<PAGE>

================================================================================

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

                             ----------------------

                                   FORM 10-QSB

                                   (Mark One)

      (X)   Quarterly Report Under Section 13 or 15(d) of the Securities
            Exchange Act of 1934.

            For the quarterly period ended June 30, 2006.

      ( )   Transition Report Under Section 13 or 15(d) of the Securities
            Exchange Act of 1934

            For the transition period from _______ to _______

                          Commission File No: 000-30045

                                  CATUITY INC.
             (Exact Name of Registrant as specified in its charter)

            Delaware                                          38-3518829
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                           Identification Number)

37650 Professional Center Drive, Suite 145A
Livonia, MI                                                       48154
(Address of principal executive offices)                       (Zip Code)

               Registrant's telephone number, including area code:
                                 (734) 779-9000

Check whether the issuer (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                                 Yes (X) No ( )

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

                                 Yes ( ) No (X)

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: Common stock outstanding - 2,222,491
shares as of August 1, 2006.

Transitional Small Business Disclosure Format (Check one): Yes ( ) No ( X )

================================================================================

<PAGE>

                                  CATUITY INC.
                                   FORM 10-QSB
                                      INDEX

<TABLE>
<S>                                                                                                    <C>
PART I.  FINANCIAL INFORMATION.....................................................................     3
   Item 1.  Financial Statements...................................................................     3
     Consolidated balance sheets - June 30, 2006 and December 31, 2005.............................     3
     Consolidated statements of operations - Three and six months ended June 30, 2006 and 2005.....     4
     Consolidated statements of cash flows - June 30, 2006.........................................     5
     Notes to Consolidated Financial Statements - June 30, 2006....................................     6
   Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...    12
   Item 3.  Controls and Procedures................................................................    17
PART II. OTHER INFORMATION.........................................................................    17
   Item 1.  Legal Proceedings......................................................................    17
   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds............................    17
   Item 3.  Defaults Upon Senior Securities........................................................    17
   Item 4.  Submission of Matters to a Vote of Security Holders....................................    18
   Item 5.  Other Information......................................................................    18
   Item 6.  Exhibits...............................................................................    18
SIGNATURES AND CERTIFICATIONS......................................................................    19
</TABLE>

                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                  CATUITY INC.
                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    JUNE 30       DECEMBER 31
                                                                      2006            2005
                                                                  ------------    ------------
                                                                  (UNAUDITED)
<S>                                                               <C>             <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                       $  1,570,653    $    958,746
  Short term investments                                                     0       2,245,839
  Accounts receivable-trade, less allowance of
  $144,000 and $122,000                                                529,590         543,200
  Restricted cash                                                       80,156          81,443
  Work in process                                                       10,687          39,760
  Prepaid expenses and other                                            96,120         159,797
                                                                  ------------    ------------
TOTAL CURRENT ASSETS                                                 2,287,206       4,028,785

LONG TERM ASSETS:
  Property and equipment, net                                          252,897         273,941
  Goodwill                                                           3,004,667       3,004,667
  Other intangible assets, net                                       1,638,988       1,811,752
                                                                  ------------    ------------
TOTAL LONG TERM ASSETS                                               4,896,552       5,090,360

TOTAL ASSETS                                                      $  7,183,758    $  9,119,145
                                                                  ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                $    187,818    $    175,643
  Deferred revenue                                                      80,799         114,721
  Accrued compensation                                                 101,829          98,160
  Taxes, other than income                                              68,306          98,330
  Other accrued expenses                                               203,408         150,412
  Trust liability                                                       80,109          81,443
                                                                  ------------    ------------
TOTAL CURRENT LIABILITIES                                              722,272         718,709

LONG TERM LIABILITIES:
Leasing Liability                                                            0           4,861
Accrued compensation                                                    59,328          56,009
                                                                  ------------    ------------
TOTAL LONG TERM LIABILITIES                                             59,328          60,870

SHAREHOLDERS' EQUITY:
 Common stock - $.001 par value; Authorized - 6,666,667 shares;
     issued and outstanding - 2,222,491 at June 30, 2006 and
     2,111,807 at December 31, 2005                                      2,222           2,112
  Preferred stock - $0.001 par value; Authorized -
  666,667 shares                                                             0               0
  Additional paid-in capital                                        46,006,712      45,649,199
  Foreign currency translation adjustment                              (58,244)        (65,589)
  Accumulated deficit                                              (39,548,529)    (37,246,156)
                                                                  ------------    ------------
TOTAL SHAREHOLDERS' EQUITY                                           6,402,158       8,339,566
                                                                  ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $  7,183,758    $  9,119,145
                                                                  ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       3
<PAGE>

                                  CATUITY INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED JUNE 30       SIX MONTHS ENDED JUNE 30
                                                          2006            2005            2006            2005
                                                      ------------    ------------    ------------    ------------
<S>                                                   <C>             <C>             <C>             <C>
REVENUES:
  Processing                                          $    350,267    $          0    $    697,850    $          0
  Service                                                  110,696           1,560         225,281          21,220
  License                                                   18,299          12,600          36,578          25,200
                                                      ------------    ------------    ------------    ------------
TOTAL REVENUES                                             479,262          14,160         959,709          46,420

COST OF REVENUE AND OTHER OPERATING EXPENSES:
    Cost of processing revenue                             465,786          64,435         846,932          67,335
    Cost of service revenue                                 72,666           2,000         144,700          17,365
    Cost of license revenue                                      0           2,679               0           3,869
    Cost of revenue - amortization of intangibles           41,559               0          83,118               0
    Cost of revenue - stock-based compensation              12,457               0          32,688               0
    Research and development                               131,698         121,479         258,767         253,395
    Research and development - stock-based
    compensation                                            17,749               0          26,659               0
    Sales and  marketing                                   282,007         142,709         523,822         287,067
    Sales and  marketing - stock-based compensation          6,820               0          (9,600)              0
    Sales and  marketing  - amortization of
    intangibles                                             32,187               0          64,374               0
    General & administrative                               566,864         371,667       1,059,434         726,595
    General & administrative - stock-based
    compensation                                           136,898               0         263,281               0
    General & administrative - amortization of
    intangibles                                             12,636               0          25,272               0
                                                      ------------    ------------    ------------    ------------
TOTAL COSTS AND EXPENSES                                 1,779,326         704,968       3,319,448       1,355,625
                                                      ------------    ------------    ------------    ------------

OPERATING LOSS                                          (1,300,064)       (690,808)     (2,359,739)     (1,309,205)

INTEREST INCOME                                             25,032          17,869          57,366          42,125
                                                      ------------    ------------    ------------    ------------

NET LOSS                                              $ (1,275,032)   $   (672,939)   $ (2,302,373)   $ (1,267,080)
                                                      ============    ============    ============    ============

NET LOSS PER SHARE - BASIC & DILUTED                  $      (0.59)   $      (0.86)   $      (1.08)   $      (1.63)
                                                      ============    ============    ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC & DILUTED      2,167,035         778,184       2,139,268         778,184
                                                      ============    ============    ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       4
<PAGE>

                                  CATUITY INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED JUNE 30
                                                             2006            2005
                                                         ------------    ------------
<S>                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                 $ (2,302,373)   $ (1,267,080)
Adjustments used to reconcile net loss to net cash
used in operating activities:
   Stock-based compensation                                   313,029               0
   Depreciation and amortization                              243,893          38,951
Changes in assets and liabilities:
   Accounts receivable                                         13,610          21,960
   Accounts payable                                            12,175          61,670
   Deferred revenue                                           (33,922)              0
   Accrued expenses and other liabilities                      23,770        (179,287)
   Other assets                                               138,650          67,871
                                                         ------------    ------------
Net cash used in operating activities                      (1,591,168)     (1,255,915)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                         (50,085)         (3,480)
   Sale of Assets                                                   0               0
   Short Term Investments                                   2,245,839               0
   Acquisition net of cash acquired                                 0        (274,864)
                                                         ------------    ------------
Net cash provided/(used) in investing activities            2,195,754        (278,344)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issue of common stock, net of expenses                            0               0
  Repayment of fractional shares related to reverse
  stock split                                                     (23)           (938)
                                                         ------------    ------------
Net cash provided by financing activities                         (23)           (938)

Foreign exchange effect on cash                                 7,344         (21,769)
                                                         ------------    ------------
Net increase/(decrease) in cash and cash equivalents          611,907      (1,556,966)
Cash and cash equivalents, beginning of period                958,746       2,560,683
                                                         ------------    ------------
Cash and cash equivalents, end of period                 $  1,570,653    $  1,003,717
                                                         ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       5
<PAGE>

                                  CATUITY INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2006

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Catuity Inc.
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for annual
financial statements and notes. The balance sheet at December 31, 2005 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended June 30, 2006 are not necessarily indicative of the
results that may be expected for any subsequent quarter or for the entire year
ended December 31, 2006. The accompanying interim, consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission for the year ended December
31, 2005.

Certain prior year amounts have been reclassified to conform with the current
year presentation.

2.  RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004 and 2005), "Share-Based Payment" ("SFAS 123(R)") which
requires the measurement of all employee share-based payments to employees,
including grants of employee stock options, using a fair-value-based method and
the recording of such expense in the consolidated statement of operations. The
accounting provisions of SFAS 123(R) are effective for reporting periods
beginning after December 15, 2005. We adopted SFAS 123(R) effective January 1,
2006. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. As a result, because
SFAS 123(R) requires the expensing of stock options, it will have an adverse
effect on our future financial results. The level of impact on the Company's
financial statements will depend, in part, on future grant awards. See note 4
for a description of the expense recorded in the second quarter of 2006 under
SFAS 123(R).

In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return, including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006. If there are changes in net assets as a result of application
of FIN 48 these will be accounted for as an adjustment to retained earnings. The
Company is currently assessing the impact of FIN 48 on its consolidated
financial position and results of operations.

3. COMPREHENSIVE INCOME/ (LOSS)

Comprehensive income/ (loss) is summarized as follows:

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED               SIX MONTHS ENDED
                                              JUNE 30,                        JUNE 30,
                                    ----------------------------    ----------------------------
                                        2006            2005            2006            2005
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>
Net loss                            $ (1,275,032)   $   (672,939)   $ (2,302,373)   $ (1,267,080)
   Foreign currency translation           19,471          (9,241)          7,344         (21,769)
                                    ------------    ------------    ------------    ------------
Total comprehensive loss            $ (1,255,561)   $   (682,180)   $ (2,295,029)   $ (1,288,849)
                                    ============    ============    ============    ============
</TABLE>

                                       6
<PAGE>

4. STOCK-BASED COMPENSATION

Effective January 1, 2006, under the modified prospective method, the Company
adopted the provisions of SFAS 123(R), Share-Based Payment, a replacement of
SFAS No. 123, Accounting For Stock-Based Compensation, and rescission of APB
Opinion No. 25, Accounting for Stock Issued to Employees. This statement applies
to all awards granted after the effective date and to modifications, repurchases
or cancellations of existing awards. The adoption of SFAS No. 123(R) had a
significant impact on the Company's results of operations. The Company's
consolidated statement of operations for the three months ended June 30, 2006
and June 30, 2005 includes $174,000 and $0 of stock-based compensation expense
respectively. Stock-based compensation expense for the six months ended June 30,
2006 and June 30, 2005 was $313,000 and $0, respectively. Unrecognized
stock-based compensation expense expected to be recognized over an estimated
weighted-average amortization period of 1.86 years was $865,604 at June 30,
2006. We expect to expense $304,147 of that total in the remaining six months of
2006.

Additionally, under the modified prospective method of adoption, the Company
recognizes compensation expense for the portion of outstanding awards on the
adoption date for which the requisite service period has not yet been rendered
based on the grant-date fair value of those awards calculated under SFAS No. 123
and 148 for pro forma disclosures. Compensation expense in calendar year 2005
related to stock options continues to be disclosed on a pro forma basis only.

The fair value of the option grants is estimated as of the date of the grant
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                             2006     2005      2004
                            -----    ------    ------
<S>                         <C>      <C>       <C>
Risk Free Interest Rate     4.50%     3.00%     2.00%
Expected Dividend Yield       --        --        --
Expected Lives (years)       N/A      1.00      1.13
Expected Volatility         1.35     0.968     0.862
</TABLE>

SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as previously required under EITF Issue No.
00-15, "Classification in the Statement of Cash Flows of the Income Tax Benefit
Received by a Company upon Exercise of a Nonqualified Employee Stock Option".
This requirement had no effect on the Company's net operating cash flows or its
net financing cash flows in the three or six month periods ended June 30, 2006.

EMPLOYEE STOCK-BASED COMPENSATION PLANS

The Company issues new common stock from its pool of authorized stock upon
exercise of stock options or upon granting of restricted stock. The Company has
established four stock-based compensation plans:

<TABLE>
<CAPTION>
                                                                          SHARES     DATE OF SHAREHOLDER
PLAN NAME                                                               AUTHORIZED         APPROVAL
---------                                                               ----------   -------------------
<S>                                                                     <C>          <C>
The 2000 Employee Stock Option Plan (the "ESOP")                          300,000       March 17, 2000
The 2000 Non-employee Director Stock Option Plan (the "DSOP")              58,667         May 21, 2001
The 2005 Employee Restricted Stock Plan (the "ERSP")                      267,000        July 18, 2005
The 2005 Non-employee Director Restricted Stock Plan (the "DRSP")          50,000        July 18, 2005
</TABLE>

The Company's Compensation Committee of the Board administers the above plans
and the stock-based awards are granted at terms approved or determined by them.
As of June 30, 2006, the total number of shares awarded under these plans is
398,733, of which 250,281 are options and 148,452 are restricted shares. The
plans do not provide for unvested options to automatically vest upon a change in
control of the Company. The Company recognizes compensation expense associated
with share-based awards over the vesting period on a straight-line basis.

                                       7
<PAGE>

For the three and the six month periods ended June 30, 2006, the effects of
applying the provisions of SFAS 123(R) on the Company's operating results were
as follows:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED JUNE 30, 2006              SIX MONTHS ENDED JUNE 30, 2006
                                   ------------------------------------------  --------------------------------------------
                                   As if under    SFAS 123(R)                   As if under     SFAS 123(R)
                                     APB 25      adjustments    As Reported        APB 25       adjustments    As Reported
                                  -------------  -------------  -------------  -------------   -------------  -------------
<S>                               <C>            <C>            <C>            <C>             <C>            <C>
Net income (loss)                 ($ 1,101,109)  ($   173,923)  ($ 1,275,032)  ($  1,989,34)   ($   313,029)  ($ 2,302,373)
Cash flow from operating
activities                          (1,088,520)       173,923       (914,597)  ($  1,904,19)        313,029     (1,591,168)
Earnings per share: basic and
diluted                           ($      0.51)  ($      0.08)  ($      0.59)  ($      0.93)   ($      0.15)  ($      1.08)
</TABLE>

STOCK OPTIONS

The maximum contractual term for awards under the ESOP and DSOP is ten years
from the date of grant. The maximum contractual vesting period for awards
granted under the ESOP is five years from the date of grant. The DSOP does not
have a maximum vesting period specified. Awards granted under the ESOP may be
service, market, or performance based. Market based options include shares that
vest once the Company's share price reaches a certain target level defined in
the award. Performance based awards include those where vesting is tied to the
achievement of certain personal or Company targets or goals, such as achieving a
targeted number of customer location deployments or achieving a targeted sales
goal as measured by revenue over the term of new customer agreements.

The following table sets forth the summary of option activity under the
Company's stock option program for the six months ended June 30, 2006:

<TABLE>
<CAPTION>
                                                              WEIGHTED
                                                              AVERAGE
                                             SHARES        EXERCISE PRICE
                                            --------       --------------
<S>                                         <C>            <C>
OUTSTANDING OPTIONS AT DECEMBER 31, 2005    205,668           $  23.16
   Granted                                   67,000           $   8.33
   Forfeited                                (22,387)          $  16.39
                                            --------          --------
OUTSTANDING OPTIONS AT JUNE 30, 2006        250,281           $  20.97
</TABLE>

The weighted average estimated grant date fair values of options granted under
the Company's stock option plans for the three and six month periods ended June
30, 2005 and 2006 were as follows:

<TABLE>
<CAPTION>
                                THREE MONTHS ENDED       SIX MONTHS ENDED
                                      JUNE 30,                JUNE 30,
                                -------------------      -----------------
                                2006          2005       2006        2005
                                -----         -----      -----       -----
<S>                             <C>           <C>        <C>         <C>
Weighted Average Fair Value     $1.86         $3.59      $1.86       $3.59
</TABLE>

A summary of the changes in the Company's nonvested shares during the six months
ended June 30, 2006 is presented below:

<TABLE>
<CAPTION>
                                                            WEIGHTED
                                                         AVERAGE GRANT
                                              SHARES    DATE FAIR VALUE
                                             --------   ---------------
<S>                                          <C>        <C>
NONVESTED OPTIONS AT DECEMBER 31, 2005        63,364         $ 5.21
   Granted                                    67,000           1.86
   Vested                                    (18,659)          4.70
   Forfeited                                 (15,810)          5.55
                                             -------         ------
NONVESTED OPTIONS AT JUNE 30, 2006            95,895         $ 2.91
</TABLE>

All options granted by the Company had a fair market value assigned at grant
date based on the use of the Black-Scholes option pricing model. There were no
options exercised during the quarters ended June 30, 2006 and 2005. As a result
the total intrinsic value of options exercised in both periods was $0.

                                       8
<PAGE>

Information regarding the stock options outstanding at June 30, 2006 is
summarized below:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                    ----------------------------------------------    ----------------------------------------------
                                    Weighted Average      Weighted                    Weighted Average    Weighted
                        Number          Remaining         Average         Number           Remaining      Average
Range of Exercise   Outstanding at  Contractual Life      Exercise    Outstanding at  Contractual Life    Exercise
      Price         June 30, 2006        (Years)           Price       June 30, 2006        (Years)        Price
<C>         <C>     <C>             <C>                   <C>         <C>             <C>                 <C>
$ 4.05        4.27       78,914           4.10             $  4.20         78,914            4.10         $  4.20
  5.31        7.50       48,366           3.61                6.30         22,271            3.35            5.83
 10.52       33.60       92,333           7.79               14.44         20,833            6.08           15.97
 39.60      178.38       30,668           2.74              106.93         30,668            2.74          106.93
                        -------                                           -------
                        250,281           3.57             $ 20.97        152,686            3.17         $ 26.68
</TABLE>

The aggregate intrinsic value of options outstanding and options exercisable as
of June 30, 2006 was ($4,025,000) and ($3,327,000), respectively. The intrinsic
value is calculated as the difference between the market value as of June 30,
2006 and the exercise price of the shares.

RESTRICTED STOCK

The Company awards restricted stock to employees and Directors pursuant to the
ERSP and DRSP respectively. There is no contractual maximum term or vesting
period for awards under either plan. ERSP awards may be service, market and
service, or performance based. Market based awards include shares that vest once
the Company's share price reaches a certain target level defined in the award.
Performance based awards include those where vesting is tied to the achievement
of certain personal or Company targets or goals, such as achieving a targeted
number of customer location deployments or achieving a targeted sales goal as
measured by revenue over the term of new customer agreements. DRSP awards are
performance based and are restricted until the Company achieves profitability
and is cash flow positive for two consecutive quarters.

A summary of the unvested restricted stock as of June 30, 2006, and changes
during the six months then ended, is as follows:

<TABLE>
<CAPTION>
                                                                 WEIGHTED
                                                                 AVERAGE
                                                                GRANT DATE
                                                     SHARES      FAIR VALUE
                                                    --------    ----------
<S>                                                 <C>         <C>
UNVESTED RESTRICTED STOCK AT DECEMBER 31, 2005       42,768      $  10.58
   Granted                                          118,184          9.98
   Vested                                            (5,000)        11.62
   Forfeited                                         (7,500)        11.62
                                                    -------      --------
UNVESTED RESTRICTED STOCK AT JUNE 30, 2006          148,452      $  10.02
</TABLE>

PRO FORMA STOCK-BASED COMPENSATION 2005

Had compensation cost for the plans been determined based on the fair value at
the grant dates for awards under the plans consistent with the fair value method
of SFAS No. 123, the effect on the Company's net income (loss) in the three and
six months ended June 30, 2005 would have been the following:

<TABLE>
<CAPTION>
                                                   THREE MONTHS    SIX MONTHS
                                                       ENDED          ENDED
                                                       2005            2005
                                                   -------------  -------------
<S>                                                <C>            <C>
Net (loss) as reported                             ($   672,939)  ($ 1,267,080)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards                                     ($     1,916)  ($     3,832)
                                                   ------------   ------------
Pro forma net (loss)                               ($   674,855)  ($ 1,270,912)
                                                   ============   ============

Net (loss) per share: basic & diluted - as
reported                                           ($      0.86)  ($      1.63)
                                                   ============   ============

Pro forma basic & diluted (loss) per share         ($      0.87)  ($      1.63)
                                                   ============   ============
</TABLE>

                                       9
<PAGE>

5.  COMMITMENTS AND CONTINGENCIES

In September, 2005 the Company entered into employment agreements with Chris
Leach, the CEO of Loyalty Magic, John H. Lowry, the CFO of Catuity Inc and
Alfred H. Racine III, the CEO of Catuity Inc. The agreements expire on December
31, 2007, July 1, 2007, and September 30, 2007 respectively. Under the terms of
Mr. Leach's agreement, if Mr. Leach is terminated without cause he will receive
3 months salary which would represent a payment of $37,000. Under the terms of
Mr. Lowry's agreement, if Mr. Lowry is terminated without cause he will receive
9 months salary which would represent a payment of $128,000. Under the terms of
Mr. Racine's agreement, if Mr. Racine is terminated after a "Change of Control
Transaction" he will receive severance in an amount equal to the greater of 12
months salary or the balance of his contract, which as of June 30, 2006 is 15
months and represents a payment of $325,000. Also under the terms of Mr.
Racine's agreement, if Mr. Racine is terminated without cause for any reason,
other than a change of control, he will receive 1 month salary which would
represent a payment of $21,000.

6. ACQUISITION, CAPITAL RAISINGS, AND PRO FORMA INFORMATION

On September 1, 2005 Catuity Inc. completed the acquisition of all of the
outstanding shares of Loyalty Magic Pty. Ltd. (Loyalty Magic), headquartered in
Melbourne Australia. The Shareholders of Loyalty Magic received $2,700,000
(A$3,600,000) in cash and 335,000 shares of Catuity common stock in
consideration for Loyalty Magic. The shares were issued pursuant to an exemption
from registration under Regulation D of the Securities Act of the United States.
Loyalty Magic is now a wholly-owned subsidiary of Catuity. The acquisition of
Loyalty Magic was reflected in the consolidated financial statements of the
Company beginning September 1, 2005 and has been accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No 141, Business
Combinations. Catuity's second quarter 2006 financial statements reflect three
months of Loyalty Magic's operations, while the second quarter 2005 financial
information does not include any results of Loyalty Magic's operations.

The Company, as part of its turnaround strategy, determined that the acquisition
of Loyalty Magic and its combination with our company would create a stronger,
more competitive industry participant, based on potential benefits that include:
(1) the complementary nature of the companies' markets, products, technologies
and customers; (2) the more diversified portfolio of products that will result
from the combination of the companies; (3) the opportunity to accelerate revenue
growth as a result of being able to offer Loyalty Magic's products to Catuity's
customers and prospective customers and to offer Catuity's products to Loyalty
Magic's customers and prospective customers; (4) the potential ability of the
combined company to effectively develop new products and improve existing
products by sharing technologies and intellectual property; (5) the expansion of
our presence in new and current markets; (6) the development of an international
platform for future acquisitions as and when attractive opportunities arise; and
(7) the management team in place at Loyalty Magic.

Although the transaction resulted in a significant amount of goodwill on the
consolidated balance sheet, the Company believes that the combination of the two
entities will generate sufficient positive results to justify these amounts.
This is based on our evaluation of the experience and skill of the Loyalty Magic
personnel, the potential of the existing customer base and the future potential
of the Loyalty Magic sales pipeline.

The following table details the amortization of the intangibles:

<TABLE>
<CAPTION>
                                     Useful Life                                                                         2111 to
    Annual Totals           Value      (Years)    Method *    2005      2006      2007      2008      2009      2010       2029
----------------------   ----------  -----------  --------   --------  --------  --------  --------  --------  --------  --------
<S>                      <C>         <C>          <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>
Trademarks               $  566,700      30          SL      $  6,296  $ 18,888  $ 18,888  $ 18,888  $ 18,888  $ 18,888  $465,964
Software                    644,800       5       CF based     49,887   166,236   163,764   137,580    92,604    34,729         -
Customer Contracts          285,100       5       CF based     30,991    80,580    69,888    52,140    35,028    16,473         -
Customer Relationships      278,400      10       CF based     23,823    48,168    43,092    38,028    32,952    27,888    64,449
Non-compete agreements      158,300       5          SL        10,552    31,656    31,656    31,656    31,656    21,124         -
                         ----------                          --------  --------  --------  --------  --------  --------  --------
Totals                   $1,933,300                          $121,549  $345,528  $327,288  $278,292  $211,128  $119,102  $530,413
</TABLE>

----------
(* - SL = Straight line CF based = Cash flow based)

                                       10
<PAGE>

Pro forma information for the Company and Loyalty Magic as if the acquisition
had been completed on January 1, 2005 is as follows:

<TABLE>
<CAPTION>
                     Three Month Period Ended   Six Month Period Ended
                        June 30, 2005              June 30, 2005
                     ------------------------   ----------------------
                         (unaudited)                (unaudited)
<S>                  <C>                        <C>
Revenue              $                622,283   $            1,160,109
Net Loss             $               (649,035)  $           (1,383,930)
Earnings per share   $                  (0.31)  $                (0.66)
</TABLE>

7. MANAGEMENT PLANS

Catuity's primary business is providing a hosted loyalty and gift card
processing solution for chain retailers and their partners. Our focus is
primarily on retailing organizations with 50 to 250 stores, a group commonly
referred to as tier two retailers, and smaller, tier three retailers through
resellers. We offer member-based loyalty programs at the point-of-sale and gift
card programs. These programs are designed to help retailers improve customer
retention, add new customers and increase each customer's average spend amount.

Our operational priorities as a Company this year are in three areas.

Loyalty and Gift Card Processing: We believe the U.S. reseller market is
adopting the type of technology that Catuity offers. There is an apparent demand
for a turnkey solution for small to mid-sized chains and small merchants through
re-sellers, including merchant services companies, Independent Sales
Organizations, marketing companies and operators of coalition loyalty programs
in local markets. This is a good fit for Catuity because we believe that we have
an efficient product with an operational service capability that provides
turnkey outsourcing to resellers. This gives us the ability to leverage
Catuity's fixed costs faster than by selling exclusively to chain retailers.

Packaged Loyalty and Gift Card Products: Catuity also plans to introduce
packaged products to broaden our offering to retailers. We believe there is
demand in the chain world for packaged products, such as bundled loyalty, gift
card and payments processing services. Packaged products are generally
co-branded with the retailer, offered with a fixed set of benefits to the
consumer, and at a pre-determined cost per unit to the retailer. It is important
to note that introducing product packages does not require significant new
development of our technology.

Mergers and Acquisitions: Acquiring a profitable operating business remains
important to our strategy. The recent decline in the Company's stock price has
negatively impacted our ability to achieve our 2006 goal of completing the
acquisition of one or more U.S. based companies that are complementary to our
business strategy. Catuity continues to seek the acquisition of complementary
businesses such as traditional loyalty services and/or database marketing firms
to expand our range of products and services. Catuity's technology generates a
robust stream of information and our prospective clients often rely on others to
manage and maximize this type of data.

The Company has $1,571,000 in cash as of June 30, 2006. At the annual
shareholders meeting in May 2006, shareholders approved the issuance of 400,000
shares of common stock at a minimum price of $6.25 per share. The Company did
not issue the authorized shares due to its recent share price levels. As a
result, pursuant to Australian Stock Exchange (ASX) Listing Rules, shareholder
approval to issue the shares expired on August 12, 2006 and the 400,000 shares
will not be issued.

The Company intends to raise capital in 2006 by issuing additional shares of its
common stock. The Company, pursuant to NASDAQ and ASX listing rules, can issue
up to 15% of its total shares outstanding (approximately 330,000 shares) at any
time after September 19, 2006 without requiring shareholder approval. While
management and the Board have had several discussions regarding capital raising
options, a final plan has not been approved. The Company is in the process of
determining whether to raise capital in 2006 in two stages or one. Under the two
stage approach, the Company will sell approximately 330,000 shares after
September 19 in a separate placement and then complete a larger capital raise,
subject to shareholder approval at a special meeting of shareholders that would
likely occur in the fourth quarter of 2006. Under the one stage approach, the
Company will complete one capital raising for a larger amount, also subject to
shareholder approval at a special meeting of shareholders that would likely
occur in the fourth quarter of 2006. Under either approach, the board will hold
a special meeting of shareholders to receive shareholder approval

                                       11
<PAGE>

prior to issuing any shares in excess of 330,000. Management has met recently
with U.S. institutional investors to review potential structures of the capital
raise and believes the Company will proceed with a placement in the fourth
quarter of 2006.

The Company believes that its capital raising efforts, combined with its
existing capital resources and revenue opportunities, are adequate to meet its
cash requirements for the next twelve months.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Catuity provides loyalty and gift card processing services to retailers that are
designed to increase the profit they earn from their customers at the Point of
Sale (POS). The Company provides its customers with a hosted, Application
Service Provider (ASP) based system that enables retailers to offer member-based
loyalty programs that can deliver customized discounts, promotions, rewards and
points-based programs designed to help retailers find, keep and profit from
their best customers. The Company also provides its retail customers with a full
range of gift card solutions. The system enables robust and highly customizable
programs that work on a retailer's payment terminals and Electronic Cash
Registers (ECR's) via their internal store networks. In 2005, the company
integrated to the Verifone and Lipman POS terminal lines, which are among the
most widely used by retailers of all sizes. In 2006, the Company finished its
integration to the Hypercom platform and Ingenico's 32-bit POS models. As a
result, we are integrated to the four most widely used POS terminal systems in
our primary market. In the second half of 2006, Catuity expects to continue to
add new terminals and POS software systems to our Terminal Library, which will
broaden the markets that we are ready to serve. This is part of our strategy to
make it easier for new customers to connect to the Catuity platform. Management
believes that this strategy will reduce the perceived IT risks that its retailer
clients may have and give us a competitive advantage over other providers.

2006 SIGNIFICANT ACTIVITIES

The company entered 2006 with a marketable product, but with very limited
adoption of its new processing platform. In the first half, the Company has been
successful in our goals to establish an effective sales process and building out
our U.S. team. To date, we have begun successful program deployments for clients
representing at least 1,000 potential locations and we have either model
deployments or pilots underway for regional chains which have at least 1,100
locations available today. Management believes that these benchmarks will be
important in creating reference clients which are important in driving new sales
decisions. Additionally, the Company has significantly expanded its U.S. based
client management and development teams in the first half. That team has been
focused on finalizing the technology infrastructure necessary to meet industry
standards and to demonstrate to prospects our ability to service their programs.
We also have made significant progress since May in establishing a sales
pipeline as we head into the August-November decision time frame which is common
in our business. The Company cannot forecast how many locations are likely to
come on line in 2006 because our clients ultimately control that schedule.

The Company continues to be interested in acquiring additional companies to
re-establish its business, diversify its product offering to retailers, and
achieve an operational critical mass. Catuity is most interested in acquiring
companies that share its strategy of providing a range of transaction-based
products to chain retailers. These products include loyalty programs, closed
loop gift card programs; open network gift card programs; and credit and debit
card processing. All of these markets are heavily fragmented and most exhibit
growth characteristics. The Company believes that the ability to offer a bundled
solution of products and services to retailers will enhance its ability to close
new sales and retain existing customers. The Company continues to identify
companies that meet its acquisition criteria and to initiate discussions of
interest. Many factors impact the timing, structure, pricing and potential to
close such transactions. As the Company has previously disclosed, acquisitions
carry diverse risks that could affect the timely execution of its strategy. The
Company does not expect it can reach its performance goals by year-end 2006
unless it is able to complete the acquisition of at least one profitable company
in the U.S. in 2006.

In Australia, Catuity's wholly owned subsidiary Loyalty Magic completed three
development projects for customers, all of which were delivered in the second
quarter. The first project involved the integration of the customer's product
with

                                       12
<PAGE>

Retail Insight's technology, a Point-of-Sale device, for a grocery chain. The
first installation was successful and the program is in operation. Additional
installations for that grocery chain are planned for the third and fourth
quarters of 2006. The second project was the development and subsequent
installation of Loyalty Magic's latest gaming-entertainment-leisure client, in
New South Wales. This development consisted of enhancing the Company's
Membership, Promotions and Voting modules, plus integrating to the customer's
Citrix system. The third project was the integration and second round of field
testing for our loyalty program to run on the X-POS platform of a significant
new customer. The tests were highly successful and the next step in the roll out
plan, which is further field testing, has begun. Additionally, in the first half
of 2006 Loyalty Magic invested in new sales resources which have resulted in
qualifying more retail clients that can benefit from the Catuity/Loyalty Magic
solution.

As mentioned earlier, during the first half of 2006 the Company invested in
building out our infrastructure of both people and technology to support our
clients. Our progress is measured in a series of individual projects which are
inter-dependent on one another. We have invested in upgrading our data security
practices as part of our plan to gain certification with Payment Card Industry
(PCI) standards by year-end. Additionally, we completed the selection,
integration and testing of a North America network communications partner. We
selected and are currently using HB Net to give us the ability to seamlessly and
securely provide a private network to manage transactions from our client's
point of sale to our processing platform. Through HB Net, which is a subsidiary
of Hypercom Inc., we have a reliable and affordable communications capability
across the U.S. and Canada. Finally, we have completed implementation of the use
of LiveVault, a subsidiary of Iron Mountain, which provide us with multiple
continuous redundant back-ups for our clients. All of these investments were
critical for us to be ready to service our clients while also requiring us to
revisit our policies and procedures for operations, back-up and disaster
recovery. Management believes that we have a solid foundation upon which to
service our clients. We caution however that, in our industry, legal
requirements and certification standards are always evolving. We are committed
to achieving and maintaining the certifications which are vital to customers in
adopting our technology.

Catuity has been, and is, in the process of re-building its business in the
United States. The Company's net loss in the second quarter of 2006 was $602,000
higher than in the same period last year. The increase in the loss compared to
2005 is principally attributable to: $174,000 of non-cash expense related to the
expensing of stock-based compensation due to the adoption of SFAS 123 (R);
$86,000 of amortization expense related to the acquisition of Loyalty Magic;
$168,000 in additional expenses involved in building and maintaining our US
infrastructure to support the processing of our loyalty and gift card customers
that did not exist in the first half of 2005; and $60,000 in additional sales
expenses to increase our U.S. sales efforts.

OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2006

Catuity completed the acquisition of Loyalty Magic on September 1, 2005. As a
result, the financial information for the three month period ended June 30, 2006
includes the operating results of Loyalty Magic while the financial information
for the three month period ended June 30, 2005 does not include Loyalty Magic.

REVENUE

Total revenues for the three month period ended June 30 ("second quarter")
increased to $480,000 in 2006 compared to $14,000 in 2005. Although U.S. revenue
has increased year-over-year, the $466,000 increase is principally attributable
to the operations of Loyalty Magic. Second quarter 2006 revenues consisted of
approximately $350,000 in processing fees, $111,000 in service revenue and
approximately $18,000 in license revenue. Processing revenues are generally
recurring in nature and result from the hosting of loyalty and gift card
programs on our servers and related on-going support for the customer's
programs. Service revenue is generally non-recurring and results from one time
projects for customers. License revenue consists of software license and
maintenance fees for customers who operate our software on their own equipment.
Second quarter 2005 revenues consisted of approximately $2,000 in service
revenue and approximately $13,000 in license revenue.

                                       13
<PAGE>

COST OF PROCESSING REVENUE

Cost of processing revenue primarily consists of co-location facility costs,
other processing costs, third party costs, salary and related expenses, office
costs, and overhead for the staff that work on supporting customer programs. Of
the $466,000 of cost of processing revenue in the second quarter of 2006,
$234,000 was due to U.S. based cost and $232,000 was due to the addition of
Loyalty Magic. Cost of processing revenue in the second quarter of 2005 was
$64,000 and related to establishing U.S. processing and customer support
capabilities.

COST OF SERVICE REVENUE

Cost of services revenue primarily consists of employee salary and related
costs, third party costs and overhead cost associated with the staff that works
on special projects and software customization for customers. Cost of service
revenue for the second quarter increased from $2,000 in 2005 to $73,000 in 2006.
Of the $73,000 cost in the second quarter of 2006, a significant majority
related to project work performed for customers of Loyalty Magic.

COST OF LICENSE REVENUE

Cost of license revenue consists of the salary related expenses, overhead for
client support and technical staff time spent on maintenance activities related
to software that has been licensed to customers. The Company did not incur any
cost in support of its license revenue in the second three months of 2006.
Maintenance and support costs in the second three months of 2005 totaled
approximately $2,500 for work performed for customers utilizing the Company's
software on a licensed basis.

COST OF REVENUE - AMORTIZATION OF INTANGIBLES

The cost of amortization of intangible assets represents the monthly
amortization expense from the purchase price of Loyalty Magic allocated to
software that relates to processing. These intangible assets are amortized over
the estimated useful life in years.

COST OF REVENUE - STOCK-BASED COMPENSATION

Cost of Revenue - stock-based compensation expense represents the costs related
to equity based compensation awards under the Company's employee and director
restricted stock and stock option plans in accordance with SFAS 123(R) for those
employees whose compensation cost is charged to cost of revenue.

RESEARCH AND DEVELOPMENT

Research and Development expenses consist primarily of salaries, employee
benefits and overhead cost for work on upgrades and future releases of the
Company's software. Research and Development expenses were $132,000 in the
second quarter of 2006 compared to $121,000 in the second quarter of 2005
(+$11,000). The increase is attributable to the addition of approximately
$35,000 of R&D expense at Loyalty Magic, partially offset by a decrease of
approximately $24,000 in R&D expense for the CALS product.

RESEARCH AND DEVELOPMENT - STOCK-BASED COMPENSATION

Research and Development - stock-based compensation expense represents the costs
related to equity based compensation awards under the Company's employee and
director restricted stock and stock option plans in accordance with SFAS 123(R)
for those employees whose compensation cost is charged to research and
development.

SALES AND MARKETING

Sales and marketing expenses consist primarily of salaries, employee benefits,
travel, marketing, and related overhead costs of the Company's sales and
marketing departments. Sales and marketing expenses increased $139,000, or 98%,
in the second quarter of 2006 compared to the second quarter of 2005.
Approximately $86,000 of the increase was from the addition of Loyalty Magic,
while approximately $53,000 of the increase was principally due to salary,
employee benefits, and office costs associated with the growth of Catuity's U.S.
sales staff in 2006 compared to 2005.

                                       14
<PAGE>

SALES AND MARKETING - AMORTIZATION OF INTANGIBLES

The cost of amortization of intangible assets represents the monthly
amortization expense from the purchase price of Loyalty Magic allocated to
customer contracts and customer relationships. The intangible assets of customer
contracts and customer relationships are amortized over their estimated useful
life in years.

SALES AND MARKETING - STOCK-BASED COMPENSATION

Sales and Marketing - stock-based compensation expense represents the costs
related to equity based compensation awards under the Company's employee and
director restricted stock and stock option plans in accordance with SFAS 123(R)
for those employees whose compensation cost is charged to sales and marketing.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of salaries, employee
benefits, general overhead costs and professional services fees related to the
management of the company. General and administrative expenses increased
$195,000, or 53%, in the second quarter of 2006 compared to the second quarter
of 2005 due principally to the addition of Loyalty Magic ($75,000) increases in
US legal & professional services of $71,000, board and annual meeting costs of
$27,000, salaries and benefits of $6,000 and outside contract costs of $16,000.

GENERAL AND ADMINISTRATIVE - STOCK-BASED COMPENSATION

General and administrative stock-based compensation expense represents the costs
related to equity based compensation awards under the Company's employee and
director restricted stock and stock option plans in accordance with SFAS 123(R)
for those employees and directors whose compensation cost is charged to general
and administrative expense. The cost for stock-based compensation of employees
whose salary is charged to direct cost of revenue, research and development, or
sales and marketing is included in the respective category on the statement of
operations.

GENERAL AND ADMINISTRATIVE - AMORTIZATION OF INTANGIBLES

The cost of amortization of intangible assets represents the monthly
amortization expense from the purchase price of Loyalty Magic allocated to
trademark and non-compete agreements. The intangible for trademarks is amortized
on a straight line basis over a 30 year life, while the value of non-compete
agreements is amortized over a 5 year life on a straight line basis.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded our operations with proceeds from the issuance of
common stock and cash collections from customers. As of June 30, 2006, the
Company had approximately $1,571,000 in cash and cash equivalents, an increase
of $612,000 from December 31, 2005. The increase is due to the maturity of a
short term investment of approximately $2,245,000 held at December 31, 2005
during the six month period, offset by cash utilization of approximately
$1,633,000 during the first six months of the year.

Net cash used in operating activities was $1,591,000 for the six month period
ended June 30, 2006 compared with $1,256,000 for the six month period ended June
30, 2005. The $335,000 increase is attributable to an increase of $1,035,000 in
the 2006 net loss over 2005, offset by differences in assets & liabilities of
$182,000, an increase in depreciation and amortization of $205,000, and an
increase in stock-based compensation of $313,000.

Cash from investing activities was $2,196,000 for the six month period ended
June 30, 2006 compared with a usage of $278,000 for the six month period ended
June 30, 2005. The cash from investing activities in 2006 was from the maturity
of a short term investment of $2,246,000 during the period, offset by purchases
of property and equipment of $50,000. The $278,000 of cash used in 2005 was for
legal, accounting, and other professional services incurred in the acquisition
of Loyalty Magic.

Net cash used in financing activities in the six months of 2006 and 2005 is due
to repayment of fractional shares in

                                       15
<PAGE>

conjunction with the Company's reverse stock split in November 2004.

The Company has $1,571,000 in cash as of June 30, 2006. At the annual
shareholders meeting in May 2006, shareholders approved the issuance of 400,000
shares of common stock at a minimum price of $6.25 per share. The Company did
not issue the authorized shares due to its recent share price levels. As a
result, pursuant to Australian Stock Exchange (ASX) Listing Rules, shareholder
approval to issue the shares expired on August 12, 2006 and the 400,000 shares
will not be issued.

The Company intends to raise capital in 2006 by issuing additional shares of its
common stock. The Company, pursuant to NASDAQ and ASX listing rules, can issue
up to 15% of its total shares outstanding (approximately 330,000 shares) at any
time after September 19, 2006 without requiring shareholder approval. While
management and the Board have had several discussions regarding capital raising
options, a final plan has not been approved. The Company is in the process of
determining whether to raise capital in 2006 in two stages or one. Under the two
stage approach, the Company will sell approximately 330,000 shares after
September 19 in a separate placement and then complete a larger capital raise,
subject to shareholder approval at a special meeting of shareholders that would
likely occur in the fourth quarter of 2006. Under the one stage approach, the
Company will complete one capital raising for a larger amount, also subject to
shareholder approval at a special meeting of shareholders that would likely
occur in the fourth quarter of 2006. Under either approach, the board will hold
a special meeting of shareholders to receive shareholder approval prior to
issuing any shares in excess of 330,000. Management has met recently with U.S.
institutional investors to review potential structures of the capital raise and
believes the Company will proceed with a placement in the fourth quarter of
2006.

The Company believes that its capital raising efforts, combined with its
existing capital resources and revenue opportunities, are adequate to meet its
cash requirements for the next twelve months.

CONTRACTUAL OBLIGATIONS

The following table presents ours contractual obligation and commitments as of
January 1, 2006 over the next 5 years.

<TABLE>
<CAPTION>
Contractual Obligations:    Total       2006        2007      2008      2009     2010
-----------------------   ---------   ---------   --------   -------   ------   ------
<S>                       <C>         <C>         <C>        <C>       <C>      <C>
Operating Leases          $ 221,710   $ 138,184   $ 81,252   $ 2,274       --       --
Capital Leases               33,188      23,566      9,622        --       --       --
                          ---------   ---------   --------   -------   ------   ------
         Total            $ 254,898   $ 161,750   $ 90,874   $ 2,274       --       --
                          =========   =========   ========   =======   ======   ======
</TABLE>

There have been no material changes in our obligations since 12/31/05.

FORWARD LOOKING INFORMATION

This document includes "forward-looking" statements within the meaning of the
Private Securities Litigation Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information so long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important factors that
could cause actual results to differ from the expected results. All statements
other than statements of historical fact made in this document are forward
looking. In some cases, they can be identified by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
consider various factors that may cause actual results to differ materially from
any forward-looking statements.

As used in this Annual Report on form 10-QSB, "Company," "us," "we," "our" and
similar terms means Catuity Inc., a Delaware corporation.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievement. Moreover, neither we nor any other person
assumes liability for the accuracy and completeness of the forward-looking
statements. Actual results may differ materially from those projected as a
result of certain risks and uncertainties, including but not limited to: changes
in

                                       16
<PAGE>

currency exchange rates from period to period, inflation rates in the United
States and Australia, recession, and other external economic factors over which
the Company has no control; the timing and speed with which customers and
prospects execute their plans for the use of our loyalty software processing and
services; continued development of the Company's software products; competitive
product and pricing pressures; use of internally developed software
applications; patent and other litigation risks; the risk of key staff leaving
the Company; the risk that major customers of the Company's products and
services reduce their requirements or terminate their arrangements with the
Company; as well as other risks and uncertainties, including but not limited to
those detailed from time to time in the Company's Securities and Exchange
Commission filings. These forward-looking statements are made only as of the
date hereof, and the Company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.

ITEM 3. CONTROLS AND PROCEDURES

Management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures, pursuant to Rule 13a-15 of the
Securities and Exchange Act of 1934 as of December 31, 2005. The Company's
disclosure controls and procedures are designed to ensure: (1) that information
required to be disclosed by the Company in its periodic SEC filings is recorded,
processed and reported within the time periods specified by the SEC and (2) that
information required to be disclosed is accumulated and communicated to the
Company's management, including its principal executive and financial officers,
to allow timely decisions regarding required disclosure. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective as of June
30, 2006. The disclosure controls and procedures are designed to provide
reasonable assurance that the information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as required on a timely basis. The Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective at the reasonable assurance level.

In September 2005, the Company completed the acquisition of Loyalty Magic. The
Company continues to integrate Loyalty Magic's operations and evaluate its
processes and controls.

Except as discussed in the above paragraph, there has not been any change in the
Company's internal controls during the 2nd quarter ending June 30, 2006 that
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting. There were no significant
deficiencies or material weaknesses identified in the evaluation and, therefore,
no corrective actions were taken.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

                                       17
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 11, 2006, Catuity held its annual meeting at which time the shareholders
elected Alexander S. Dawson, Alfred H. (John) Racine, III, Geoffrey C. Wild,
Donald C. Campion and Clifford W. Chapman, Jr. as Directors of the Company for
the next twelve months.

The tabulation of the voting on each of the proposals put before the
shareholders is as follows:

<TABLE>
<CAPTION>
                                        VOTES       VOTES
               PROPOSAL                  FOR       AGAINST    WITHHELD    ABSTAIN    NON-VOTE
----------------------------------    ---------    -------    --------    -------    --------
<S>                                   <C>          <C>        <C>         <C>        <C>
1. Elect Alexander S. Dawson
     Director                         1,356,853     18,585      4,189         731

2.  Elect Alfred H. (John) Racine,
     III
     Director                         1,361,619      4,560     11,272       2,907

3. Elect Geoffrey C. Wild
     Director                         1,368,605      4,426      3,956       3,371

4. Elect Donald C. Campion
     Director                         1,368,319      4,059      4,609       3,371

5. Elect Clifford W. Chapman, Jr.
     Director                         1,368,102      4,876      4,459       2,921

6. To approve the grant of options
to acquire 50,000 shares of common
stock and the grant of 100,000
shares of restricted stock to Mr.
Alfred H. (John) Racine, III            516,844     31,554                  6,819     825,141

7. To approve the issue of up to
400,000 shares of common stock
pursuant to Australian Stock
Exchange Limited Listing Rule 7.1       512,239     39,729                  3,249     825,141
</TABLE>

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

<TABLE>
<CAPTION>
(a)  Exhibit   Description
     -------   -----------
<S>  <C>       <C>
     EX-31.1   Certification by Alfred H. Racine III, President and Chief Executive Officer
               pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     EX-31.2   Certification by John H. Lowry, Chief Financial Officer
               pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     EX-32     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

                                       18
<PAGE>

SIGNATURES AND CERTIFICATIONS

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.

                              CATUITY INC.
                                (Registrant)

                                       By: /s/ Alfred H. Racine III
                                           -------------------------------------
                                           Alfred H. Racine III
                                           President and Chief Executive Officer

                                       By: /s/ John H. Lowry
                                           -------------------------------------
                                           John H. Lowry
                                           Chief Financial Officer

Date:  August 14, 2006

                                       19
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number   Description
--------------   -----------
<S>              <C>
EX - 31.1        Certification by Alfred H. Racine III, President and Chief  Executive Officer pursuant to
                 Section 302 of the Sarbanes-Oxley Act of 2002

EX - 31.2        Certification by John H. Lowry, Chief Financial Officer pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002

EX - 32          Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

                                       20