MACRO METALS LIMITED — Audit Report / Information 2006

Aug 3, 2006

2 August 2006

The Directors Brainytoys Limited PO Box 35 NORTH PERTH WA 6906

Level 1 London House 216 St George's Terrace Perth WA 6000 PO Box 7255 Cloisters Square WA 6850 Telephone: (61-8) 9426 0666 Facsimile: (61-8) 9481 1947

Dear Sirs

Independent Expert's Report to Shareholders in Brainvtoys Limited

You have requested Pendragon Capital Limited ("Pendragon") to prepare an Independent Expert's Report ("Our Report") to advise the shareholders of Brainytoys Limited ("Brainytoys"/"the Company") as to whether the proposed convertible notes ("Convertible Notes") and shares ("Shares") to be issued by Brainytovs to Noble Investments Pty Ltd ("Noble") is fair and reasonable to shareholders and to set out the reasons for our conclusion.

Terms and phrases used in this report have the same meaning given to them in the Notice of Meeting and Explanatory Statement, unless separately defined.

1. Proposed Transaction

The Directors of Brainytoys intend to proceed with the placement of \$800,000 worth of Convertible Notes to Noble. If converted, and based on the current number of shares on issue, Noble's shareholding interest in Brainytoys may increase from 18.93% to 43.29%.

The agreement can be summarised as:

• a) One secured Convertible Note with a face value of \$100,000 being convertible at the discretion of Noble to 1,666,667 Shares at an issue price of \$0.06 per Share;
• b) At the discretion of Brainytoys up to seven secured Convertible Notes with a face value of \$100,000 convertible at the discretion of Noble to that number of Shares equal to the drawn down face value of each such Convertible Note divided by the higher of the following:
• $(i)$ \$0.05 Share: or
• (ii) the rolling three month volume weighted average price of the Company's Shares traded on the Australian Stock Exchange ("ASX") discounted by 20%;
• c) A facility fee of 6% of the maximum Face Value of the Convertible Notes (being \$800,000) is paid by way of issue of 800,000 Shares to Noble.

• d) Interest will accrue daily in respect of each Convertible Note at a rate of 10% per annum payable quarterly in arrears. Interest will cease to accrue and be payable in respect of any Convertible Note on and from the date such Convertible Note is converted or redeemed.

• e) The Convertible Notes will be secured with a fixed charge over:

• (i) All the present and future right, title and interest of Brainytoys ("Chargor") in, to or under:
  • ì. any freehold or leasehold property or any other interest in real property, fixtures, plant and
  • equipment (other than stock in trade): ii.
  • iii. any uncalled or called but unpaid nominal or premium capital of the Chargor;
  • iv. any encumbrance over any real or personal property or any guarantee:
  • any title document and any other documents evidencing a right to the possession of $\mathbf{v}_i$ any real or personal property;
  • vi. any partnership in which the Chargor is a partner;
  • vii. any joint venture in which the Chargor is a joint venturer:
  • viii. any insurance policy in relation to the Charged Property including, without limitation, the proceeds from that insurance policy;
  • ix. any marketable securities;
  • x. any intellectual property rights;
  • xi. the designated account and any chosen in action in respect of the Designated Account;
  • xii. any book or other debt but not the proceeds of any such debt.
• (ii) A floating charge over the balance of the Charged Property

Pendragon has been requested to prepare this Independent Expert's Report in accordance with Section 611 (Item 7) of the Corporations Law to advise whether the placement of the Convertible Notes is fair and/or reasonable to non participating shareholders.

2. Summary and Opinion

Based on our analysis and the terms of the proposal as outlined further in this report, we have concluded that the placement of Convertible Notes is fair and reasonable to the non participating shareholders in Brainytoys.

3. Purpose of the Report

Section 611 (Item 7) of the Corporations Law exempts the acquisition of a relevant interest from the application of Section 606 where the acquisition has been approved by a resolution agreed to by shareholders. It recognises that the shareholders of a company may choose to give up one of their basic rights, namely an equal opportunity to participate in any benefits accruing to other shareholders where the acquisition or allotment may change the control of the company.

Accordingly the Directors of Brainytoys believe that it is appropriate to provide an Independent Expert's Report to shareholders and to seek shareholder approval for "Resolution 1 – Issue of Convertible Notes" and "Resolution 2 – Issue of Shares to Noble", at the General Meeting to be held on 4 September 2006.

Regulatory Guidance

This report is prepared by Pendragon in its capacity as an Independent Expert to provide an opinion as to whether or not the consideration received by Brainytoys for Shares issued as a result of the Secured Convertible Notes issue is fair and/or reasonable to shareholders in Brainytoys. This report should not be used for any other purpose.

In determining whether the transaction is "fair and/or reasonable", we have considered The Australian Securities and Investments Commission ("ASIC") Policy Statements 74 and 75 as well as Practice Note 42 which sets out matters to be considered in Independent Experts' reports to non-participating shareholders.

Fair and Reasonable

The term fair and reasonable does not have a legal definition. However, the ASIC Policy Statement 74 establishes certain guidelines in respect of the preparation of experts' reports.

What is fair and reasonable for non-participating shareholders should be judged in all circumstances of the proposal. The report must compare the likely advantages and disadvantages for non-participating shareholders if the proposal is agreed to and if it is not.

An offer is "fair" if the value of the consideration is equal to or greater than the value of the assets that are subject to the offer.

By definition, an offer is reasonable if it is fair. However, where an offer is not fair, it can be reasonable if, after considering other significant factors, shareholders should accept the offer in the absence of any higher bid before the close of the offer.

4. Background on Brainvtovs

Corporate History

Brainytoys is a company listed on the ASX. The Company has been listed since 24 March 2005. The Company's principal activity is the development of toy and game products. Further information on the operation of the Company is available on the ASX website.

In July 2006, Brainytoys made a "1 for 4" rights issue to shareholders in the company that was underwritten by Leadenhall Australia Limited ("Leadenhall"), an associate of Noble. The rights issue experienced a shortfall and Leadenhall made up this shortfall. The Convertible Note issue was announced to the market on the same day as the rights issue.

Brainytoys intends to use the monies raised from the issue of the Convertible Notes on funding initial product manufacturing against a range of purchase orders.

Share Structure

As at 26 July 2006, there were 31,955,053 Shares on issue by Brainytoys.

The existing share structure of Brainytoys (prior to the proposed transactions) is as follows:

Details	Number
Issued Capital (26 July 2006)	31,955,053
Shares subscribed under rights issue	6,361,438
Total	38,316,491

For the purpose of calculating Noble's shareholding in Brainytoys, 'Noble' includes Leadenhall and all associated entities.

As at 26 July, Noble held 7,251,438 Shares in Brainytoys. This represents 18.93% of the total issued shares in the Company.

If all Convertible Notes to be issued were converted to Shares in Brainytoys at the lowest possible issue price the capital structure of Brainvtovs will be as follows:

Details	Number
Issued Capital	31,955,053
Shares subscribed under rights issue	6,361,438
Facility Fee	800,000
1 st Convertible note	1,666,667
$2nd - 8th$ (inclusive) Convertible notes	14,000,000
	54,783,158

Therefore it is possible that the shareholding of Noble could increase from 18.93% to 43.29%, assuming all notes are drawn down and converted into Shares in Brainytoys at the lowest possible issue price.

5. Valuation Methodologies

In determining whether the proposed transaction of the issue of Convertible Notes is fair and reasonable, we must consider the valuation of Shares in Brainytoys.

The value of the company's shares is usually determined by reference to both asset values and the consistency and quality of earnings.

Therefore we have considered the following valuation methodologies:

Discounted Cash Flow Method

This method values a business by discounting the future net cash flows to their present day value using an appropriate discount rate. The discount rate is representative of the opportunity cost of capital being the expected rate of return that could be obtained by investing in equivalent risk investments.

Market Based Methods

• Capitalisation of Maintainable Earnings
• o This method places a value on the business by estimating the likely Future Maintainable Earnings capitalised at a rate which reflects business outlook, business risk, investor expectations, future growth prospects and other factors specific to the entity. Use of this method relies on the availability and analysis of comparable market data.
• Industry Specific Methods
• o Uses industry specific assumptions and comparisons to form a valuation.
• Availability of alternative offers
• $\Omega$ Where there are other similar offers, a comparison between offers can be used to determine the market value of the Company.
• Ouoted Market Price Basis
• Where there is a ready market for securities such as the ASX, through which shares are traded, $\circ$ recent prices at which shares are bought and sold can be taken as the market value of a security. Such market value includes all factors and influences that impact upon the ASX. The use of ASX pricing is more relevant where a share displays regular high volume trading, creating a "deep" market in that share.

o This method relies on the efficient market hypothesis which states in general terms that the market price at any point in time should fully reflect available information given willing buyers and willing sellers. This method is widely accepted and there is extensive evidence available to support this hypothesis.

Asset Based Methods

• Liquidation of Assets Method
• o This method values a company based on the net value of its assets should they be sold today as if in a "fire sale" on liquidation of the company.
• Orderly Realisation of Assets Methods
• o This method values a company based on the net value of its assets should the assets be put to market and held out for a fair value sale price given the market and condition of the assets.
• Net Tangible Asset Value on a Going Concern Value Basis ("NTA")
• NTA is appropriate where the majority of assets consist of cash or passive investments. The combined market value of the entity's assets and liabilities is used to value the entity.

6. Value of Brainvtovs Shares

As the company has little cash inflows other than from capital raisings, the discounted cash flow method is not appropriate.

Asset based methods will not appropriately recognise the value of intellectual property that Brainytoys has developed.

Brainytoys is listed on the ASX, and as such there is a ready market on which the securities can be traded. Notwithstanding that there appears to be infrequent trading in low volumes, we are of the opinion that the most appropriate method for valuation of the Shares is the Quoted Market Price Basis of valuation.

Market value is influenced by the market's perception of many factors including the value of assets, the industry in which the Company operates, managerial skills and future expectations for the Company. These market perceptions can change significantly over a short period of time. A share price can also be greatly influenced by the supply and demand for shares.

A review of the twelve month trading history of Brainytoys on the ASX to 27 July 2006 reveals that the securities were traded in low volumes with a high of \$0.098 and a low of \$0.042. The weighted average price of securities was \$0.065 per Share with a standard deviation from the mean price of 0.011 during the same period. This reflects low volatility. The most recent trade of the company's shares, to 27 July 2006, was on 19 July 2006 at \$0.056.

Conclusion as to the value of Shares in Brainytoys

With reference to the above trading history, our assessment of the value of the Shares in Brainytoys is between the most recently traded price of \$0.056, and the twelve month weighted average of \$0.065.

7. Assessment as to Fairness

The first Convertible Note

Under the terms of the Convertible Note issue, the first note with a face value of \$100,000 will be converted into 1,666,667 Shares at an issue price of \$0.06 cents per Share. This is fair as it is within the range of our assessment of the value of Shares in Brainytoys.

The 2^nd to 8^th Convertible Notes

The remaining seven Convertible Notes with combined face value of \$700,000 are convertible to that number of Shares equal to the drawn down face value of each Convertible Note divided by the higher of:

• $i$ \$0.05 per Share: or
• ii) the rolling three month volume weighted average price of the Company's Shares, traded on the ASX discounted by 20%

The Shares in Brainy to you'll be issued at no more than a 20% discount to the market value. This discount is consistent with terms offered on placements of shares in other listed companies.

Facility fee

Under the terms of the agreement a facility fee of 6% of the maximum Face Value of the Convertible Notes (being \$800,000) is paid by way of issue of 800,000 Shares to Noble.

It is not uncommon for credit providers lending money to charge a fee for the provision of such a facility. The facility fee in this case of $6\%$ is consistent with rates charged in the market for similar securities.

Interest rate

Interest accrues and is payable by the Company in respect of each Convertible Note at a rate of 10% per annum payable quarterly in arrears. Interest will cease to accrue and be payable in respect of any Convertible Note on and from the date such Convertible Note is converted or redeemed.

It is standard practice for lenders to charge a rate of interest to borrowers of money. The interest rate of $10\%$ is within the range of acceptable interest rates charged on similar facilities.

Conclusion as to fairness of transaction

In our opinion the proposed transaction of the issue of Convertible Notes and the associated Facility Fee to Noble is fair.

8. Assessment as to Reasonableness

We have considered other significant factors which shareholders should consider when deciding whether to accept / reject the proposed transactions.

Likely Advantages if the transaction is approved by shareholders

If the transactions are agreed to and the Brainytoys issues eight Convertible Notes:

Advantages

a) Flexible Facility

Other than for the first note draw down of \$100,000 there is no requirement or compulsion for the Company to draw down the remaining notes. The Company's decision to draw down the remainder is discretionary. This represents a flexible facility package for the Company.

b) Further Notes May Not be Drawn

The Directors of the Company are not obliged to draw down further Convertible Notes if alternative and more attractive sources of working capital become available.

c) Conversion Terms Market Related

If additional Convertible Notes are drawn down the terms of conversion to ordinary shares in the Company are market related, subject to a discount of 20%. Accordingly, the dilution of equity effect for existing shareholders would not be appreciably different to what may arise pursuant to a market placement or other form of capital raising at some future time.

d) The Company being able to confidently complete its initial business plan

The availability of the substantial facility enables the Company and its management to operate with confidence in completing its product development, marketing and distribution program. In the last financial year the Company spent \$1,314,116 in cash. As at 30 June 2006, the Company had \$85,361 in cash. While the Company received \$454.346 in July 2006 from a rights issue, in the absence of this facility, the board may find it difficult to confidently operate in a commercially sensible manner given the product development and manufacturing budgeted

e) Existing Shareholders Not Required to Provide Further Capital

The shortfall arising from the recent "1 for 4 rights" issue indicates a lack of interest from the Company's shareholders in providing additional capital at prices similar to the proposed transaction. This flexible facility reduces the need to ask current shareholders to contribute further capital.

Likely disadvantages if the transaction is approved by shareholders

Disadvantages and Risks

a) Possible Transfer of Control to Noble

The note issue may result in Noble obtaining a controlling interest of up to 43.29% of the Company's Share capital.

b) Issue of Secured Notes

Given the lack of recurrent cash flow with which to fund borrowings it would have been desirable for the Company to fund its business plan without resorting to secured borrowings.

c) No Equal Opportunity to Participate in the Convertible Notes Issue

Company shareholders are not being afforded an equal opportunity to participate in the issue. However, shareholders were given an opportunity to participate in the recent rights issue which resulted in a shortfall from shareholders.

d) Risk of Draw Down Notice being Dishonoured

Noble is a private company and we have not performed a review as to its capacity to meet its obligations under the arrangement.

Directors Interests

The Directors of Brainytoys are:

• Mr Charles MacKinnon
• Mr Alexander Aguero $\bullet$
• Mr Graham Nicol

Their interests are detailed below.

Directors
Mr Charles MacKinnon	1,649,186
Mr Alex Aguero	9,175,418
Mr Graham Nicol	465,618
Total	11,290,222

The Directors' interests in Brainytoys will, like all shareholders, be diluted as a result of the Convertible Note transaction. Entering into the Convertible Note transaction does not afford any additional benefit to the directors' interests at the expense of non participating shareholders.

Conclusion as to Reasonableness

We are not aware of any alternative transactions more advantageous to non-participating shareholders and, having considered all factors relevant to the proposed transaction, it is our opinion that the issue of convertible notes to Noble and the associated Facility Fee is reasonable to non-participating shareholders.

9. Sources of Information

This report has been based on the following information:

• Draft Convertible Deed Note between Brainytoys and Noble.
• Draft Deed of Charge between Brainytoys and Noble. $\bullet$
• Draft notice of General Meeting to Shareholders of Brainvtovs. $\bullet$
• Unaudited financial statements of Brainytoys for the year ended 30 June 2006 contained in $\bullet$ Appendix A, B and C.
• Register of Shareholders $\bullet$
• Twelve month Share trading history of Brainytoys $\bullet$
• Budgeted Cash flow for the year ended 30 June 2007 for Brainytoys $\bullet$
• Discussions with the Chairman and Company Secretary of Brainytoys $\bullet$

In preparing this report we have reviewed the information described above as well as other published and unpublished information.

We have relied upon information provided by directors of Brainytoys. We have not independently verified the information supplied to us, nor have we conducted anything similar to an audit.

10. Disclosure of Interests

Pendragon is entitled to receive a fee in accordance with their normal professional charges for preparing this report. Except for this fee, Pendragon, and their directors, employees and associates, have not received and will not receive any other benefit whether direct or indirect in connection with the preparation of this report.

11. Indemnity

Pendragon has been provided with an indemnity from Brainy to is the following form:

"Brainytoys indemnifies Pendragon and any employees or associates from any claims arising out of omission or any mis-statement in relation to any material provided (or which, being relevant, is not provided) by Brainvtovs".

12. Oualifications

Pendragon holds an Australian Financial Services Licence (number 237549) issued by the ASIC. Pendragon has experience in the provision of corporate finance advice. Mr Rick Hopkins, the director responsible for and signing this report, has many years experience in company valuations and reports.

13. Disclaimers and Consents

This report has been prepared at the request of Brainytoys for inclusion in its Notice of General Meeting for shareholders to be forwarded to shareholders in relation to its issue if Convertible Notes.

Pendragon hereby consents to this report accompanying the Notice of General Meeting for Brainytoys shareholders. Pendragon takes no responsibility for the contents of the Notice of General Meeting other than this report. This report has been prepared for the directors of Brainytoys to forward to shareholders, and apart from such use, neither the whole nor any part of this report may be used for any other purpose.

In providing our opinion, we have relied on information provided by directors of Brainytoys. Where financial forecasts have been provided, it should be noted that there are likely to be differences to actual results due to various and unpredictable commercial and external factors.

Pendragon has not independently verified the information supplied to us and it has not conducted anything in the nature of an audit of Brainytoys. Pendragon has no reason to believe that any information relied on by us is incorrect or incomplete. The opinions and statements in this report are given in good faith and in the reasonable belief they are not false, misleading or incomplete.

Yours faithfully

Motorder.

RICK HOPKINS DIRECTOR

Appendix A

SUMMARISED UNAUDITED INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2006

		Economic Entity		Parent Entity
	2006	2005	2006	2005
	\$	S	\$	S
Revenue	32,192	127,441	32,192	40,814
Accounting and Audit Fees	(32, 794)	(29, 638)	(32,794)	(29, 638)
Finance Costs	(925)	(796)	(925)	(796)
Consultancy Fees	(177, 878)	(134, 114)	(177, 878)	(134, 114)
Share registry and Listing Fees	(29, 693)	(38, 547)	(29, 693)	(38, 547)
Legal Costs	(12, 778)	(4,173)	(12,778)	(4,173)
People Costs	(575, 277)	(339, 294)	(575, 277)	(314, 294)
Computers and Software	(7,487)	(55,067)	(7, 487)	(55,067)
Rent	(18, 167)	(19, 848)	(18, 167)	(19, 848)
Printing and Stationery	(21, 420)	(19, 784)	(21, 420)	(19, 784)
Research and Development	(273, 493)		(273, 493)
Supplies and Materials	(27,011)		(27,011)
Depreciation and amortisation expense	(59, 595)	(92,670)	(58,023)	(16, 875)
Travel and Accommodation	(122, 205)	(61, 232)	(122, 205)	(61, 232)
Share based payments expense		(4,400)		(4,400)
Impairment of Intellectual Property	(2,198,063)
Impairment of Investment			(2,187,821)
Other expenses	(102, 023)	(72, 583)	(102, 023)	(71, 296)
(Loss)/Profit from continuing operations	(3,626,618)	(744, 705)	(3,587,792)	(729, 251)
Income tax expense	89,879		89,879
Net (loss)/profit from continuing operations	(3,536,739)	(744, 705)	(1,337,104)	(729, 251)
Net (Loss)/Profit attributable to members of the parent entity
	(3,536,739)	(744, 705)	(1,337,104)	(729, 251)

Appendix B

SUMMARISED UNAUDITED BALANCE SHEET AS AT 30 JUNE 2006
	Economic Entity			Parent Entity
	2006 \$	2005 \$	2006 S	2005 \$
CURRENT ASSETS
Cash and cash equivalents	93,225	1,399,477	93,225	1,399,477
Trade and other receivables
Other financial assets	113,706	40,550	113,706	40,550
	40,000	40,000	40,000	40,000
TOTAL CURRENT ASSETS	246,931	1,480,027	246,931	1,480,027
NON-CURRENT ASSETS
Property, plant and equipment	167,927	220,083	167,927	218,512
Patents and Trademarks
Intellectual Property	7,915	7,494	7,915	7,494
Trade and other financial assets		2,198,066
Receivables				2,187,821
TOTAL NON-CURRENT			25,000	25,000
ASSETS	175,842	2,425,643	200,842	2,438,827
TOTAL ASSETS	422,773	3,905,670	447,778	3,918,854
CURRENT LIABILITIES
Trade and other payables	61,855	22,525	61,855	22,525
Short term borrowings	7,864		7,864
Short term provisions	34,727	21,997	32,460	19,727
TOTAL CURRENT
LIABILITIES	104,446	44,522	102,179	42,252
TOTAL LIABILITIES	104,446	44,522	102,179	42,252
NET ASSETS	318,327	3,861,148	345,594	3,876,602
EQUITY
Issued Capital	8,095,781	8,101,864	8,095,781	8,101,864
Share Based payments reserve	4,400	4,400	4,400	4,400
Retained Earnings	(7, 781, 855)	(4,245,116)	(7,754,587)	(4,229,662)
TOTAL EQUITY	318,326	3,861,148	345,594	3,876,602

Appendix C

SUMMARISED UNAUDITED CASHFLOW STATEMENT FOR THE YEAR ENDED 30
JUNE 2006

	Economic Entity		Parent Entity
	2006 \$	2005 \$	2006 \$	2005 S
CASH FLOWS FROM OPERATING ACTIVITIES
Payments to suppliers and employees	(1,332,364)	(777, 775)	(1,332,364)	(778, 758)
Interest received	32,192	40,814	32,192	40,814
Net cash provided by (used in) operating activities	(1,300,172)	(736, 961)	(1,300,172)	(737, 944)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment	(7, 439)	(236,370)	(7, 439)	(235, 387)
Purchase of other non-current assets	(422)	(7, 494)	(422)	(7, 494)
Payment for subsidiary (net of cash) acquired	$\overline{\phantom{0}}$	(109, 232)		(109, 232)
Net cash provided by (used in) investing activities	(7, 861)	(353,096)	(7,861)	(352, 113)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares net of cost	(6,083)	2,352,063	(6,083)	2,352,063
Net cash provided by (used in) financing activities	(6,083)	2,352,063	(6,083)	2,352,063
Net increase in cash held	(1,314,116)	1,262,006	(1,314,116)	1,262,006
Cash at beginning of financial year	1,399,477	137,471	1,399,477	137,471
Cash at end of financial year	85,361	1,399,477	85,361	1,399,477