BRAINYTOYS LIMITED ABN 28 001 894 033

RIGHTS ISSUE PROSPECTUS

For a non-renounceable rights issue of 1 Share for every 4 Shares held by Shareholders registered at 5.00pm (WST) on 23 June 2006 at an issue price of 6 cents per Share (Rights (ssue)

THIS ISSUE IS FULLY UNDERWRITTEN

Underwriter of the Offer: Leadenhall Australia Limited

IMPORTANT NOTICE

This document is important and should be read in its entirety. If after reading this Prospectus you have any questions about the securities being offered under this Prospectus or any other matter, then you should consult your stockbroker, accountant or other professional adviser.

The securities offered by this Prospectus should be considered as speculative.

$\mathbf{1}$ .	SUMMARY OF IMPORTANT DATES AND IMPORTANT NOTES1
2.	CORPORATE DIRECTORY
3.	CHAIRMAN'S LETTER
$\ddot{4}$ .	DETAILS OF THE OFFER
5.	PURPOSE AND EFFECT OF THE OFFER
$\mathbf{6}$	RIGHTS AND LIABILITIES ATTACHING TO THE SHARES
$\overline{z}$ .	RISK FACTORS
8.	ADDITIONAL INFORMATION
9.	AUTHORITY OF DIRECTORS
10.	DEFINITIONS

$\mathbf{L}$ SUMMARY OF IMPORTANT DATES AND IMPORTANT NOTES

TIMETABLE AND IMPORTANT DATES

	Lodgement of Prospectus with the ASIC			15 June 2006
Ex Date				19 June 2006
Record Date for determining Shareholder entitlements			23 June 2006
Prospectus despatched to Shareholders			28 June 2006
	Closing Date of Offer			12 July 2006
holdings*		Despatch date/Shares entered into Shareholders security		20 July 2006

* These dates are determined based upon the current expectations of the Directors and may be changed without notice.

IMPORTANT NOTES

Shareholders should read this document in its entirety and, if in doubt, should consult their professional advisers.

This Prospectus is dated 15 June 2006 and a copy of this Prospectus was lodged with the ASIC on that date. The ASIC and ASX take no responsibility for the content of this Prospectus.

The expiry date of the Prospectus is that date which is 13 months after the date this Prospectus was lodged with the ASIC (Expiry Date). No securities will be allotted or issued on the basis of this Prospectus after the Expiry Date.

Applications for Shares offered pursuant to this Prospectus can only be submitted on an original Entitlement and Acceptance Form which accompanies this Prospectus.

A copy of this Prospectus is available for inspection at Unit 6, 34 York Street North Perth WA 6006 during normal business hours. The Company will provide a copy of this Prospectus to any person on request. The Company will also provide copies of other documents on request (see Section 8).

The Shares offered by this Prospectus should be considered speculative. Please refer to Section 7.2 for details relating to investment risks.

This Prospectus does not constitute an offer in any place in which, or to any person to whom, it would not be lawful to make such an offer.

The distribution of this Prospectus in jurisdictions outside Australia may be restricted by law and persons who come into possession of this Prospectus should seek advice on and observe any of these restrictions. Failure to comply with these restrictions may violate securities laws. Applicants who are resident in countries other than Australia should consult their professional advisers as to whether any governmental or other consents are required or whether any other formalities need to be considered and followed.

No person is authorised to give information or to make any representation in connection with this Prospectus which is not contained in the Prospectus. Any information or representation not so contained may not be relied on as having been authorised by the Company in connection with this Prospectus.

In making representations in this Prospectus regard has been had to the fact that the Company is a disclosing entity for the purposes of the Corporations Act and certain matters may reasonably be expected to be known to investors and professional advisers whom potential investors may consult.

ELECTRONIC PROSPECTUS

The Prospectus is available in electronic form at the Company's website. www.brainytoys.com. Any person accessing the electronic version of this Prospectus for the purpose of making an investment in the Company must be an Australian resident and must only access the Prospectus from within Australia.

The Corporations Act prohibits any person passing onto another person an Application Form unless it is attached to a hard copy of this Prospectus or it accompanies the complete and unaltered version of this Prospectus. Any person may obtain a hard copy of this Prospectus free of charge by contacting the Company.

$\overline{2}$ . CORPORATE DIRECTORY

Directors

Charles MacKinnon Graham Nicol Alexander Aquero

Company Secretary

Jay Stephenson

Registered Office

Unit 6 34 York Street NORTH PERTH WA 6006

Telephone	$(08)$ 9228 0703
Facsimile	(08) 9228 0704

Auditor*

BDO Chartered Accountants Level 8 256 St Georges Terrace PERTH WA 6000

Share Registry*

Computershare Investor Services Pty Ltd Level 2, Reserve Bank Building 45 St Georges Terrace PERTH WA 6000

Telephone	1300 557 010
Facsimile	$(08)$ 9323 2033

Solicitors

Price Sierakowski Lawyers Level 24 44 St Georges Terrace PERTH WA 6000

* These parties are included for information purposes only. They have not been involved in the preparation of this Prospectus.

$3₁$ CHAIRMAN'S LETTER

Dear Shareholder

On behalf of the Board of Directors, I have pleasure in offering you the opportunity to participate in this non-renouceable rights issue of 1 Share for every 4 Shares held by Shareholders at 5.00pm (WST) on 23 June 2006 (Rights Issue).

The Directors view the Rights Issue as an opportunity to reward loyal Shareholders for their support of Brainytoys over the previous 12 months and also as an opportunity to augment the current working capital to enable the Company to commercialise its product range. Principally, these funds will be used to manufacture products and begin the sale of a number of Brainytoys products in accordance with the Company's marketing and distribution arrangements with Modern Brands, Enertec, and Reveal.

The Board of Directors takes this opportunity to thank all Shareholders for your support since the listing of Brainytoys and looks forward to your continued support in the future.

Yours faithfully

dur-

CHARLES MACKINNON

Chairman

$\mathbf{A}$ DETAILS OF THE OFFER

$4.1$ Offer of Shares

The Offer is being made as a non-renounceable rights issue of 1 Share for every 4 Shares held by Shareholders registered at 5.00pm (WST) on 23 June 2006 at an issue price of 6 cents per Share.

Based on the capital structure of the Company (and assuming no existing Options are exercised prior to the Record Date), the maximum number of Shares to be issued pursuant to this Rights Issue is approximately 7,572,429. The Offer will raise up to approximately \$454,346. The purpose of the Offer and the use of funds raised are set out in Section 5 of this Prospectus.

The Company currently has 10.054.498 Options on issue. The terms and conditions of these Options do not allow for the participation by those Option holders in new issues of securities. Those Option holders will, however, be entitled to exercise their Options during the time period set out in the ASX Listing Rules in order to participate in the Offer.

Fractional entitlements arising from this issue of the Non-Renounceable entitlement Issue will be rounded down to the nearest whole number.

$4.2$ Underwriting of the Issue

Leadenhall Australia Limited has underwritten the whole of the Issue in consideration of the payment of an underwriting fee of 6% of the underwritten amount, subject to the terms and conditions of the Underwriting Agreement summarised in section 8.2 of this Prospectus.

4.3 How to Accept the Offer

Your acceptance of the Offer must be made on the Entitlement and Acceptance Form accompanying this Prospectus. Your acceptance must not exceed your Entitlement as shown on that form. If it does, your acceptance will be deemed to be for the maximum Entitlement.

4.4 If you wish to take up part of your entitlement only

If you wish to take up your entitlement in full or in part, complete the accompanying Entitlement and Acceptance Form by filling in the details in the spaces provided, including the number of Shares you wish to accept and the amount payable (calculated at six cents (\$0.06) per Share accepted), and attach a cheque for appropriate Application Monies. When completed, please forward your Form intact, together with your cheque for the amount payable on acceptance, to reach the Company's share registry no later than 5.00pm WST on 12 July 2006.

Cheques should be made payable to "Brainytoys Limited - Share Issue Account" and crossed "Not Negotiable".

Forms can be mailed or delivered to the Company's share registry at: By delivery: Level 2, 45 St Georges Terrace, Perth, Western Australia 6000 By post: GPO Box D182, Perth, Western Australia 6840

$4.5$ Entitlements not taken up

If you do not wish to accept any of your Entitlement, you are not obliged to do anything. In that case, Shares not accepted by the Closing Date will revert to those persons who apply for the Shortfall and other persons nominated by the Directors.

4.6 No Rights Trading

Your Entitlement to Shares under the Offer is non-renounceable. Accordingly, there will be no trading of rights and you may not dispose of your entitlements to subscribe for Shares to any other party. If you do not take up your entitlement to Shares under the Offer by the Closing Date, the Offer to you will lapse and the Shares not accepted will revert to those persons who apply for the shortfall.

$4.7$ Australian Stock Exchange Listing

Application for official quotation by ASX of the Shares offered pursuant to this Prospectus will be made within 7 days after the date of this Prospectus. If approval is not obtained from ASX before the expiration of 3 months after the date of issue of the Prospectus, (or such period as varied by the ASIC), the Company will not issue any Shares and will repay all application monies for the Shares within the time prescribed under the Corporations Act, without interest.

The fact that ASX may grant official quotation to the Shares is not to be taken in any way as an indication of the merits of the Company or the Shares now offered for subscription.

4.8 Allotment of Shares

Shares issued pursuant to the Offer will be allotted as soon as practicable after the Closing Date. Where the number of Shares issued is less than the number applied for, or where no allotment is made, surplus application monies will be refunded without any interest to the applicant as soon as practicable after the Closing Date.

4.9 Application Monies held on Trust

Pending the allotment and issue of the Shares or payment of refunds pursuant to this Prospectus, all application monies will be held by the Company in trust for the Applicants in a separate bank account as required by the Corporations Act. The Company, however, will be entitled to retain all interest that accrues on the bank account and each Applicant waives the right to claim interest.

4.10 Overseas Shareholders

The distribution of this Prospectus in jurisdictions outside Australia may be restricted by law and persons who come into possession of this Prospectus should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws. No action has been taken to register or qualify these Shares the subject of this Prospectus or otherwise permit a public offering of the Shares the subject of this Prospectus in any jurisdiction outside Australia.

It is the responsibility of applicants outside Australia to obtain all necessary approvals for the allotment and issue of the Shares pursuant to this Prospectus. The return of a completed Entitlement and Acceptance Form will be taken by the Company to constitute a representation and warranty by the Applicant that all relevant approvals have been obtained.

$4.11$ Taxation Implications

The Directors do not consider that it is appropriate to give Applicants advice regarding the taxation consequences of applying for Shares under this Prospectus, as it is not possible to provide a comprehensive summary of the possible taxation consequences. The Company, its advisers and officers, do not accept any responsibility or liability for any taxation consequences to Applicants. Potential Applicants should, therefore, consult their own professional tax adviser in connection with the taxation implications of the Shares offered pursuant to this Prospectus.

$4.12$ Minimum Subscription

There is no minimum subscription.

4.13 Shortfall

The Company reserves the right to issue Shares pursuant to any Shortfall to the Underwriter in accordance with the terms of the Underwriting Agreement summarised in section 8.2 and the ASX Listing Rules.

$4.14$ Clearing House Electronic Sub-Register System (CHESS) and Issuer Sponsorship

The Company will not be issuing share certificates. The Company will apply to ASX to participate in CHESS, for those investors who have, or wish to have, a sponsoring stockbroker. Investors who do not wish to participate through CHESS will be issuer sponsored by the Company. Because the sub-registers are electronic, ownership of securities can be transferred without having to rely upon paper documentation.

Electronic registers mean that the Company will not be issuing certificates to investors. Instead, investors will be provided with a statement (similar to a bank account statement) that sets out the number of Shares allotted to them under this Prospectus. The notice will also advise holders of their Holder Identification Number (HIN) and explain, for future reference, the sale and purchase procedures under CHESS and issuer sponsorship.

Further monthly statements will be provided to holders if there have been any changes in their security holding in the Company during the preceding month.

4.15 Privacy Act

If you complete an application for Shares, you will be providing personal information to the Company (directly or by the Company's share registry). The Company collects, holds and will use that information to assess your application, service your needs as a Shareholder, facilitate distribution payments and corporate communications to you as a Shareholder and carry out administration.

The information may also be used from time to time and disclosed to persons inspecting the register, bidders for your securities in the context of takeovers, regulatory bodies, including the Australian Taxation Office, authorised securities brokers, print service providers, mail houses and the Company's share registry.

You can access, correct and update the personal information that we hold about you. Please contact the Company or its share registry if you wish to do so at the relevant contact numbers set out in this Prospectus.

Collection, maintenance and disclosure of certain personal information is governed by legislation including the Privacy Act 1988 (Cth) (as amended), the Corporations Act and certain rules such as the ASTC Settlement Rules. You should note that if you do not provide the information required on the application for Shares, the Company may not be able to accept or process your application.

4.16 Risk Factors

An investment in Shares should be regarded as speculative. In addition to the general risks applicable to all investments in listed securities, there are specific risks associated with an investment in the Company, which are set out in Section 7.

4.17 Withdrawal

The Directors may at any time decide to withdraw this Prospectus and the Offer in which case the Company will repay, as soon as practicable and without interest, all Application Monies received pursuant to this Prospectus.

4.18 Enquiries

Any questions concerning the Offer should be directed to the Company Secretary, Mr Jay Stephenson, on (08) 9228 0703. Enquiries concerning the Entitlement and Acceptance Form should be directed to Computershare Investor Services Pty Limited by telephone on (08) 9323 2000 or facsimile on (08) 9323 2033.

$5₁$ PURPOSE AND EFFECT OF THE OFFER

$5.1$ Purpose of the Offer

The purpose of the Offer is to raise approximately \$454,346. The proceeds from the Offer (after expenses) will be used to augment the current working capital and enable the Company to continue its product commercialisation. Principally, these funds will be used to manufacture products and begin the sale of a number of Brainytoys products in accordance with the Company's marketing and distribution arrangements with Modern Brands, Enertec, and Reveal.

Refer to Section 8.6 of this Prospectus for further details relating to the expenses of the Offer.

$5.2$ Effect of the Offer and Pro Forma Statement of Financial Position

The principal effect of the Offer will be to:

increase the cash reserves by approximately \$454,346 immediately after $(a)$ completion of the Offer after deducting the estimated expenses of the Offer: and
$(b)$ increase the number of Shares on issue from 30,289,714 Shares as at the date of this Prospectus, to approximately 37,862,143 Shares, issued pursuant to the Rights Issue and any additional shares that may be issued to the Underwriter in consideration for payment of its fee, as calculated in accordance with the terms of the Underwriting Agreement summarised in section 8.2 of this Prospectus. The maximum number of shares the Underwriter may receive in payment of its fee is 454,348 shares on the basis that the Offer is fully subscribed.

$5.3$ Statement of Financial Position

The unaudited Consolidated Balance Sheet as at 31 March 2006 and the unaudited Pro Forma Consolidated Balance Sheet as at 31 March 2006 shown on the following page have been prepared on the basis of the accounting policies normally adopted by the Company and reflect the changes to its financial position as a result of the Offer. The Consolidated Balance sheet and unaudited Pro Forma Consolidated Balance Sheet have been prepared on the assumption that a total of 7,572,429 Shares pursuant to this Prospectus are issued. The estimated cash expenses of the Offer of \$34,010 has been recognised directly against the Share capital, as a reduction of the proceeds of the issue.

Pro Forma Consolidated Balance Sheet

	31.03.06	Pro-forma 31.03.06 \$
ASSETS	\$
CURRENT ASSETS
Cash and cash equivalents	412,186	832,522
Trade and other receivables	36,365	36,365
Financial assets	40,000	40,000
TOTAL CURRENT ASSETS	488,551	908,887
NON-CURRENT ASSETS
Property, plant and equipment	185,303	185,303
Patents and Trademarks	7,494	7,494
TOTAL NON-CURRENT ASSETS	192,797	192,797
TOTAL ASSETS	681,348	1,101,684
CURRENT LIABILITIES
Trade and other payables	15,974	15,974
Short term provisions	29,820	29,820
TOTAL CURRENT LIABILITIES	45,794	45,794
TOTAL LIABILITIES	45,794	45,794
NET ASSETS	635,554	1,055,890
EQUITY
Issued capital	8,101,864	8,522,200
Share based payments Reserve	4,400	4,400
Accumulated Losses	(7,470,710)	(7,470,710)
TOTAL EQUITY	635,554	1,055,890

$5,4$ Effect on Capital Structure

A comparative table of changes in the capital structure of the Company as a consequence of the Offer is set out below, assuming that the Offer is fully subscribed.

Shares
30,289,714	Current
7,572,429	Shares offered pursuant to the Prospectus
454,348*	Shares issued to Underwriter as part of Underwriter's fee
38,316,491	Total Shares on issue

*Note: this figure indicates the maximum number of shares that may be issued to the Underwriter in accordance with clause 8.2.

Options
10,054,498	Current
10,054,498	Total Options on issue

$\mathbf{A}$ RIGHTS AND LIABILITIES ATTACHING TO THE SHARES

$6.1$ Rights Attaching to Shares

The rights attaching to Shares in the Company are set out in the Constitution of the Company, a copy of which is available for inspection during normal business hours at the registered business office of the Company.

The following is a summary of the more significant rights and liabilities attaching to Shares upon conversion of Shares to be issued pursuant to this Prospectus. This summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of Shareholders. To obtain such a statement, persons should seek independent legal advice.

General Meetings

Shareholders are entitled to be present in person, or by proxy, attorney or representative to attend and vote at general meetings of the Company.

Shareholders may requisition meetings in accordance with Section 249D of the Corporations Act and the Constitution of the Company.

Voting Rights

Subject to any rights or restrictions for the time being attached to any class or classes of Shares, at general meetings of Shareholders or classes of Shareholders:

$(a)$ each Shareholder entitled to vote may vote in person or by proxy, attorney or representative;
on a show of hands, every person present who is a Shareholder or a $(b)$ proxy, attorney or representative of a Shareholder has one vote; and
on a poll, every person present who is a Shareholder or a proxy, attorney $(c)$ or representative of a Shareholder shall, in respect of each Share held by him, or in respect of which he is appointed a proxy, attorney or representative, have one vote for each Share held, but in respect of partly paid shares shall have a fraction of a vote equivalent to the proportion which the amount paid up bears to the total issue price for the share.

Dividend Rights

The Directors may from time to time declare and pay or credit a dividend in accordance with the Corporations Act. Subject to any special right as to dividends attaching to a share, all dividends will be declared and paid according to the proportion which the amount paid is of the total amount paid and payable in respect of the Shares is paid (but any amount paid during the period in respect of which a dividend is declared only entitles the Shareholder to an apportioned amount of that dividend as from the date of payment). The Directors may from time to time pay or credit to the Shareholders such interim dividends as they may determine. No dividends shall be payable except out of profits. A determination by the Directors as to the profits of the Company shall be conclusive. No dividend shall carry interest as against the Company.

The Directors may from time to time grant to Shareholders or any class of shareholders the right to elect to reinvest cash dividends paid by the Company by subscribing for Shares in the Company on such terms and conditions as the Directors think fit. The Directors may, at their discretion, resolve in respect of any dividend which it is proposed to pay or to declare on any Shares of the Company, that holders of such Shares may elect to forgo their right to the whole or part of the proposed dividend and to receive instead an issue of Shares credited as fully paid to the extent and on the terms and conditions of the Constitution. The Directors may set aside out of the profits of the Company such amounts as they may determine as reserves, to be applied at the discretion of the Directors, for any purpose for which the profits of the Company may be properly applied.

Winding-Up

If the Company is wound up, the liquidator may, with the authority of a special resolution, divide among the Shareholders in kind the whole or any part of the property of the Company, and may for that purpose set such value as he considers fair upon any property to be so divided, and may determine how the division is to be carried out as between the Shareholders or different classes of Shareholders. The liquidator may, with the authority of a special resolution, yest the whole or any part of any such property in trustees upon such trusts for the benefit of the contributories as the liquidator thinks fit, but so that no Shareholder is compelled to accept any Shares or other securities in respect of which there is any liability.

Transfer of Shares

Generally, Shares in the Company are freely transferable, subject to formal requirements, the registration of the transfer not resulting in a contravention of or failure to observe the provisions of a law of Australia and the transfer not being in breach of the Corporations Act and the Listing Rules.

Future Increase In Capital

The allotment and issue of any new Shares is under the control of the Directors of the Company. Subject to restrictions on the issue or grant of securities contained in the Listing Rules, the Constitution and the Corporations Act (and without affecting any special right previously conferred on the holder of an existing share or class of shares), the Directors may issue Shares as they shall, in their absolute discretion, determine.

Variation of Rights

Under Section 246B of the Corporations Act, the Company may, with the sanction of a special resolution passed at a meeting of Shareholders vary or abrogate the rights attaching to Shares.

If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class), whether or not the Company is being wound up, may be varied or abrogated with the consent in writing of the holders of three quarters of the issued shares of that class, or if authorised by a special resolution passed at a separate meeting of the holders of the shares of that class.

$\overline{z}$ RISK FACTORS

This Section identifies the areas the Directors regard as the major risks associated with an investment in the Company. Investors should be aware that an investment in the Company involves many risks that may be much higher than the risks associated with an investment in other companies.

The securities offered by the Prospectus should be considered highly speculative. The securities offered by this Prospectus carry no quarantee whatsoever with respect to return on capital investment, payment of dividends or the future value of the securities. Investors should carefully consider these factors in light of personal circumstances (including financial and taxation issues) and seek professional advice from an accountant, stockbroker, lawyer or other professional adviser before deciding whether to invest.

There are numerous widespread risks associated with investing in any form of business and with investing in the share market generally. There are also a range of specific risks noted below and elsewhere in this Prospectus which may materially affect the financial performance of the Company and the market price of the Shares. These include:

$7.1$ Going concern risk

If no funds were raised from the Rights Issue or insufficient funds were raised to cover the Company's working capital requirements, further funding will be required by the Company. There is no quarantee that such funding will be obtained on favourable terms or at all. This would have a materially adverse effect on the Company's ability to continue as a going concern.

$7.2$ Investment Risk

The Shares to be issued pursuant to this Prospectus should be considered speculative. They carry no guarantees as to payment of dividends, return of capital or the market value of the Shares. The prices at which an Investor may be able to trade the Shares may be above or below the price paid for the Shares.

$7.3$ Exchange Rate Risk

As the Company's potential earnings may be derived from international markets, changes in the Australian dollar exchange rate may impact on the earnings of the Company. The exchange rate is affected by numerous factors beyond the control of the Company, including interest rates, inflation and the general economic outlook.

$7.4$ Economic and Government Risks

The future viability of the Company is also dependent on a number of other factors affecting performance of all industries and not just the toys and games industry including, but not limited to, the following:

$(a)$ general economic conditions in Australia and overseas markets;

$(b)$ changes in Government policies, taxation and other laws;
the strength of the equity and share markets in Australia and throughout $|C|$ the world;
$(d)$ movement in, or outlook on, interest rates and inflation rates; and
natural disasters, social upheaval or war in Australia or overseas. $(e)$

$7.5$ Additional Requirements for Capital

The Company's capital requirements depend on numerous factors. Depending on the Company's ability to generate income from the products it develops, the Company may require further financing in addition to amounts raised in the Offer. Any additional equity financing will dilute shareholdings, and debt financing, if available, may involve restrictions on financing and operating activities. If the Company is unable to obtain additional financing as needed, it may be required to reduce the scope of its operations and reduce its development programmes as the case may be.

$7.6$ Product Development

The Company can make no representations that any of its product development and commercialisation will be successful, that the Company's development milestones will be achieved, or that the Company will develop further products that are commercially exploitable. Projects can be delayed or fail or product/market development may cease to be viable for a range of unexpected commercial reasons.

$7.7$ Intellectual Property Rights

Securing and protecting rights to intellectual property, and in particular to patents, trademarks and copyright is highly problematic in the toys and games industry. Accordingly, the best protection for the Company to avoid infringements in international markets is to expedite the development and sale of the Company's products.

The granting of a patent does not guarantee that the rights of others are not infringed or that competitors will not develop competing intellectual property that circumvents such patents. The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of third parties.

Because the patent positions of companies in the toys and games industry can be highly uncertain and frequently involve complex legal evaluation, neither the breadth of claims allowed in such patents nor their enforceability can be predicted. There can be no assurance that any patents that the Company may own or control or license now and in the future will afford the Company commercially significant protection of its intellectual property or its projects or have commercial application.

While the Company is not aware of any third party interests in its intellectual property rights will take steps to protect and confirm its interest in these rights, there is always a risk of third parties claiming an interest in the intellectual property of the Company and if any such disputes arise, they could adversely affect the Company.

$7.8$ Reliance on Key Personnel, and Need to Attract Qualified Staff

The loss of any one or more of the Directors, in particular, Mr Aquero, could have an adverse impact on the performance and the prospects of the Company.

The Company is also reliant on its management, as well as outsourced manufacturing suppliers and distributors, the loss of whose services could materially and adversely affect the Company and impede the achievements of its commercialisation objectives.

Because of the specialised nature of the Company's business, its ability to commercialise its products will depend in part upon its ability to attract and retain suitably qualified management, and third party suppliers and distributors over time.

There can be no assurance that the Company will be able to attract or retain sufficiently qualified personnel on a timely basis, retain its key management personnel, or maintain its relationship with key suppliers and distributors.

$7.9$ Risk and Product Liability, and Uninsured Risks

The Company's business exposes it to potential product liability risks that are inherent in the research and development, manufacturing, marketing, and use of its products. In the course of maintaining its business, it will be necessary for the Company to secure sufficient levels of insurance to cover various product liability risks. However, there can be no assurance that adequate or necessary insurance coverage will be available at an acceptable cost or in sufficient amounts, if at all, or that product liability or other claims would not materially and adversely affect the business or financial condition of the Company.

$7.10$ Industry Risks

The Company's current and future potential competitors include companies with substantially greater resources than it. There is no assurance that competitors will not succeed in developing products that are more effective or economic than the current products or any of those being developed by the Company or which would render the products obsolete and/or otherwise uncompetitive. In addition, the Company may not be able to compete successfully against current or future competitors where aggressive pricing policies are employed to capture market share. Such competition could result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's future business, operating results and financial position.

$7.11$ Legislative Regulation

This is the danger that new government legislation or change to existing legislation will have an adverse effect on the investment. For instance this could include changes to compliance regulations, changes to occupational health and safety regulations, higher taxes, prohibitive licensing or higher tariff barriers affecting the Company's commercialisation and development of the product.

$7.12$ No Profit to Date and Uncertainty of Future Profitability

The Company has incurred losses and it is therefore not possible to evaluate the future prospects based on past performance. The Directors anticipate making further losses in the foreseeable future.

Factors that will determine the Company's profitability are its ability to manage its costs, to execute its development and growth strategies, economic conditions in the markets the Company operates, competitive factors and requlatory developments. Accordingly, the extent of future profits, if any, and the time required to achieve a sustained profitability is uncertain. Moreover, the level of such profitability cannot be predicted and may vary significantly from quarter to quarter.

$7.13$ Absence of Dividends

Brainytoys is not currently generating significant revenue to enable it to pay dividends to its shareholders. As Brainytoys is in the early stages of commercialisation, shareholders may not receive any dividends until such time that the Company is in a position whereby it is able to pay dividends to its shareholders and return a higher income stream.

$7.14$ Investment Speculative

The list of risk factors ought not to be taken as exhaustive of the risks faced by the Company or by investors in the Company. The risk factors, and others not specifically referred to above, may in the future materially affect the financial performance of the Company and the value of the securities offered under this Prospectus.

Therefore, the securities to be issued pursuant to this Prospectus carry no guarantee with respect to the payment of dividends, returns of capital or the market value of those securities.

Potential investors should consider that the investment in the Company is speculative and should consult their professional advisers before deciding whether to apply for securities.

$7.15$ Failure of Underwriter

The Underwriter fails to fulfil its obligations under the Underwriting Agreement and does not subscribe for the Shortfall.

8. ADDITIONAL INFORMATION

$8.1$ Continuous Disclosure Obligations

The Company is a "disclosing entity" (as defined in Section 111AC of the Corporations Act) for the purposes of Section 713 of the Corporations Act and, as such, is subject to regular reporting and disclosure obligations. Specifically, like all listed companies, the Company is required to continuously disclose any information it has to the market which a reasonable person would expect to have a material effect on the price or the value of the Company's securities. The Shares which will be issued pursuant to this Prospectus are in the same class of Shares that have been quoted on the official list of the ASX during the 12 months prior to the issue of this Prospectus.

This Prospectus is a "transaction specific prospectus". In general terms "transaction specific prospectuses" are only required to contain information in relation to the effect of the issue of securities on the Company and the rights attaching to the securities. It is not necessary to include general information in relation to all of the assets and liabilities, financial position, profits and losses or prospects of the issuing company.

This Prospectus is intended to be read in conjunction with the publicly available information in relation to the Company which has been notified to ASX and does not include all of the information that would be included in a prospectus for an initial public offering of securities in an entity that is not already listed on a stock exchange. Investors should therefore have regard to the other publicly available information in relation to the Company before making a decision whether or not to invest.

Having taken such precautions and having made such enquires as are reasonable, the Company believes that it has complied with the general and specific requirements of ASX as applicable from time to time throughout the 12 months before the issue of this Prospectus which required the Company to notify ASX of information about specified events or matters as they arise for the purpose of ASX making that information available to the stock market conducted by ASX.

Information that is already in the public domain has not been reported in this Prospectus other than that which is considered necessary to make this Prospectus complete.

The Company, as a disclosing entity under the Corporations Act states that:

$(a)$ it is subject to regular reporting and disclosure obligations;
$(b)$ copies of documents lodged with the ASIC in relation to the Company (not being documents referred to in Section 1274(2)(a) of the Corporations Act) may be obtained from, or inspected at, the offices of the ASIC; and
$(c)$ it will provide a copy of each of the following documents, free of charge, to any person on request between the date of issue of this Prospectus and the Closing Date:
the financial statements of the Company for the financial year ended $(i)$ 30 June 2005 being the last financial statements for a financial year. of the Company lodged with the ASIC before the issue of this Prospectus; and
any documents used to notify ASX of information relating to the $(ii)$ Company in the period from lodgement of the financial statements referred to in paragraph (i) above until the issue of the Prospectus in accordance with the Listing Rules as referred to in Section 674(1) of the Corporations Act.

Copies of all documents lodged with the ASIC in relation to the Company can be inspected at the registered office of the Company during normal office hours.

The Company has lodged the following announcements with ASX since the lodgement of the 2005 audited financial statements:

13/06/06	Appoints US Licensing and Marketing Expert
01/06/06	Appendix 3B
01/06/06	Initial Director's Interest Notice
01/06/06	Initial Director's Interest Notice
29/05/06	Final Director's Interest Notice
29/05/06	Final Director's Interest Notice
26/05/06	New Issue and Intentions relating to US Listing
26/05/06	Change of Board
02/05/2006	Signs MOU with Modern Brands
28/04/2006	Commitments Test Entity - Third Quarter Report
27/04/2006	Signs MOU with Reveal Entertainment Inc.
04/04/2006	Brainytoys signs MOU with Enertec
15/03/2006	Half Yearly Report/Half Year Report
31/01/2006	Commitments Test Entity - Second Quarter Report
27/01/2006	Marketing Manager
09/01/2006	Appendix 3B
22/11/2005	New Constitution as adopted at AGM
22/11/2005	Results of AGM
22/11/2005	MD's Address to Shareholders
22/11/2005	Chairman's AGM Address to Shareholders

Date Description of Announcement

ASX maintains files containing publicly available information for all listed companies. The Company's file is available for inspection at ASX during normal office hours

$8.2$ Summary of Underwriting Agreement

On 15 June 2006, the Company entered into an Underwriting Agreement with Leadenhall Australia Limited (Underwriter), whereby the Company engaged the Underwriter to fully underwrite the Offer.

The Underwriter will receive an underwriting commission of 6% of the total aggregate offer price of the Shares offered under this Prospectus satisfied by the issue of shares in the company at an issue price of 6 cents each. The Underwriter will also be reimbursed cost, charges and expenses incurred by the Underwriter in connection with the Offer and the value of such costs and expenses have been agreed at \$5,000 plus GST.

The Underwriter may elect to terminate its obligations under the Underwriting Agreement by notice to the Company if on or before the allotment of all the Shares one of the events set out below occurs and, if in the reasonable opinion of the Underwriter the event has or is likely to have a material adverse effect on the Offer or is likely to create a potential liability for the Underwriter:

$(a)$ Change in Law or Policy: Any announcement is made by the Government of Australia or any state of Australia or any governmental authority or the Reserve Bank of Australia which in the reasonable opinion of the Underwriter could materially adversely affect the success of the Pro-Rata Offer as a consequence of proposed or promulgated legislation or regulations which would materially adversely affect the operations of the Company or any industry in which the Company operates; or
Material or Adverse Change: There is in the reasonable opinion of the $(b)$ Underwriter any material adverse change in relation to any of the interests held by the Company or in any of its projects or businesses which are referred to in the Prospectus;
$(c)$ Default under this Agreement: The Company is in default under any of the terms and conditions of this Underwriting Agreement or any of the provisions binding on it hereunder;
Prospectus Withdrawal: The Company withdraws the Prospectus; $(d)$
Breach of Provisions: The occurrence of any event set in 652C of the $(e)$ Corporations Act in relation to the Company as though the Company were a target, other than any allotment of securities, and any grant of security, contemplated in the Prospectus;
Prospectus Deficiencies: The Prospectus does not comply with the $(f)$ relevant provisions of the Corporations Act;
$(q)$ Insolvency: If a resolution is passed by the Company for its voluntary liquidation or an order is made for its winding-up or the Company enters into a scheme of arrangement with its creditors under the Corporations Act or any liquidator, receiver, or official manager is appointed in respect of the Company or if the Company becomes insolvent;
Market Conditions: There is in the reasonable opinion of the Underwriter $(h)$ a material adverse change in the state of domestic and/or overseas securities markets that jeopardise the success of the Pro-Rata Offer:
$(i)$ Material or Adverse Change: There is in the opinion of the Underwriter any material adverse change in the financial position or prospects of the Company: or
$(i)$ ASX Withdrawal: ASX refuses, does not grant on terms acceptable to the Underwriter, or withdraws approval for the granting of Official Quotation for the Shares offered pursuant to the Pro Rata Offer or ASX makes a statement to that effect to the Company, the Underwriter or any other person;

The Company has provided standard warranties to the Underwriter and has indemnified the Underwriter and its related bodies corporate and their respective officers, employees, agents, representatives or advisers (each an Indemnified Party) against all losses suffered by the Indemnified Party, all liabilities incurred by the Indemnified Party and all legal costs and other expenses in connection with a demand, action, arbitration or proceeding arising directly or indirectly as a result of or in connection with, amongst other things, the Offer, this Prospectus or a breach or non-performance of any of the obligations of the Company under the Underwriting Agreement (except to the extent the losses, liabilities or costs are judicially determined to arise out of the gross negligence, recklessness or wilful default or fraud of the Indemnified Party).

If the Underwriter takes up the Shortfall, the Underwriter's voting power in the Company will increase from 2.94% up to a maximum of 23.27% (in the unlikely event that no valid applications have been received and accepted by the Company by the Closing Date).

Underwriters Interest	Underwriters Shares**	Total Shares on Issue	Percentage Interest

Before Offer	890,000	30,289,714	2.94%
Interest if fully Underwritten	8,462,429	37,862,143	22.35%
Interest after Underwriting Fee Paid	8,916,177	38,316,491	23.27%

** The Underwriter holds in its own name 200,000 shares; however a further 690,000 shares are held by companies who could be deemed to be associated with the Underwriter

Directors' Interests $8.3$

Other than as set out below or elsewhere in this Prospectus, no Director nor any firm in which such a Director is a partner, has or had within 2 years before the lodgement of this Prospectus with the ASIC, any interest in:

the formation or promotion of the Company; $(a)$
property acquired or proposed to be acquired by the Company in $(b)$ connection with its formation or promotion or the Offer of securities pursuant to this Prospectus; or
$(c)$ the Offer of securities pursuant to this Prospectus.

and no amounts have been paid or agreed to be paid (in cash or Shares or otherwise) to any Director or to any firm in which any such Director is a partner. either to induce him to become, or to qualify him as, a Director or otherwise for services rendered by him or by the firm in connection with the formation or promotion of the Company or Offer of securities pursuant to this Prospectus.

Name	Shares	Options	Shares post rights issue
Charles MacKinnon	832,500	393,750	1,040,625
Graham Nicol	399,067	12,500	498,833
Alexander Aguero KILL All All All	8,282,851	2,118,750	10,353,293

Directors' interests in securities of the Company at the date of this Prospectus are:

Notes:

$1.$ Each of the directors has indicated that it is their present intention to take up their full Entitlement under the Offer.

The Constitution of the Company provides that the non-executive Directors may be paid for their services as Directors, a sum not exceeding such fixed sum per annum as may be determined by the Company in general meeting, to be divided among the Directors and in default of agreement then in equal shares.

8.4 Interests and Consents of Experts and Advisers

Other than as set out below or elsewhere in this Prospectus, no expert, underwriter. promoter or any other person named in this Prospectus as performing a function in a professional advisory or other capacity in connection with the preparation or distribution of the Prospectus, nor any firm in which any of those persons is or was

a partner, nor any company with which any of those persons is or was associated, has or had within 2 years before the lodgement of this Prospectus with the ASIC. any interest in:

$(a)$ the formation or promotion of the Company; or
property acquired or proposed to be acquired by the Company in $(b)$ connection with its formation or promotion or the Offer of securities pursuant to this Prospectus; or
$(c)$ the Offer of securities pursuant to this Prospectus,

and no amounts have been paid or agreed to be paid (in cash or Shares or otherwise) to any expert, underwriter, promoter or any other person named in this Prospectus as performing a function in a professional advisory or other capacity in connection with the preparation or distribution of this Prospectus, or to any firm in which any of those persons is or was a partner, or to any company with which any of those persons is or was associated, for services rendered by that person, or by the firm or the company, in connection with the formation or promotion of the Company or the Offer of securities pursuant to this Prospectus.

Pursuant to Section 716 of the Corporations Act. Price Sierakowski has given, and has not withdrawn its consent to being named as Solicitors to the Company in the Corporate Directory of this Prospectus in the form and context in which it is named. Price Sierakowski has not caused or authorised the issue of this Prospectus, does not make or purport to make any statement in this Prospectus and takes no responsibility for any part of this Prospectus.

Leadenhall Australia Limited has given written consent to being named as the Underwriter of the Offer and has not withdrawn its consent prior to lodgement of this Prospectus with the ASIC.

Price Sierakowski act as solicitors to the Company. Price Sierakowski will be paid approximately \$5,000 for services in relation to this Prospectus.

8.5 Legal Proceedings

There is no litigation, arbitration or proceedings pending against or involving the Company as at the date of this Prospectus.

$8.6$ Estimated Expenses of Offer

In the event that the Offer is fully subscribed, the estimated expenses of the Offer are as follows:

	5
Underwriting fee	*32,260
ASIC fees	2,010
Listing fees	12,000
Legal expenses	5,000
Printing and other expenses	10,000
Total	61,270

*Note: The Underwriting fee comprises a sum of \$27,260 which is payable in Shares issued at 6 cents each and a sum of \$5,000 being for incidental costs and expenses of the Underwriter in accordance with the terms of the Underwriting Agreement summarised in clause 8.2.

$8.7$ Market Price of Shares

The Company is a disclosing entity for the purposes of the Corporations Act and its Shares are enhanced disclosure securities quoted on ASX.

The highest and lowest market sale prices of the Company's Shares on ASX during the three months immediately preceding the date of lodgement of this Prospectus with the ASIC and the respective dates of those sales were:

Highest: 10.0 cents on 3 May 2006

Lowest: 6.0 cents on 27 March 2006 and 14 June 2006

The latest available closing sale price of the Company's Shares on ASX prior to the lodgement of this Prospectus with the ASIC was 6 cents on 14 June 2006.

8.8 Electronic Prospectus

Pursuant to Class Order 00/044, the ASIC has exempted compliance with certain provisions of the Corporations Act 2001 to allow distribution of an electronic prospectus and electronic application form on the basis of a paper prospectus lodged with the ASIC, and the publication of notices referring to an electronic prospectus or electronic application form, subject to compliance with certain conditions.

If you have received this Prospectus as an electronic Prospectus, please ensure that you have received the entire Prospectus accompanied by the Entitlement and Acceptance Form. If you have not, please phone the Company on (08) 9228 0703 and the Company will send you, for free, either a hard copy or a further electronic copy of the Prospectus, or both.

The Company reserves the right not to accept an Entitlement and Acceptance Form from a person if it has reason to believe that when that person was given access to the electronic Entitlement and Acceptance Form, it was not provided together with the electronic Prospectus and any relevant supplementary or replacement prospectus or any of those documents were incomplete or altered.

$\overline{ }$ AUTHORITY OF DIRECTORS

$9.1$ Directors' Consent

Each of the Directors of Brainytoys Limited has consented to the lodgement of this Prospectus with the ASIC in accordance with Section 720 of the Corporations Act.

Dated the 15th day of June 2006

Signed for and on behalf of
BRAINYTOYS LIMITED
by Alexarider Aguero

$10₁$ DEFINITIONS

Applicant means a Shareholder or Underwriter who applies for Shares pursuant to the Offer.

ASIC means the Australian Securities and Investments Commission.

ASTC Settlement Rules means the settlement rules of the securities clearing house which operates CHESS.

ASX means the Australian Stock Exchange Limited (ACN 008 624 691).

Board means the board of Directors of the Company unless the context indicates otherwise.

Business Day means a day on which trading takes place on the stock market of ASX.

Closing Date means the closing date of the Offer, being 5pm (WST) on 12 July 2006 (unless extended).

Company or Brainytoys means Brainytoys Limited (ABN 28 001 894 033).

Constitution means the Company's Constitution as at the date of this Prospectus.

Corporations Act means the Corporations Act 2001 (Cth).

Directors: means the directors of the Company at the date of this Prospectus.

Dollar or "\$" means Australian dollars.

Entitlement means the entitlement of a Shareholder who is eligible to participate in the Offer.

Entitlement and Acceptance Form means the application form either attached to or accompanying this Prospectus.

Listing Rules or ASX Listing Rules means the Listing Rules of the ASX.

Offer or Rights Issue means the non-renounceable entitlement offer of 1 Share for every 4 Shares to Shareholders on the Record Date, further details of which are included in the "Details of the Offer" section of this Prospectus.

Offer Period means the period commencing on the Opening Date and ending on the Closing Date.

Official List means the official list of ASX.

Prospectus means this prospectus.

Quotation and Official Quotation means official quotation on ASX.

Record Date means 5pm (WST) on 23 June 2006.

Related Corporation has the meaning given to that term in the Corporations Act.

Share means a fully paid ordinary share in the capital of the Company.

Shareholder means a shareholder of the Company.

Shortfall means the Shares (if any) not taken up under the Rights Issue.

Underwriter means Leadenhall Australia Limited (ABN 63 007 997 248), AFS Licence No. 228819 of Level 1, 31 Franklin Street, Adelaide, South Australia 5000.

Underwriter Agreement means the agreement entered into between Leadenhall Australia Limited and Brainytoys Limited dated 15 June 2006 and summarised in clause 8.2.

WST means Western Standard Time.

ENTITLEMENT AND ACCEPTANCE FORM

THIS DOCUMENT IS IMPORTANT. IF YOU ARE IN DOUBT AS TO HOW TO DEAL WITH IT, PLEASE CONTACT YOUR STOCKBROKER OR LICENSED PROFESSIONAL ADVISER.

BRAINYTOYS LIMITED

ABN 28 001 894 033

REGISTERED OFFICE Unit 6, 34 York Street North Perth, Western Australia 6006

SHARE REGISTRY Level 2, 45 St Georges Terrace Perth, Western Australia 6000

Non-renounceable entitlement issue of approximately 7,572,429 Shares on the basis of one (1) Share for every four (4) Shares held, at an issue price of five (\$0.06) cents each.

Non-renounceable entitlement, closing 5.00 p.m. Western Standard Time on 23 June 2006.

Holder Identification Number: Entitlement No: Sub-Register:

Shareholding at 23 June 2006

Enfitlement to

Amount payable at \$0.06 per Share

To the Directors Brainytoys Limited Unit 6, York Street North Perth, WA 6006

1. I/We the above mentioned, being registered on 23 June 2006 as the holder(s) of ordinary shares in the Company hereby accept the below mentioned Shares issued in accordance with the enclosed Prospectus;
1. I/We enclose my/our cheque made payable to "Brainytoys Limited Rights Issue Account", for the amount shown being payment at the rate of \$0.6 per Share;
1. I/We hereby authorise you to place my/our name(s) on the register of shareholders and optionholders in respect of the number of Shares allotted to me/us; and
I/We agree to be bound by the Constitution of the Company.

RETURN OF THIS DOCUMENT WITH THE REQUIRED REMITTANCE WILL CONSTITUTE YOUR ACCEPTANCE OF THE SECURITIES BEING OFFERED

	Shares Accepted	Amount Enclosed at \$0.6 per Share

PLEASE ENTER	Drawer .	Secondary Bank december 20	Branch The County of Street	Source Amount compare
CHEQUE DETAILS THANK YOU

My/Our contact numbers in the case of inquiry are:

Telephone ( )................................... $\text{Fax}(\ )$ .......... NOTE: Cheques should be made payable to "Brainytoys Limited - Share Issue Account", crossed "NOT NEGOTIABLE" and forwarded to Level 2, 45 St Georges Terrace, Perth Western Australia 6000 or by post to GPO Box D182, Perth, Western Australia 6840 to arrive no later than 5.00pm Western Standard Time on 12 July 2006.

Complete this panel and sign below only if a change of address is to be registered with the Company
			New Address: , , , , , , , , , , , , , , , , , ,
			.
			Signature(s):
			Please indicate your correct title: Director / Secretary /

ISSUE CLOSES 5.00PM W.S.T. 12 July 2006

THE DIRECTORS RESERVE THE RIGHT TO MAKE AMENDMENTS TO THIS FORM WHERE APPROPRIATE.

PLEASE REFER OVERLEAF FOR INSTRUCTIONS

EXPLANATION OF ENTITLEMENT

1. The front of this form sets out the number of Shares, which you are entitled to accept.
1. Your entitlement may be accepted either in full or in part. There is no minimum acceptance.
1. You may not apply for Shares in excess of your maximum entitlement.
1. The price payable on acceptance of each Share is \$0.06.
1. You may accept your entitlement in full or in part by completing the Entitlement and Acceptance Form overleaf.

APPLICATION INSTRUCTIONS

1. The issue price of \$0.06 per Share is payable in full upon application.
1. Payments must be made in Australian currency by cheque or bank draft drawn on and payable at a bank within Australia. Cheques or bank drafts drawn on banks outside Australia in either Australian currency or in foreign currency will not be accepted.
1. The cheques must be made payable to "Brainytoys Limited Share Issue Account" and crossed "Not Negotiable".
1. When completed, this form together with the appropriate payment in Australian currency should be forwarded to Brainytoys Limited, c/- [Computershare Investor Services Pty Ltd, Level 2, 45 St Georges Terrace, Perth, Western Australia 60171.
1. Acceptances must be received by [Computershare Investors Service Pty Ltd] no later than [5.00pm] WST 12 July 2006.

ENQUIRIES

Any enquiries should be directed to The Company's share registry:

Computershare Investors Service Pty Ltd Level 2, 45 St George's Terrace Perth, Western Australia 6000

Postal Address: GPO Box D182 Perth, Western Australia 6840

Telephone (08) 9323 2000 Facsimile (08) 9323 2033