB , current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of
the Exchange Act are made available free of charge through the Companys website, located at http://www.catuity.com as soon as reasonably practicable after reports have been filed
with the Securities and Exchange Commission (SEC). The SEC also maintains an Internet site at http://www.sec.gov where these reports and other information about the Company can be
obtained.
 
 Item 1. Description of Business
 OUR BUSINESS
      3




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INDUSTRY
       BUSINESS SEGMENTS
  PRODUCTS AND SERVICES
  2006
    
    
    2006
    
    
    2005
    
    
    2005Revenue Type
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Processing
    
    $
    1,409,698
    
    
    
    72
    %
    
    $
    510,826
    
    
    
    52
    %Service
    
    
    354,815
    
    
    
    18
    %
    
    
    404,611
    
    
    
    41
    %License
    
    
    184,287
    
    
    
    10
    %
    
    
    65,485
    
    
    
    7
    %Total Revenue
    
    $
    1,948,800
    
    
    
    100
    %
    
    $
    980,922
    
    
    
    100
    %
  4




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-
    
    Increasing the wallet-share of existing customers (tapping into the money that customers
are spending at similar retailers)-
    
    Increasing basket lift (giving customers reasons to spend more on targeted products and
categories);-
    
    Improving gross margin (giving customers reasons to buy higher margin products);-
    
    Increasing customer purchase frequency (driving customers back to the store more often); and-
    
    Increasing customer response rates.
  -
    
    Launching and managing membership-based programs;-
    
    Managing points-based programs;-
    
    Delivering discounts or rebates based on shopping behavior; and-
    
    Offering customizable gift card programs which can be enhanced with loyalty functionality.
  COMPETITION
  -
    
    IN-HOUSE SOLUTION: Retailers, especially the largest, often seek competitive advantage by
custom development of proprietary in-house solutions. This is generally done in conjunction
with loyalty consultancies, database service firms and IT service firms. This is not a
primary market for Catuity due to the typically lengthy and complex sales cycle and the
strict financial requirements placed on the provider, which tend to exclude smaller
companies. While Catuity does not actively target tier one retailers or custom installation
projects, we will provide this option at the request of our target customers.-
    
    HOSTED SOLUTION: Retailers, especially those in our sweet spot market of 75-250 locations,
favor a turnkey hosted solution which enables them to minimize capital investment; avoid the
need for large, specialized IT; and reduce the risks associated with complex integration,
deployment and upgrades. This market typically prefers a hosted solution which allows them to
customize their programs  not their technology  to be aligned with the retailers
merchandising and branding strategy. Many players, including payments processors, gift card
solutions providers and marketing services firms are generally focused by vertical market.-
    
    PROGRAM-BASED SOLUTION: Retailers actively participate in promotional programs which are
generally designed to drive a single type of customer behavior, such as new account
acquisition, customer retention, or target the sale of specific products. These programs are
generally attractive because they have a defined cost, require little to no technology
adoption and do not require complex back-end technology to manage beyond a specific
promotion. Catuity does not compete in this market.
 5




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-
    
    Our ability to establish a clear business case that is aligned with the strategy of our
client and which has a clearly defined return on investment.-
    
    Our ability to successfully market the features of our product and to continually make it
easier for our clients to use.-
    
    Our ability to continually expand our reputation and credibility in our markets and to
differentiate Catuity from the many competitive alternatives.-
    
    Our ability to leverage marquee client relationships to establish a more visible presence in North America and Australia.-
    
    Our ability to execute on schedule and on budget and to consistently exceed our customers ongoing service requirements.
  DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
  RESEARCH AND DEVELOPMENT
   -
    
    EVERY DEVELOPMENT PROJECT SHOULD GIVE OUR CUSTOMER CONTROL OF THEIR PROGRAMS. This is
important because retailers of all sizes want to be able to quickly and easily implement
measure and modify their marketing and loyalty programs. Because we are delivered in an ASP
model, a key element of our R&D strategy is to always make it simpler and more intuitive for
our customers to use the technology.-
    
    EVERY DEVELOPMENT SHOULD OFFER SUPERIOR DATA SECURITY. The security of customer information
remains a major concern among retailers and payments industry players. Catuity addresses the
security of our own system through the training of our people; clearly drafted policies and
procedures; ongoing review and discussions with our customers about their best practices; and
compliance with industry standards. Catuity has certified its U.S. operations as being
compliant with industry standards around customer data security.-
    
    EVERY DEVELOPMENT SHOULD NOT IMPACT THE TIME OF THE TOTAL TRANSACTION. Because our programs
work at the point of sale, it is critical that our technology never slow down the checkout
process. Retailers equate delays at the checkout with lost business. Our technology, which
requires a proprietary application to be installed at the POS, is designed to operate under
the ISO 8583 message format, simultaneously with the approval of the payment transaction.
Before any version of our applications are released, they are tested and improved to
streamline the total transaction time so that Catuity never hurts the checkout time of one of
its customers.-
    
    EVERY DEVELOPMENT SHOULD MINIMIZE OR ELIMINATE INTEGRATION AND OTHER IT-RELATED RISKS FOR
OUR CUSTOMERS. Like most buyers of technology driven solutions, retailers assess the total
cost of deploying and managing a solution. Our investment in our Application Program
Interface (API) development and integration with market-standard protocols is designed to
reduce the upfront cost of doing business with Catuity. These upfront costs can act as a
deterrent to a buying decision. We believe that a critical success factor in
transaction-driven companies is to make it easy for customers to start doing business with
us.Development projects that do not meet these four standards are generally only considered if
they are funded by a client.
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INTELLECTUAL PROPERTY
     Country
    
    Patent NumberUnited States
    
    
    6,449,684United States
    
    
    6,532,518Australia
    
    
    755,388
   Country
    
    Patent NumberAustralia
    
    
    746,867New Zealand
    
    
    513,678Belgium
    
    
    1,163,633Finland
    
    
    1,163,633France
    
    
    1,163,633Germany
    
    
    60020818.4Great Britain
    
    
    1,163,633
   SALES BACKLOG AND PIPELINE
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REVENUE AND ASSETS BY GEOGRAPHIC LOCATION
  Revenue by Geographic Location:
    
    2006
    
    2005*Catuity Inc. (US operations)
    
    
    12
    %
    
    
    8
    %Loyalty Magic (Australia operations)
    
    
    88
    %
    
    
    92
    %
 
 *
    
    - Loyalty Magic, the source of all
our Australian revenue, was acquired in
September 2005 and only had four months
activity for the year ended 2005. EMPLOYEES AND FACILITIES
  
 Item 2. Description of Property
     
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  8




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SYMBOL - CAT
    
    SYMBOL - CATN
    
    SYMBOL - CTTYHIGH
    
    LOW
    
    HIGH
    
    LOW
    
    HIGH
    
    LOWPERIOD
    
    (AUSTRALIAN $)
    
    (AUSTRALIAN $)
    
    (AUSTRALIAN $)
    
    (AUSTRALIAN $)
    
    (UNITED STATES $)
    
    (UNITED STATES $)2005First Quarter
    
    $
    7.00
    
    
    $
    3.90
    
    
    
    N/A
    
    
    
    N/A
    
    
    $
    8.30
    
    
    $
    3.47Second Quarter
    
    $
    18.50
    
    
    $
    4.50
    
    
    
    N/A
    
    
    
    N/A
    
    
    $
    22.58
    
    
    $
    3.75Third Quarter
    
    $
    23.00
    
    
    $
    10.50
    
    
    $
    13.50
    
    
    $
    10.50
    
    
    $
    20.39
    
    
    $
    8.53Fourth Quarter
    
    $
    14.20
    
    
    $
    9.25
    
    
    $
    11.00
    
    
    $
    7.50
    
    
    $
    12.10
    
    
    $
    5.972006First Quarter
    
    $
    11.00
    
    
    $
    8.00
    
    
    $
    10.00
    
    
    $
    5.75
    
    
    $
    9.17
    
    
    $
    5.68Second Quarter
    
    $
    10.00
    
    
    $
    5.00
    
    
    $
    8.00
    
    
    $
    3.00
    
    
    $
    8.03
    
    
    $
    4.49Third Quarter
    
    $
    7.00
    
    
    $
    3.50
    
    
    $
    5.00
    
    
    $
    3.00
    
    
    $
    4.97
    
    
    $
    3.06Fourth Quarter
    
    $
    7.50
    
    
    $
    4.00
    
    
    $
    5.20
    
    
    $
    3.00
    
    
    $
    6.19
    
    
    $
    3.14
  DIVIDEND POLICY
   EQUITY COMPENSATION PLAN INFORMATION
  NUMBER OF SECURITIESREMAININGNUMBER OF
    
    
    
    
    
    AVAILABLE FOR FUTURESECURITIES
    
    
    
    
    
    ISSUANCE UNDERTO BE ISSUED
    
    WEIGHTED-
    
    EQUITY COMPENSATIONUPON
    
    AVERAGE
    
    PLANSEXERCISE OF
    
    EXERCISE
    
    (EXCLUDING SECURITIESOUTSTANDING
    
    PRICE OF
    
    REFLECTED INOPTIONS
    
    OUTSTANDING OPTIONS
    
    COLUMN (A)PLAN CATEGORY:
    
    (A)
    
    (B)
    
    (C)Equity compensation plans approved by
security holders:The 2000 Employee Stock Option Plan
    
    
    232,181
    
    
    $
    18.81
    
    
    
    67,221The 2000 Non-employee Director Stock Option Plan
    
    
    23,667
    
    
    $
    14.66
    
    
    
    34,2502005 Employee Restricted Stock Plan
    
    N/A
    
    N/A
    
    
    119,0002005 Non-employee Director Restricted Stock Plan
    
    N/A
    
    N/A
    
    
    24,848Equity compensation plans not approved by
security holders:
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
 
 Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
  9




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CATUITYS BUSINESS
  OVERVIEW OF SIGNIFICANT ACTIVITIES
   GrossCashPreferred
    
    ProceedsInvestor
    
    Senior Notes
    
    Warrants
    
    Shares
    
    to CatuityGottbetter Capital Master, Ltd.
    
    $
    1,111,112
    
    
    
    220,459
    
    
    
    432.10
    
    
    $
    1,388,890BridgePointe Master Fund Ltd.
    
    
    688,888
    
    
    
    136,684
    
    
    
    267.90
    
    
    
    861,110Totals
    
    $
    1,800,000
    
    
    
    357,143
    
    
    
    700.00
    
    
    $
    2,250,000
     10




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FISCAL YEAR ENDED 2006 COMPARED TO 2005
  Total revenues
 Changefrom 2005Revenue
    
    2006
    
    2005
    
    to 2006Processing
    
    $
    1,410,000
    
    
    $
    511,000
    
    
    $
    899,000Service
    
    
    355,000
    
    
    
    405,000
    
    
    
    (50,000
    )License fees
    
    
    184,000
    
    
    
    65,000
    
    
    
    119,000Total
    
    $
    1,949,000
    
    
    $
    981,000
    
    
    $
    968,000
 The cost of processing and service revenues
 Changefrom 2005Cost of Revenue
    
    2006
    
    2005
    
    to 2006Processing
    
    $
    1,771,000
    
    
    $
    533,000
    
    
    $
    1,238,000Service
    
    
    299,000
    
    
    
    233,000
    
    
    
    66,000License fees
    
    
    
    
    
    
    21,000
    
    
    
    (21,000
    )Amortization
of intellectual property
    
    
    176,000
    
    
    
    50,000
    
    
    
    126,000Stock-based Compensation
    
    
    55,000
    
    
    
    20,000
    
    
    
    35,000Total
    
    $
    2,301,000
    
    
    $
    857,000
    
    
    $
    1,444,000
 Cost of license revenue
 Research and Development
 Sales and marketing expenses
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General and Administrative (G&A) expenses
 Other
Income
 LIQUIDITY AND CAPITAL RESOURCES
             CRITICAL ACCOUNTING POLICIES AND ASSUMPTIONS
  REVENUE RECOGNITION
          12




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DEFERRED TAX ASSETS
  STOCK-BASED COMPENSATION
  RECENT ACCOUNTING PRONOUNCEMENTS
     13




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FACTORS AFFECTING OUR OPERATING RESULTS, OUR BUSINESS AND OUR SHARE PRICE
  Risks Related to Our Business
 WE
ANTICIPATE THAT OUR BUSINESS WILL NOT GENERATE SUFFICIENT CASH FLOW
TO SUSTAIN THE CURRENT LEVEL OF OPERATIONAL ACTIVITY AND ADDITIONAL CASH
RESOURCES WILL BE NEEDED
       WE HAVE A HISTORY OF LOSSES
  rd
 WE MAY BE ADVERSELY AFFECTED IF WE FAIL TO RETAIN KEY PERSONNEL AND ATTRACT NEW QUALIFIED PERSONNEL
  WE WILL BE ADVERSELY AFFECTED IF OUR CALS PRODUCT DOES NOT ACHIEVE MARKET ACCEPTANCE
  FAILURE TO OBTAIN CERTIFICATIONS IN A TIMELY MANNER
  SALES ACTIVITIES WITH PROSPECTIVE CUSTOMERS MAY NOT GENERATE REVENUE FOR THE COMPANY
  PLANNED
ACQUISITIONS MAY NOT OCCUR OR MAY NOT GENERATE ANTICIPATED RESULTS
  14




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Risks Related To Our Industry
 COMPETITION IN THE APPLICATION SOFTWARE INDUSTRY COULD HARM OUR BUSINESS
   -
    
    conduct more extensive marketing campaigns to capture market share;-
    
    provide more attractive incentive and pricing packages to customers;-
    
    negotiate more favorable contracts with existing and potential employees and strategic partners;-
    
    establish cooperative relationships among themselves or with third parties, including large
Internet participants, to increase the ability of their products and services to address the
needs of prospective customers;-
    
    bundle their products with other software or hardware, including operating systems and
browsers, in a manner that may discourage users from purchasing products offered by us;-
    
    establish cooperative relationships with our current or potential competitors, thereby
limiting our ability to sell our products through particular reseller channels; and-
    
    more quickly develop new products and services or enhance existing products and services.
  NEW TECHNOLOGIES COULD RENDER OUR PRODUCT OBSOLETE
  WE MAY FACE RISKS RELATED TO THE STORAGE OR PROVISION OF INACCURATE OR CONFIDENTIAL INFORMATION
    15




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WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR USE OR MISUSE OF OUR PRODUCT
  WE MAY FACE RISKS RELATED TO THE USE OF ELECTRONIC PAYMENT CARDS
  WE MAY BE AFFECTED BY POTENTIAL PRIVACY REGULATION
  WE MAY FACE INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
   WE MAY FACE INTELLECTUAL PROPERTY CHALLENGES
  16




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Corporate and Market Risks
 OUR TRADING VOLUME MAY BE LOW AND OUR SHARE PRICE MAY BE VOLATILE
   -
    
    variations in actual or anticipated quarterly or annual operating results;-
    
    changes in financial estimates by securities analysts;-
    
    changes in market valuations of loyalty software & service companies;-
    
    announcements by us of significant contracts, reseller arrangements, strategic
partnerships, joint ventures or capital commitments;-
    
    additions or departures of key personnel;-
    
    sales of common stock or termination of stock transfer restrictions; and-
    
    fluctuations in stock market price and volume, which are particularly common among
securities of small technology companies.
  WE MAY BE SUBJECT TO ARBITRAGE RISKS
  COMPLYING WITH NASDAQS CONTINUED LISTING REQUIREMENTS
    17




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(3)
    
    a market value of public float of $1,000,000;(4)
    
    a minimum bid price of $1.00 per share;(5)
    
    at least two market makers;(6)
    
    at least 300 round lot stockholders; and(7)
    
    compliance with NASDAQ corporate governance rules.
 CERTAIN DELAWARE ANTI-TAKEOVER PROVISIONS MAY PRODUCE RESULTS DISFAVORED BY OUR STOCKHOLDERS
            CHANGES IN, OR INTERPRETATIONS OF, ACCOUNTING RULES AND REGULATIONS, SUCH AS EXPENSING OF STOCK
OPTIONS, COULD RESULT IN UNFAVORABLE ACCOUNTING CHARGES
  THE APPLICATION OF THE PENNY STOCK RULES COULD ADVERSELY AFFECT TRADING IN OUR COMMON STOCK
  18




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NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDERS ABILITY TO BUY AND SELL OUR STOCK
  WE DO NOT ANTICIPATE PAYING ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH MAY REDUCE YOUR
RETURN ON AN INVESTMENT IN OUR COMMON STOCK
  SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE
   WE MAY
RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD
DILUTE EXISTING OWNERSHIP
INTEREST AND VOTING RIGHTS
   19




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OUR INCORPORATION DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS CONSIDER
FAVORABLE AND COULD ALSO LIMIT THE MARKET PRICE OF YOUR STOCK, WHICH MAY INHIBIT AN ATTEMPT BY OUR
STOCKHOLDERS TO CHANGE OUR DIRECTION OR MANAGEMENT
  -
    
    authorize our board of directors to determine the rights, preferences,
privileges and restrictions granted to, or imposed upon, the preferred
stock and to fix the number of shares constituting any series and the
designation of such series without further action by our stockholders;-
    
    establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can
be acted upon by stockholders at a meeting; and
    OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING MAY NOT BE EFFECTIVE, AND OUR INDEPENDENT AUDITORS
MAY NOT BE ABLE TO CERTIFY AS TO THEIR EFFECTIVENESS, WHICH COULD HAVE A SIGNIFICANT AND ADVERSE
EFFECT ON OUR BUSINESS
  THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY
UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT AND LIMITED OPERATING HISTORY.
 20




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Item 7. Financial Statements
  PageReport of Independent Registered Public Accounting Firm
    
    
    22Consolidated Balance Sheets
    
    
    23Consolidated Statements of Operations
    
    
    24Consolidated Statements of Cash Flows
    
    
    25Consolidated Statements of Stockholders Equity
    
    
    26Notes to Consolidated Financial Statements
    
    
    27
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Report of Independent Registered Public Accounting Firm
 
         22




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DECEMBER 312006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,993,910
    
    
    $
    958,746Short term investments
    
    
    
    
    
    
    2,245,839Accounts receivable-trade, less allowance of $250,000 in 2006, and $122,000 in 2005
    
    
    390,116
    
    
    
    543,200Restricted cash
    
    
    85,523
    
    
    
    81,443Non-income taxes receivable
    
    
    290,711
    
    
    
    Prepaid expenses and other
    
    
    250,899
    
    
    
    199,557Total Current Assets
    
    
    3,011,159
    
    
    
    4,028,785Long Term Assets:Property and equipment, net
    
    
    294,424
    
    
    
    273,941Notes receivable
    
    
    35,548
    
    
    
    Deferred financing costs, net
    
    
    236,876
    
    
    
    Goodwill
    
    
    3,142,420
    
    
    
    3,004,667Other intangible assets, net
    
    
    1,532,898
    
    
    
    1,811,752Total Long Term Assets
    
    
    5,242,166
    
    
    
    5,090,360Total Assets
    
    $
    8,253,325
    
    
    $
    9,119,145LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    337,887
    
    
    $
    175,643Deferred revenue
    
    
    80,957
    
    
    
    114,721Accrued compensation
    
    
    345,473
    
    
    
    98,160Taxes, other than income
    
    
    86,829
    
    
    
    98,330Other accrued expenses
    
    
    263,459
    
    
    
    150,412Senior
convertible notes, net of discount of $1,794,710 in 2006
    
    
    5,290
    
    
    
    Trust liability
    
    
    85,523
    
    
    
    81,443Total Current Liabilities
    
    
    1,205,418
    
    
    
    718,709Long Term Liabilities:Leasing liability
    
    
    
    
    
    
    4,861Accrued compensation
    
    
    39,036
    
    
    
    56,009Total Long Term Liabilities
    
    
    39,036
    
    
    
    60,870Total Liabilities
    
    
    1,244,454
    
    
    
    779,579Commitments and Contingencies (note 4)
    
    
    
    
    
    
    Stockholders Equity:Common stock
 $.001 par value; Authorized  6,666,667 shares: 2,242,343
shares issued and 2,076,691 shares
outstanding in 2006, 2,111,807 issued and 2,069,039 outstanding in 2005
    
    
    2,242
    
    
    
    2,112Preferred stock  $0.001 par value; Authorized  666,667 shares; 700 shares Series A issued and outstanding in 2006
    
    
    450,187
    
    
    
    Additional paid-in capital
    
    
    48,299,469
    
    
    
    45,797,503Stockholder loans
    
    
    
    
    
    
    (16,738
    )Deferred equity compensation
    
    
    
    
    
    
    (131,566
    )Accumulated other comprehensive income
    
    
    193,636
    
    
    
    (65,589
    )Accumulated deficit
    
    
    (41,936,663
    )
    
    
    (37,246,156
    )Total Stockholders Equity
    
    
    7,008,871
    
    
    
    8,339,566Total Liabilities and Stockholders Equity
    
    $
    8,253,325
    
    
    $
    9,119,145
  23




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YEAR ENDED DECEMBER 31,2006
    
    
    2005Revenues:Processing
    
    $
    1,409,698
    
    
    $
    510,826Service
    
    
    354,815
    
    
    
    404,611License
    
    
    184,287
    
    
    
    65,485Total revenues
    
    
    1,948,800
    
    
    
    980,922Cost of revenue and other operating expenses:Cost of processing revenue
    
    
    1,770,500
    
    
    
    533,163Cost of service revenue
    
    
    298,632
    
    
    
    233,056Cost of license revenue
    
    
    
    
    
    
    21,384Cost of revenue  amortization of intangibles
    
    
    176,407
    
    
    
    49,886Cost of revenue  stock-based compensation
    
    
    54,527
    
    
    
    19,770Research and development
    
    
    465,321
    
    
    
    728,108Research and development  stock-based compensation
    
    
    30,585
    
    
    
    23,571Sales and marketing
    
    
    992,806
    
    
    
    592,498Sales and marketing  amortization of intangibles
    
    
    137,368
    
    
    
    54,813Sales and marketing  stock-based compensation
    
    
    742
    
    
    
    35,305General and administrative
    
    
    2,136,279
    
    
    
    1,685,152General and administrative  amortization of intangibles
    
    
    53,713
    
    
    
    16,850General and administrative  stock based compensation
    
    
    409,338
    
    
    
    77,048Total costs and expenses
    
    
    6,526,218
    
    
    
    4,070,604Operating loss
    
    
    (4,577,418
    )
    
    
    (3,089,682
    )Other income
    
    
    270,469
    
    
    
    Interest
income, net of interest expense of $31,886 in 2006
    
    
    74,211
    
    
    
    108,652Net loss
    
    $
    (4,232,738
    )
    
    $
    (2,981,030
    )Preferred stock dividends
    
    
    (457,769
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (4,690,507
    )
    
    $
    (2,981,030
    )Net loss attributable to common stockholders per share  basic & diluted
    
    $
    (2.26
    )
    
    $
    (2.48
    )Weighted average shares outstandingbasic & diluted
    
    
    2,072,789
    
    
    
    1,203,584
  24




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##### Table of Contents



YEAR ENDED DECEMBER 31,2006
    
    
    2005Cash flows from operating activities:Net Loss
    
    $
    (4,232,738
    )
    
    $
    (2,981,030
    )Adjustments used to reconcile net loss to net cash used in operating activities:Stock based compensation
    
    
    495,192
    
    
    
    155,694Depreciation and amortization
    
    
    508,197
    
    
    
    217,751In process research and development
    
    
    
    
    
    
    205,900Changes in assets and liabilities:Accounts receivable
    
    
    153,084
    
    
    
    (54,770
    )Accounts payable
    
    
    162,244
    
    
    
    (167,330
    )Deferred revenue
    
    
    (33,764
    )
    
    
    (78,618
    )Accrued expenses and other liabilities
    
    
    336,392
    
    
    
    (344,740
    )Other assets
    
    
    (381,687
    )
    
    
    245,453Net cash used in operating activities
    
    
    (2,993,080
    )
    
    
    (2,801,690
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (154,424
    )
    
    
    (52,691
    )Short Term Investments
    
    
    2,245,839
    
    
    
    (2,245,839
    )Acquisition net of cash acquired
    
    
    
    
    
    
    (2,810,280
    )Net cash
provided by (used in) investing activities
    
    
    2,091,415
    
    
    
    (5,108,810
    )Cash flows from financing activities:Issue of common stock, net of expenses
    
    
    
    
    
    
    6,460,184Proceeds from issuance of convertible notes, preferred stock and warrants, net of
expenses
    
    
    1,911,605
    
    
    
    Repayment of fractional shares related to reverse stock split
    
    
    (31
    )
    
    
    (1,104
    )Cash
Dividends paid on preferred stock
    
    
    (7,582
    )
    
    
    Net cash provided by financing activities
    
    
    1,903,992
    
    
    
    6,459,080Foreign exchange effect on cash
    
    
    32,837
    
    
    
    (150,517
    )Net increase/(decrease) in cash and cash equivalents
    
    
    1,035,164
    
    
    
    (1,601,937
    )Cash and cash equivalents, beginning of period
    
    
    958,746
    
    
    
    2,560,683Cash and cash equivalents, end of period
    
    $
    1,993,910
    
    
    $
    958,746Non cash investing & financing activities:Shares Issued in Acquisition
    
    $
    
    
    
    $
    2,512,000
  25




---



##### Table of Contents



Additional
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Preferred
    
    
    Paid in Capital
    
    
    Shareholder
    
    
    Equity
    
    
    Accumulated Other
    
    
    Accumulated
    
    
    Stockholders(at par)
    
    
    Stock
    
    
    Amount
    
    
    Loans
    
    
    Compensation
    
    
    Comprehensive Income
    
    
    Deficit
    
    
    EquityShares
    
    
    AmountBalances at December 31, 2004
    
    
    778,184
    
    
    $
    778
    
    
    $
    
    
    
    $
    36,603,127
    
    
    $
    (79,533
    )
    
    $
    
    
    
    $
    96,656
    
    
    $
    (34,265,126
    )
    
    $
    2,355,902Exercise of options
    
    
    1,282
    
    
    
    1
    
    
    
    
    
    
    
    6,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,301Restricted stock granted
    
    
    42,768
    
    
    
    43
    
    
    
    
    
    
    
    242,200
    
    
    
    
    
    
    
    (242,243
    )
    
    
    
    
    
    
    
    
    
    
    Capital raise & acquisition shares
    
    
    1,305,000
    
    
    
    1,305
    
    
    
    
    
    
    
    8,964,758
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,966,063Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,017Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,677
    
    
    
    
    
    
    
    
    
    
    
    110,677Repayment of fractional shares related to
stock split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,104
    )Adjust shareholder loan to fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,795
    )
    
    
    62,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Buyback of shares
    
    
    (15,427
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,981,030
    )
    
    
    (2,981,030
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162,245
    )
    
    
    
    
    
    
    (162,245
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,143,275
    )Balances at December 31, 2005
    
    
    2,111,807
    
    
    
    2,112
    
    
    
    
    
    
    
    45,797,503
    
    
    
    (16,738
    )
    
    
    (131,566
    )
    
    
    (65,589
    )
    
    
    (37,246,156
    )
    
    
    8,339,566Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495,192Restricted stock granted, net of forfeitures
    
    
    130,536
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130Issuance of
preferred stock, senior convertible notes and warrants
    
    
    
    
    
    
    
    
    
    
    450,187
    
    
    
    2,250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450,187
    )
    
    
    2,250,000Costs
attributable to issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,752
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,752
    )Repayment of fractional shares related to
stock split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Adjust shareholder loan to fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,738
    )
    
    
    16,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,582
    )
    
    
    (7,582
    )Adoption of FAS 123R effective 1/1/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131,705
    )
    
    
    
    
    
    
    131,566
    
    
    
    139
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,232,738
    )
    
    
    (4,232,738
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259,086
    
    
    
    
    
    
    
    259,086Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,973,652
    )Balances at December 31, 2006
    
    
    2,242,343
    
    
    $
    2,242
    
    
    $
    450,187
    
    
    $
    48,299,469
    
    
    $
    
    
    
    $
    
    
    
    $
    193,636
    
    
    $
    (41,936,663
    )
    
    $
    7,008,871
  26




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##### Table of Contents



NOTE 1. DESCRIPTION OF BUSINESS
  NOTE 2. SUMMARY OF ACCOUNTING POLICIES
 PRINCIPLES OF CONSOLIDATION
  USE OF ESTIMATES
  REVENUE RECOGNITION
          27




---



##### Table of Contents



RECLASSIFICATIONS
  CASH AND CASH EQUIVALENTS
  SHORT TERM INVESTMENTS
  ACCOUNTS RECEIVABLE
  CONCENTRATIONS OF CREDIT RISK
  PROPERTY AND EQUIPMENT
  FOREIGN CURRENCY TRANSLATION
  28




---



##### Table of Contents



GOODWILL AND INTANGIBLE ASSETS
  BUSINESS COMBINATIONS
  RESEARCH AND DEVELOPMENT
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  INCOME TAXES
  STOCK-BASED COMPENSATION
  29




---



##### Table of Contents



NET
LOSS PER SHARE


OTHER INCOME




RECENT ACCOUNTING PRONOUNCEMENTS










NOTE 3. PROPERTY AND EQUIPMENT




DECEMBER 31,2006
    
    
    2005Computer equipment
    
    $
    1,035,295
    
    
    $
    858,821Leasehold improvements
    
    
    70,736
    
    
    
    65,431Office furniture and equipment
    
    
    108,682
    
    
    
    98,536Capital Leases
    
    
    73,054
    
    
    
    67,575Gross property and equipment
    
    $
    1,287,767
    
    
    $
    1,090,363Less accumulated depreciation
    
    
    (993,343
    )
    
    
    (816,422
    )Net property and equipment
    
    $
    294,424
    
    
    $
    273,941


30



---



##### Table of Contents



NOTE 4. COMMITMENTS AND CONTINGENCIES
    ContractualObligations:
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Operating Leases
    
    $
    95,314
    
    
    $
    93,040
    
    
    $
    2,274
    
    
    
    
    
    
    
    
    
    
    
    Capital Leases
    
    
    9,622
    
    
    
    9,622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    104,936
    
    
    $
    102,662
    
    
    $
    2,274
    
    
    
    
    
    
    
    
    
    
    
    
  NOTE 5. STOCKHOLDERS EQUITY
 2006 Private Placement
       31




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##### Table of Contents



2005 Private Placements
    Preferred Stock
      Warrants
   32




---



##### Table of Contents



NOTE 6. STOCK-BASED COMPENSATION
    2006
    
    2005Risk Free Interest Rate
    
    
    4.554.98%
    
    
    
    3.00
    %Expected Dividend Yield
    
    
    
    
    
    
    Expected Lives (years)
    
    
    2.5  5
    
    
    
    1.00Weighted Avg. Expected Volatility
    
    
    95.31%Expected Volatility
    
    
    90.4  107.6
    %
    
    
    96.8%
  33




---



##### Table of Contents



Employee and Director stock-based compensation plans
  Date ofShares
    
    StockholderPlan Name
    
    Authorized
    
    ApprovalThe 2000 Employee Stock Option Plan
(the ESOP)
    
    
    300,000
    
    
    March 16, 2000The 2000 Non-employee Director Stock Option
Plan (the DSOP)
    
    
    58,667
    
    
    May 21, 2001The 2005
Employee Restricted Stock Plan
(the ERSP)
    
    
    267,000
    
    
    July 18, 2005The 2005 Non-employee Director Restricted
Stock Plan (the DRSP)
    
    
    50,000
    
    
    July 18, 2005
   Year
ended December 31, 2006SFASAs if under
    
    123(R)APB 25
    
    adjustments
    
    As ReportedNet loss attributable to common stockholders
    
    $
    (4,381,872
    )
    
    $
    (308,635
    )
    
    $
    (4,690,507
    )Net loss attributable to
common stockholders per share: basic and diluted
    
    $
    (2.11
    )
    
    $
    (0.15
    )
    
    $
    (2.26
    )
  2005Net Loss as Reported
    
    $
    (2,981,030
    )Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (305,098
    )Pro forma net loss
    
    $
    (3,286,128
    )Loss per share:basic &
diluted  as reported
    
    $
    (2.48
    )basic &
diluted  pro forma
    
    $
    (2.73
    )
 Stock Options
  34




---



##### Table of Contents



WeightedaverageexerciseShares
    
    
    priceOutstanding Options at December 31, 2004
    
    
    53,630
    
    
    $
    91.02Granted
    
    
    182,802
    
    
    
    7.00Forfeited
    
    
    (29,482
    )
    
    
    49.02Exercised
    
    
    (1,282
    )
    
    
    4.80Outstanding Options at December 31, 2005
    
    
    205,668
    
    
    
    23.16Granted
    
    
    87,500
    
    
    
    10.08Forfeited
    
    
    (37,320
    )
    
    
    11.17Outstanding Options at December 31, 2006
    
    
    255,848
    
    
    $
    18.62
   Weightedaveragegrant dateShares
    
    
    fair valueNonvested options at December 31, 2005
    
    
    63,364
    
    
    $
    5.21Granted
    
    
    87,500
    
    
    
    4.05Vested
    
    
    (34,159
    )
    
    
    3.81Forfeited
    
    
    (27,610
    )
    
    
    4.77Nonvested options at December 31, 2006
    
    
    89,095
    
    
    $
    4.55
  35




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    WeightedNumber
    
    Average
    
    Weighted
    
    Number
    
    Average
    
    WeightedOutstanding
    
    Remaining
    
    Average
    
    Outstanding
    
    Remaining
    
    AverageRange of
    
    at Dec. 31,
    
    Contractual
    
    Exercise
    
    at Dec. 31,
    
    Contractual
    
    ExerciseExercise Price
    
    2006
    
    Life (Years)
    
    Price
    
    2006
    
    Life (Years)
    
    Price$3.11  4.27
    
    
    99,414
    
    
    
    5.01
    
    
    $
    3.97
    
    
    
    89,414
    
    
    
    4.40
    
    
    $
    4.075.31  7.50
    
    
    38,433
    
    
    
    2.64
    
    
    
    6.34
    
    
    
    20,838
    
    
    
    2.85
    
    
    
    6.8110.52  33.60
    
    
    87,333
    
    
    
    6.44
    
    
    
    10.24
    
    
    
    25,833
    
    
    
    6.24
    
    
    
    14.9139.60  178.38
    
    
    30,668
    
    
    
    2.29
    
    
    
    106.93
    
    
    
    30,668
    
    
    
    2.29
    
    
    
    106.93255,848
    
    
    
    3.53
    
    
    $
    18.62
    
    
    
    166,753
    
    
    
    3.12
    
    
    $
    25.01
  Restricted Stock
   WeightedaveragegrantdateShares
    
    
    fair valueUnvested restricted stock at December 31, 2004
    
    
    --
    
    
    $
    --Granted
    
    
    42,768
    
    
    
    10.71Unvested restricted stock at December 31, 2005
    
    
    42,768
    
    
    
    10.71Granted
    
    
    140,384
    
    
    
    5.69Vested
    
    
    (7,500
    )
    
    
    11.62Forfeited
    
    
    (10,000
    )
    
    
    11.62Unvested restricted stock at December 31, 2006
    
    
    165,652
    
    
    $
    6.50
  36




---



##### Table of Contents



NOTE 7. SENIOR CONVERTIBLE NOTES
     NOTE 8. ACQUISITION
    37




---



##### Table of Contents



Condensed Balance SheetCurrent Assets
    
    $
    840,865Long Term Assets
    
    
    164,330Other Intangible Assets & In-process R&D
    
    
    2,139,200Goodwill Including Acquisition Cost
    
    
    3,004,667Total Assets
    
    
    6,149,062Liabilities
    
    
    (680,835
    )Purchase Price
    
    $
    5,468,227Transaction Cash & EquityCash Paid to Loyalty Magic Stockholders
    
    $
    2,700,000Shares of Catuity Stock @ $7.50*
    
    
    2,512,000Acquisition and Other Costs
    
    
    256,227Purchase Price
    
    $
    5,468,227
 
 *
    
    The shares were valued at the price used for the public offering, or $7.50 per share, that
was completed on the same day as the acquisition. Management determined that this represented
the fair value of the shares at the time the transaction was finalized, due to the size of
the capital raise, the number of shares issued and the high volatility of our stock price.   December 31, 2006
    
    December 31, 2005Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net BookCategory
    
    Cost
    
    Amortzation
    
    Value
    
    Cost
    
    Amortization
    
    ValueTrademarks
    
    $
    592,681
    
    
    $
    (26,368
    )
    
    $
    566,313
    
    
    $
    566,700
    
    
    $
    (6,296
    )
    
    $
    560,404Software
    
    
    674,363
    
    
    
    (226,294
    )
    
    
    448,069
    
    
    
    644,800
    
    
    
    (49,887
    )
    
    
    594,913Customer Contracts
    
    
    298,171
    
    
    
    (116,814
    )
    
    
    181,357
    
    
    
    285,100
    
    
    
    (30,991
    )
    
    
    254,109Customer
Relationships
    
    
    291,163
    
    
    
    (75,368
    )
    
    
    215,795
    
    
    
    278,400
    
    
    
    (23,823
    )
    
    
    254,577Non-compete
agreements
    
    
    165,557
    
    
    
    (44,193
    )
    
    
    121,364
    
    
    
    158,300
    
    
    
    (10,552
    )
    
    
    147,748Totals
    
    $
    2,021,935
    
    
    $
    (489,037
    )
    
    $
    1,532,898
    
    
    $
    1,933,300
    
    
    $
    (121,549
    )
    
    $
    1,811,751
  38




---



##### Table of Contents



YTD 12/31/2005(unaudited)Revenue
    
    $
    2,377,192Net loss
    
    
    (3,702,618
    )Net loss per
share  basic and diluted
    
    $
    (1.79
    )
 NOTE 9. INCOME TAXES
  YEAR ENDED DECEMBER 312006
    
    
    2005Domestic
    
    $
    (4,297,855
    )
    
    $
    (3,350,057
    )Foreign
    
    
    65,117
    
    
    
    369,027Loss before income taxes
    
    $
    (4,232,738
    )
    
    $
    (2,981,030
    )
  YEAR ENDED DECEMBER 312006
    
    
    2005Income taxes at statutory tax rate
    
    $
    (1,439,131
    )
    
    $
    (1,013,550
    )Utilization of operating loss carry forward
    
    
    (19,453
    )
    
    
    (110,708
    )Valuation allowance
    
    
    1,462,233
    
    
    
    1,139,019Other
    
    
    (3,649
    )
    
    
    (14,761
    )Provision for income taxes
    
    $
    
    
    
    $
    
 39




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##### Table of Contents



DECEMBER 312006
    
    
    2005Deferred tax assets:Net operating loss carry-forwards
    
    $
    13,564,462
    
    
    $
    12,059,673Other
    
    
    364,152
    
    
    
    108,188Total deferred tax assets
    
    
    13,928,614
    
    
    
    12,167,861Deferred tax liabilities:Intangibles
    
    
    (521,220
    )
    
    
    (616,080
    )Beneficial
conversion feature attributable to convertible notes
    
    
    (393,380
    )
    
    
    Total deferred tax liabilities
    
    
    (914,600
    )
    
    
    (616,080
    )Valuation allowance
    
    
    (13,014,014
    )
    
    
    (11,551,781
    )Total net deferred tax assets
    
    $
    
    
    
    $
    
  .
 NOTE 10. DEFINED CONTRIBUTION PLAN
   NOTE 11. RESTRICTED CASH
  40




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##### Table of Contents



NOTE 12. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
  2006
    
    
    2005Long-Lived
    
    
    Net
    
    
    Long-Lived
    
    
    NetAssets
    
    
    Revenues
    
    
    Assets
    
    
    RevenuesU.S.
    
    $
    145,513
    
    
    $
    235,563
    
    
    $
    84,906
    
    
    $
    77,618Australia
    
    
    148,911
    
    
    
    1,713,237
    
    
    
    189,035
    
    
    
    903,304Total
    
    $
    294,424
    
    
    $
    1,948,800
    
    
    $
    273,941
    
    
    $
    980,922
  NOTE 13. MANAGEMENTS PLANS
       NOTE
14. RELATED PARTY TRANSACTIONS
  41




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##### Table of Contents



Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 8A. Controls and Procedures
   
 PART III
 
 Item 9. Directors, Executive Officers,
Promoters and Control Persons and Corporate Governance;
 Compliance With Section 16(a) of the Exchange Act
  NAME
    
    AGE
    
    POSITION(S)Alexander S. Dawson
    
    
    63
    
    
    Chairman (1), (2), (3)Alfred H.(John) Racine III
    
    
    42
    
    
    Director, President and Chief Executive OfficerGeoffrey C. Wild
    
    
    67
    
    
    Director (1), (3)Donald C. Campion
    
    
    58
    
    
    Director (1), (2)Clifford W. Chapman Jr.
    
    
    38
    
    
    Director (2), (3)Debra R. Hoopes
    
    
    46
    
    
    Sr. Vice President, Chief Financial Officer, Treasurer and SecretaryGraham McStay
    
    
    40
    
    
    Managing Director of Loyalty Magic Pty. Ltd. (Australia)
 
 (1)
    
    Audit Committee(2)
    
    Compensation Committee(3)
    
    Governance and Nominating Committee   42




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##### Table of Contents



43




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##### Table of Contents



Number of Late
    
    # of Transactions notPerson
    
    Form 4 Reports in 2006
    
    Timely ReportedChris Leach, CEO Loyalty Magic
    
    
    1
    
    
    
    1Alfred Racine, CEO Catuity Inc.
    
    
    1
    
    
    
    1Geoff Wild, Board Member
    
    
    2
    
    
    
    2Donald Campion, Board Member
    
    
    2
    
    
    
    2Clifford Chapman, Board Member
    
    
    2
    
    
    
    2Alexander Dawson, Board Member
    
    
    2
    
    
    
    2John Lowry, CFO Catuity Inc.
    
    
    1
    
    
    
    1
   ETHICS AND CODES OF CONDUCT
  44




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##### Table of Contents



Item 10. Executive Compensation
 DIRECTOR AND EXECUTIVE COMPENSATION
  Summary Compensation Table
 (2)(1) Stock
    
    Option
    
    (3) All OtherSalary
    
    Awards
    
    Awards
    
    Compensation
    
    TotalName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Alfred H. (John) Racine, III, President and CEO
    
    
    2006
    
    
    
    253,365
    
    
    
    57,415
    
    
    
    174,398
    
    
    
    7,600
    
    
    
    491,778John H. Lowry, III, Vice President, CFO,
Secretary and Treasurer
    
    
    2006
    
    
    
    170,000
    
    
    
    52,152
    
    
    
    15,045
    
    
    
    113,668
    
    
    
    350,865Chris Leach CEO of Loyalty Magic
    
    
    2006
    
    
    
    134,150
    
    
    
    
    
    
    
    15,575
    
    
    
    
    
    
    
    149,725
 
 (1)
    
    The amount expensed per 123(R) in 2006 for stock awarded in 2006.(2)
    
    The amount expensed per 123(R) in 2006 for options awarded in 2005 and 2006.(3)
    
    For Mr. Lowry, includes $108,568 of salary and benefits
to be paid in 2007 in connection with his resignation on
January 2, 2007. Outstanding Equity Awards at Fiscal Yearend 2006
 Option Awards
    
    Stock AwardsMarketNumber of
    
    Number of
    
    
    
    
    
    
    
    
    
    Number
    
    ValueSecurities
    
    Securities
    
    
    
    
    
    
    
    
    
    of Shares
    
    of SharesUnderlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    or Units
    
    or UnitsUnexercised
    
    Unexercised
    
    
    
    
    
    Option
    
    of Stock
    
    of StockOptions (#)
    
    Options (#)
    
    Option Exercise
    
   Expiration
    
    That Have
    
    That HaveName
    
    
    Exercisable
    
    Unexercisable
    
    Price ($)
    
    Date
    
    Not Vested
    
    Not Vested77,914 @ $4.20(2) andAlfred H. (John) Racine, III
    
    
    
    102,914
    
    
    
    25,000
    
    
    
    50,000 @ $6.86
    (3)
    
    

    9-23-09 and 9-23-15
    
    
    
    100,000
    (1)
    
    

    444,0008,333 @ $7.50 andJohn H. Lowry, III
    
    
    
    13,333
    
    
    
    5,000
    
    
    
    10,000(5) @ $10.52
    
    
    6-20-10 and 9-20-15
    
    
    20,000
    (4)
    
    

    88,8005,000 @ $16.99 andChris Leach
    
    
    
    15,000
    
    
    
    
    
    
    
    10,000 @ $18.35
    (6)
    
    
    9-1-10
    
    
    
    
    
    
    
    
    
 45




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##### Table of Contents



(1)
    
    33,334 restricted shares will vest when the 30 day average closing price of our common
stock on the NASDAQ exceeds $15.00; 33,333 restricted shares will vest when the 30 day average
closing price of our common stock on the NASDAQ exceeds $20.625; and 33,333 restricted shares
will vest when the 20 day average closing price of our common stock on the NASDAQ exceeds
$26.25.(2)
    
    Vesting occurred between Nov. 2004 and Sep. 2005.(3)
    
    Option exercise price is $6.86 and vesting as follows: twenty-five percent (25%) on September
23, 2005 (actually vested on May 11, 2006 when stockholders approved it); twenty-five percent
(25%) on September 23, 2006; and the remaining fifty percent (50%) on September 23, 2007.(4)
    
    20,000 restricted shares at $11.62 vesting: 6,667 shares when the 30-day average closing
price of Catuity stock equals $15; 6,667 shares when the 30-day average closing price of
Catuity stock equals $20.625; and 6,666 shares when the 30-day average closing price of
Catuity stock equals $26.25.(5)
    
    10,000 options at $10.52 with 5,000 vesting Sept. 28, 2006 and 5,000 vesting on Sept. 28,
2007. 8,333 options at $7.50 and vested on Dec. 29, 2005.(6)
    
    Options to purchase 15,000 shares common stock vesting: 5,000 vested on September 1, 2005
with an exercise price equal to 25% above the 30-day average closing price on NASDAQ preceding
the grant ($16.99 USD); 5,000 vested on January 1, 2006 with an exercise price equal to 35%
above the 30-day average closing price on NASDAQ preceding the date of the grant ($18.35 USD);
and 5,000 vested on January 1, 2007 with the exercise price equal to 35% above the 30-day
average closing price on NASDAQ preceding the date of the grant ($18.35 USD.)         Director Compensation
 FeesEarnedor
    
    Stock (1)
    
    Option (2)Paid in
    
    Awards
    
    AwardsName
    
    Cash ($)
    
    ($)
    
    ($)
    
    Total ($)Alexander S. Dawson
    
    
    30,250
    
    
    
    30,254
    
    
    
    6,426
    
    
    
    66,930Alfred H.(John) Racine III
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Geoffrey C. Wild
    
    
    20,000
    
    
    
    19,996
    
    
    
    5,355
    
    
    
    45,531Donald C. Campion
    
    
    20,750
    
    
    
    20,753
    
    
    
    5,355
    
    
    
    46,858Clifford W. Chapman Jr.
    
    
    18,250
    
    
    
    18,251
    
    
    
    5,355
    
    
    
    41,856
 
 (1)
    
    Restricted stock awards vest on the first calendar day after the Company has achieved
profitability and positive cash flow for two consecutive fiscal quarters. Total shares
outstanding at YE 06 for Dawson: 8,745; Campion: 5,651; Chapman: 5,310; and Wild: 5,446.
 (2)
    
    The options outstanding at YE 06 for Dawson: 8,000; Campion: 5,000;
Chapman: 5,667; and
Wild: 5,000.
 46




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##### Table of Contents



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  AMOUNT AND NATURE OFCOMMON STOCK BENEFICIALLY
    
    PERCENTNAME AND ADDRESS OF BENEFICIAL OWNER
    OWNED (1)
    
    OWNED (2)A&B Venture FundLevel 13, 18 Bulletin Place
    
    
    251,467
    
    
    Direct
    
    
    11.2
    %Sydney, NSW 2000Alfred H. Racine III
    
    
    1,998
    
    
    Direct11 Altamont Circle, #51
    
    
    102,914
    
    
    Vested OptionsCharlottesville, VA 22902
    
    
    104,912
    
    
    Total
    
    
    4.7
    %Geoffrey C. Wild
    
    
    7,946
    
    
    DirectLevel 5, 132 Arthur Street
    
    
    5,000
    
    
    Vested OptionsNorth Sydney, NSW 2060
    
    
    12,946
    
    
    Total
    
    
    *Alexander S. Dawson
    
    
    29,745
    
    
    Direct38 McLeay Street
    
    
    8,000
    
    
    Vested OptionsPotts Point, NSW 2011 Australia
    
    
    37,745
    
    
    Total
    
    
    1.7
    %John H. Lowry III (3)
    
    
    20,422
    
    
    Direct21972 Heatheridge
    
    
    13,333
    
    
    Vested OptionsNorthville, MI 48167
    
    
    33,755
    
    
    Total
    
    
    1.5
    %Donald C. Campion
    
    
    7,628
    
    
    Direct3747 Loch Bend Dr.
    
    
    5,000
    
    
    Vested OptionsCommerce, MI 48382
    
    
    12,628
    
    
    Total
    
    
    *Clifford W. Chapman Jr.
    
    
    18,634
    
    
    Direct10 Warren Ave.
    
    
    5,667
    
    
    Vested OptionsSpring Lake, NJ 07762
    
    
    24,301
    
    
    Total
    
    
    1.1
    %Chris P. Leach
    
    
    28,409
    
    
    Direct23 Grover Ave.
    
    
    10,000
    
    
    Vested Options
    
    
    1.7
    %Cromer, NSW 2099
    
    
    38,409
    
    
    TotalAll directors and executive officers as a
    
    
    114,782
    
    
    Directgroup (7 persons)
    
    
    149,914
    
    
    Vested Options
    
    
    11.8
    %264,696
    
    
    Total
 
 (1)
    
    Beneficial ownership is determined in accordance with the SEC rules and generally includes
voting or investment power with respect to securities. Shares of common stock subject to
options, warrants or other rights to purchase common shares which are currently exercisable or
are exercisable within 60 days after December 31, 2006 are deemed vested and outstanding for
purposes of computing the percentage ownership of any person. Except as indicated by footnotes
and subject to community property laws, where applicable, the persons named above have sole
voting and investment power with respect to all shares of Common Stock shown as beneficially
owned by them. Share data does not include any shares the beneficial ownership of which has
been disclaimed pursuant to SEC Rules. Restricted stock held by the beneficial owner is
included in the direct holdings in the above table. 47




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##### Table of Contents



(2)
    
    Percentage of beneficial ownership is calculated on the basis of the amount of outstanding
securities plus those securities of the named person deemed to be outstanding under Rule 13d-3
(promulgated under the Exchange Act) by virtue of such securities being subject to rights to
acquire beneficial ownership within 60 days after December 31, 2006. An asterisk indicates
beneficial ownership of less than 1% of the common stock outstanding.(3)
    
    Mr. Lowry served as Chief Financial Officer during 2006, stepping down from that position on
January 2, 2007. 
 Item 12.
Certain Relationships and Related Transactions, and Director
Independence
     
 Item 13. Exhibits
  ExhibitNumber
    
    Description3.1
    
    Registrants Certificate of Incorporation, which appears as
Exhibit 3.3 to Registrants Form 10-12G filed March 21,
2000, which is incorporated herein by reference.3.2
    
    Registrants Certificate of Amendment to the Certificate of
Incorporation, which appears as Exhibit 3.4 to Registrants
Form 10-12G filed March 21, 2000, which is incorporated
herein by reference.3.3
    
    Registrants Certificate of Designations for Series A
Convertible Preferred Stock, which appears as Exhibit 3.1
to Registrants Form 8-K filed September 22, 2006, which is
incorporated herein by reference.3.4
    
    Registrants By-Laws, which appears as Exhibit 3.5 to
Registrants Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.3.5
    
    Certificate of Registration of Card Technologies Australia
Limited, which appears as Exhibit 3.1 to Registrants Form
10-12G filed March 21, 2000, which is incorporated herein
by reference.3.6
    
    Certificate of Registration on change of name from Card
Technologies Australia Limited to Chip Application
Technologies Limited, which appears as Exhibit 3.2 to
Registrants Form 10-12G filed March 21, 2000, which is
incorporated herein by reference.3.7
    
    Bylaws of Catuity, Inc. (formerly Novatec Inc.) as amended
June 25, 2001, which appears as Exhibit 3(ii) to
Registrants Form 10-Q for the quarter ended June 30, 2001,
which is incorporated herein by reference.3.8
    
    Bylaws of Catuity Inc. (formerly Novatec Inc.) as amended
effective September 1, 2004, which appears as Exhibit 3(g)
to Registrants Form 10-Q for the quarter ended June 30,
2004, which is incorporated herein by reference.3.9
    
    Certificate of Amendment of Amended Certificate of
Incorporation of Catuity Inc. which appears as Exhibit 3(h)
to Registrants Form 10-K for the year ended December 31,
2004, which is incorporated herein by reference.10.1
    
    Registrants 2000 Director Stock Option Plan, which appears
as Exhibit 4.2 to Registrants Form S-8 filed December 20,
2000, which is incorporated herein by reference.*10.2
    
    Employment agreement of John H. Lowry III, which appears as
Exhibit 10.10 to Registrants Form 10-12G filed March 21,
2000, which is incorporated herein by reference.*
 48




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##### Table of Contents



ExhibitNumber
    
    Description10.3
    
    Amendment to John H. Lowry III Employment Agreement with
Catuity Inc., which appears as Exhibit 10(d-1) to
Registrants Form 10-Q for the quarter ended
June 30, 2004, which is incorporated herein by reference. *10.4
    
    Form of Indemnification Agreement, which appears as Exhibit
10.24 to Registrants Form 10-12G filed March 21, 2000,
which is incorporated herein by reference.10.5
    
    Form of Stock option Plan and Form of Stock Option Agreement
under Plan, which appears as Exhibit 10.25 to Registrants
Form 10-12G filed March 21, 2000, which is incorporated
herein by reference.*10.6
    
    Catuity, Inc. 2000 Director Stock Option Plan as approved
by the Shareholders of Catuity, Inc. on May 23, 2001, which
appears as Exhibit 10.2(bb) to Registrants Form 10-Q for
the quarter ended June 30, 2001, which is incorporated
herein by reference.*10.7
    
    Amendment to Stock Option Plan, as approved by the
Shareholders of Catuity, Inc. on May 24, 2001, which
appears as Exhibit 10(s) to Registrants Form 10-K for the
year ended December 31, 2001, which is incorporated herein
by reference. *10.8
    
    Consulting agreement between Visa U.S.A and Catuity, Inc.,
signed November 17, 2000, which appears as Exhibit 10(t) to
Registrants form 10-K for the year ended December 31,
2001, which is incorporated herein by reference.10.9
    
    Catuity, Inc. 2002 Executive Stock Purchase Plan, which
appears as Exhibit 4.1 to Registrants Form S-8 filed
December 6, 2002, which is incorporated here in by
reference.*10.10
    
    Catuity, Inc. 2003 Executive Director Stock Purchase Plan
which appears as exhibit 10(v) to Registrants Form 10-K
for the year ended December 31, 2003, which is incorporated
herein by reference10.11
    
    Employment Agreement of Alfred H. Racine, with Catuity Inc.
dated September 23, 2004, which appears as exhibit 10(w) to
Registrants Form 8-K filed September 28, 2004, which is
incorporated herein by reference *10.12
    
    Nonqualified Stock Option Agreement with Alfred H. Racine
approved by the Shareholders of Catuity Inc. on July 18,
2005, which appears as Appendix A to Registrants proxy
dated June 6, 2005, which is incorporated herein by
reference.*10.13
    
    Catuity Inc. 2005 Employee Restricted Stock Plan approved
by the Shareholders of Catuity Inc. on July 18, 2005, which
appears as Appendix B to Registrants proxy dated June 6,
2005, which is incorporated herein by reference.*10.14
    
    Catuity Inc. 2005 Nonemployee Director Restricted Stock
Plan approved by the Shareholders of Catuity Inc. on July
18, 2005, which appears as Appendix C to Registrants proxy
dated June 6, 2005, which is incorporated herein by
reference.*10.15
    
    Amendment dated September 21, 2005 to Alfred H. Racine
employment agreement with Catuity Inc. dated September 23,
2004, which appears as exhibit 10(a) to Registrants Form
10-Q for the quarter ended September 30, 2005, which is
incorporated herein by reference.*10.16
    
    Amendment dated September 21, 2005 to John H. Lowry
employment agreement with Catuity Inc. dated April 18,
2000, which appears as exhibit 10(b) to Registrants Form
10-Q for the quarter ended September 30, 2005, which is
incorporated herein by reference.*10.17
    
    Agreement between Catuity Inc. and MIA Pty. Ltd. and Chris
Leach, individually for Management services dated August
31, 2005, which appears as exhibit 10(c) to Registrants
Form 10-Q for the quarter ended September 30, 2005, which
is incorporated herein by reference.*10.18
    
    Amendment dated December 21, 2005, to Alfred H. Racine III
Employment Agreement With Catuity Inc. Dated September 23,
2004 As Amended Effective September 7, 2005.*10.19
    
    Employment Agreement of Debra Hoopes with Catuity Inc.
dated December 6, 2006, which appears as exhibit 10.1 to
Registrants Form 8-K filed December 12, 2006, which is
incorporated herein by reference *10.20
    
    Amendment dated January 24, 2007 to Employment Agreement of
Debra Hoopes with Catuity Inc. dated December 6, 2006*10.21
    
    Securities Purchase Agreement for the Senior Notes,
Preferred Shares and Warrants, dated November 22, 2006, by
and among Catuity, Inc. and the investors thereto which
appears as Exhibit 10.1 to Registrants Form 8-K filed
September 22, 2006, which is incorporated herein by
reference.
 49




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##### Table of Contents



ExhibitNumber
    
    Description10.22
    
    Senior Notes issued pursuant to Securities Purchase
Agreement which appears as Exhibit 10.2 to Registrants
Form 8-K filed September 22, 2006, which is incorporated
herein by reference.10.23
    
    Warrants issued pursuant to Securities Purchase Agreement
which appears as Exhibit 10.3 to Registrants Form 8-K
filed September 22, 2006, which is incorporated herein by
reference.10.24
    
    Registration Rights Agreement executed pursuant to the
Securities Purchase Agreement which appears as Exhibit 10.4
to Registrants Form 8-K filed September 22, 2006, which is
incorporated herein by reference.10.25
    
    Security Agreement executed pursuant to the Securities
Purchase Agreement which appears as Exhibit 10.5 to
Registrants Form 8-K filed September 22, 2006, which is
incorporated herein by reference.10.26
    
    Guaranty executed by Catuity subsidiaries pursuant to the
Securities Purchase Agreement which appears as Exhibit 10.6
to Registrants Form 8-K filed September 22, 2006, which is
incorporated herein by reference.16.1
    
    Letter from Ernst & Young LLP to the Securities and
Exchange Commission regarding change in certifying
accountant, which appears as exhibit 16.1 to Registrants
Form 8-K dated September 24, 2004.21
    
    Subsidiaries of Registrant, which appears as Exhibit 21 to
Registrants Form 10-KSB dated March 30, 200623.1
    
    Consent of Independent Accountants  BDO SEIDMAN, LLP24
    
    Powers of Attorney (Contained on Signature Page)31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, by Alfred H. Racine, the Registrants Chief
Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, by John H. Lowry, the Registrants Chief
Financial Officer32
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, signed by Alfred H. Racine and John H. Lowry
 
 *
    
    Indicates that exhibit is a management contract or compensatory plan or arrangement. 50




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
 AUDIT FEES
  AUDIT RELATED FEES
  51




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##### Table of Contents



SIGNATURES
  Date: March 30, 2007
    
    
    
    CATUITY INC.By:
    
    /s/ Debra R. HoopesDebra R. HoopesSenior Vice President, CFO and Secretary
 POWER OF ATTORNEY
   Signature
    
    Title(s)
    
    Date/s/ Alexander S. Dawson

Alexander S. Dawson
    
    Chairman and Director
    
    March 30, 2007/s/ Alfred H. Racine

Alfred H. Racine
    
    President, CEO and Director
    
    March 30, 2007/s/ Clifford Chapman

Clifford Chapman
    
    Director
    
    March 30, 2007/s/ Geoffrey C. Wild

Geoffrey C. Wild
    
    Director
    
    March 30, 2007/s/ Donald C. Campion

Donald C. Campion
    
    Director
    
    March 30, 2007/s/ Debra Hoopes
    
    Senior Vice President, CFO and Secretary
    
    March 30, 2007Debra Hoopes
 52




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description23.1
    
    Consent of Independent
Registered Accounting Firm  BDO SEIDMAN, LLP24
    
    Powers of Attorney (Contained on Signature Page)31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, by Alfred H. Racine, the Registrants Chief Executive
Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, by Debra R. Hoopes, the Registrants Chief Financial Officer32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Alfred H. Racine and Debra R. Hoopes
 53