MACRO METALS LIMITED — Capital/Financing Update 2008

Mar 19, 2008

BRAINYTOYS LIMITED ABN 28 001 894 033

OPTIONS ENTITLEMENT ISSUE PROSPECTUS

For a non-renounceable pro-rata entitlement issue to shareholders of approximately 74,862,708 Options on the basis of three (3) Options for every five (5) Shares held by Shareholders registered at 5.00pm (WST) on 1 April 2008 at an issue price of 1 cent per Option, to raise up to approximately $748,627 before costs.

Partial Underwriter

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ABN 74 065 412 820

IMPORTANT NOTICE

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

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

TABLE OF CONTENTS

1.	DETAILS OF THE OFFER.......................................................................................................6
2.	PURPOSE AND EFFECT OF THE OFFER.............................................................................10
3.	RIGHTS ATTACHING TO OPTIONS AND UNDERLYING SECURITIES...............................14
4.	RISK FACTORS..................................................................................................................17
5.	ADDITIONAL INFORMATION...........................................................................................20
6.	DIRECTORS’ AUTHORISATION AND CONSENT ..............................................................27

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TIMETABLE AND IMPORTANT DATES

Lodgement of Prospectus with the ASIC	19 March 2008
Notice to Shareholders	25 March 2008
Ex Date	26 March 2008
Record Date for determining Shareholder entitlements	1 April 2008
Opening Date and dispatch of Prospectus to Shareholders	4 April 2008
Closing Date of Offer	18 April 2008
Issue and dispatch of holding statements	24 April 2008

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

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IMPORTANT INFORMATION

Investors should read this document in its entirety and, if in doubt, should consult their professional advisers before deciding whether to apply for Options offered under this Prospectus.

This Prospectus is dated 19 March 2008 and a copy of this Prospectus was lodged with the ASIC on that date. The ASIC and ASX take no responsibility for the contents of this Prospectus or the merits of the investment to which this Prospectus relates.

The expiry date of the Prospectus is the date that is 13 months after the date of this Prospectus (Expiry Date). No Options will be allotted or issued on the basis of this Prospectus after the Expiry Date.

No person is authorised to give information or to make any representation in connection with this Prospectus, which is not contained in the Prospectus.

No person named in this Prospectus, nor any other person, guarantees the performance of the Company or the payment of a return on the Shares arising from exercise of the Options. Please read this document carefully before you make a decision to accept the Offer. An investment in the Company has specific risks which you should consider before making a decision to invest.

Certain terms and abbreviations used in this Prospectus have defined meanings which are set out in the Glossary.

This Prospectus is a transaction specific prospectus for an offer of Options to acquire continuously quoted securities (as defined in the Corporations Act) and has been prepared in accordance with section 713 of the of the Corporations Act. It does not contain the same level of disclosure as an initial pubic offering 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

This Prospectus will be issued as an electronic prospectus. The offer of Options pursuant to this Prospectus is available to persons receiving an electronic version of this Prospectus within Australia. The Corporations Act prohibits any person from passing to another person an Entitlement and Acceptance Form unless it is attached to or accompanies the complete and unaltered version of this Prospectus. The Prospectus may be viewed online at: www.brainytoys.com.

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CORPORATE DIRECTORY

Directors

Share Registry*

Mr Charles MacKinnon (Chairman) Mr Alex Aguero (Managing Director) Mr Graham Nicol (Director) Mr Lawrence H. Bernstein (Director) Mr Jean Pierre (John) de la Valdene(Director)

Company Secretary

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

Telephone: 1300 557 010 Facsimile: +61 8 9323 2033

Mr Graham Nicol

Principal Place of Business

Solicitors to the Company

6-B Bowen Street O'Connor WA 6163 Telephone: +61 8 9331 8441 Facsimile: +61 8 9331 8452

Steinepreis Paganin Lawyers and Consultants Level 4, Next Building 16 Milligan Street PERTH WA 6000

Website

ASX Code

www.brainytoys.com

Auditor*

Underwriter

BDO Kendalls Audit & Assurance (WA) Pty Ltd 128 Hay Street Subiaco WA 6008

R M Capital Pty Ltd 1175 Hay Street WEST PERTH WA 6005

Telephone: +61 8 9321 3277 Facsimile: +61 8 9321 8399 Email: info@rmcapital.com.au

• These entities have not been involved in the preparation of this Prospectus and have not consented to being named in this Prospectus. Their names are included for information purposes only.

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CHAIRMAN’S LETTER

Dear Shareholder

The Board is pleased to offer Shareholders the opportunity to participate in a pro-rata nonrenounceable Option entitlement issue.

All Shareholders registered as at 5:00pm (WST) on 1 April 2008 will be entitled to participate in a pro-rata non-renounceable Option entitlement issue on the basis of three (3) Options for every five (5) Shares held. The price payable on application for each Option is 1 cent.

The Closing Date for acceptances is 5:00pm (WST) on 18 April 2008.

The Board recommends all Shareholders take up their entitlement.

The Board commends this investment opportunity to you and looks forward to your continued support in the future.

Yours sincerely

Mr Charles MacKinnon Chairman

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1. DETAILS OF THE OFFER

1.1 Offer of Options

The Offer is being made as a pro-rata non-renounceable entitlement issue of three (3) Options for every five (5) Shares held by Shareholders registered at 5.00pm on 1 April 2008 (WST) at an issue price of 1 cent per Option.

The Company also has convertible notes (Notes) on issue and whilst the Notes are outstanding, the holder has the right to participate in Share or Option issues as though all outstanding Notes have been converted to Shares. The Company’s outstanding Notes are equivalent to the Note holder being the registered holder of 15,588,235 Shares for the purpose of this Entitlement Issue.

Based on the capital structure of the Company (and assuming no existing Options are exercised prior to the Record Date), the maximum number of Options to be issued pursuant to this Offer is approximately 74,862,708. The Offer will raise up to approximately $748,627. The purpose of the Offer and the use of funds raised are set out in Section 2 of this Prospectus.

The Company currently has 18,689,212 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.

1.2 Minimum Subscription

There is no minimum amount to be raised pursuant to this Prospectus. The Offer is partially underwritten.

1.3 How to Apply

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.

You may participate in the Offer as follows:

• (a) if you wish to accept your Entitlement in full:

• (i) complete the Entitlement and Acceptance Form, filling in the details in the spaces provided; and

• (ii) attach your cheque for the amount indicated on the Entitlement and Acceptance Form; or

• (b) if you only wish to accept part of your Entitlement:

• (i) fill in the number of Options you wish to accept in the space provided on the Entitlement and Acceptance Form; and

• (ii) attach your cheque for the appropriate application monies (at 1 cent per Option); or

• (c) if you do not wish to accept all or part of your Entitlement, you are not

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obliged to do anything.

All cheques must be drawn on an Australian bank or bank draft made payable in Australian currency to “Brainytoys Limited – Entitlement Offer Account” and crossed “Not Negotiable”.

Your completed Entitlement and Acceptance Form and cheque must reach the Company’s share registry no later than 5:00pm WST on the Closing Date.

The Offer is non-renounceable. Accordingly, a holder of Options may not sell or transfer all or part of their Entitlement.

1.4 Shortfall

The Company reserves the right, within three (3) months of the Closing Date, to allot and issue the Shortfall at the discretion of the Directors, in consultation with the Underwriter. Do not complete a Shortfall Application Form unless you are directed to do so by the Underwriter or one of the Directors.

The offer of Options under the Shortfall is independent from the Offer and will remain open after the Offer has closed for a period not exceeding 3 months.

1.5 Issue of Options

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

Pending the issue of the Options 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.

1.6 Market price of Shares on ASX

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 3 months immediately preceding the date of lodgement of this Prospectus with the ASIC and the respective dates of those sales were:

• (a) Highest – 19.5 cents on 10 January 2008; and

• (b) Lowest – 10 cents on 19 February 2008.

The latest available closing sale price of the Company’s Shares on ASX prior to the lodgement of this Prospectus with the ASIC was $0.11 per Share on 18 March 2008.

1.7 Underwriter

The Offer is 50% underwritten by RM Capital (Underwriter). Please refer to Section 5.2 of this Prospectus for a summary of the terms and conditions of the Underwriting Agreement.

Pursuant to the Underwriting Agreement, in consideration for the Underwriter

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underwriting 50% of the Offer, the Company has agreed to pay the Underwriter a fee equal to 5% of the underwritten amount (i.e. the fee will be $18,715.70). In addition, the Company will pay at a rate of 5%, placement fees to Australian Financial Service Licence holders (including the Underwriter) in relation to amounts raised by them over and above the underwritten amount.

1.8

Electronic Prospectus

This Prospectus will be issued in paper form and as an electronic prospectus. The Offer constituted by this Prospectus in electronic form is available only to persons receiving this Prospectus or accompanying Entitlement and Acceptance Form in electronic form within Australia. The Corporations Act prohibits any person from passing onto another person the Entitlement and Acceptance Form unless it is attached to or accompanied by a complete and unaltered version of this Prospectus. Whilst the Offer is open, any person may obtain a hard copy of this Prospectus by contacting the Company using the contact details set out in this Prospectus.

1.9 Taxation Implications

The Directors do not consider that it is appropriate to give potential Applicants advice regarding the taxation consequences of applying for Options 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 potential applicants. Applicants should, therefore, consult their own professional tax adviser in connection with the taxation implications of the Offer.

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

The Company will not be issuing Option 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 underlying 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 Options 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 for underlying securities under CHESS and issuer sponsorship.

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

1.11 Privacy Act

If you complete an application for Options, 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,

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regulatory bodies, including the Australian Taxation Office, authorised securities brokers, print service providers, mail houses and the Company 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 (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 Options, the Company may not be able to accept or process your application.

1.12 Overseas Shareholders

The Entitlement Issue is not, and is not intended to, constitute an offer in any place or jurisdiction, or to any Shareholder to whom, it would not be lawful to make such an offer or to issue this Prospectus. 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 the Options or the underlying securities 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 issue of the Options pursuant to this Prospectus. The return of a completed Application Form will be taken by the Company to constitute a representation and warranty by the Applicant that all relevant approvals have been obtained.

1.13 Enquiries

Any questions concerning the Offer should be directed to the Chairman, Mr Charles MacKinnon, or the Company Secretary, Mr Graham Nicol, on +61 8 9331 8441.

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2. PURPOSE AND EFFECT OF THE OFFER

2.1 Purpose of the Offer and Use of Funds Raised

The purpose of the Offer is to raise approximately $748,627 (before expenses of the Offer). The funds raised from the Offer will be used to fund the Company’s activities including:

• (a) part payment for the acquisition of the Marshmallow Fun Company assets and business;

• (b) working capital; and

• (c) cash expenses of the Offer.

The estimated use of the proceeds of the Offer will be as follows:

USE OF FUNDS

Indicative Application of Funds	$Amount
Part payment of Marshmallow Fun Company assets/business	500,000
Working capital	193,573
Cash expenses of the Offer	55,054
Total	748,627

2.2 Effect of the Offer

The principal effect of the Offer will be to:

• (a) increase cash reserves by approximately $693,573 after deducting estimated cash expenses of the Offer and assuming all Options offered under this Prospectus are issued; and

• (b) increase the number of Options on issue from 18,689,212 as at the date of this Prospectus to approximately 93,551,920 Options.

2.3 Statement of Financial Position

Set out below is:

• (a) an audit-reviewed consolidated statement of financial position of the Company as at 31 December 2007; and

• (b) an unaudited pro-forma statement of financial position of the Company as at 31 December 2007 based on the consolidated financial position referred to in (a) above, incorporating and assuming:

• (i) the payment of cash costs of the Offer of $55,054 (which are payable from the proceeds of the Offer);

• (ii) the Offer of 74,862,708 Options to raise approximately $748,627;

• (iii) the acquisition by the Company of the whole of the issued share capital of:

  • (A) Enertec Enterprises Limited (a Hong Kong based toy

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distributor and manufacturing agent); and

• (B) Toyway Ltd (a UK-based toy and hobby distributor);

• (iv) the acquisition by the Company of the business and assets of:

• (A) Reveal Entertainment Inc; and

• (B) the Marshmallow Fun Company;

• (v) the recording of the abovementioned acquisitions (based on the capital outlay paid or due) as investments without reflecting the underlying tangible or intangible asset values on a consolidated basis; and

• (vi) the completion of a placement to sophisticated investors of 10,423,932 Shares (as announced to the market on 9 January 2008) and an issue of 1,103,645 Shares to a Director and Senior Executive of the Company (approved by Shareholders on 11 February 2008) for a total amount of $1,612,855.

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BRAINYTOYS LIMITED PRO-FORMA STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2007

	Consolidated	Proforma
	accounts	Group
	31-Dec-07	31-Dec-07
CURRENT ASSETS
Cash and cash equivalents	1,347,188	2,485,627
Trade and other receivables	71,711	71,711
Inventory & work in progress	80,377	80,377
Financial assets	-
TOTAL CURRENT ASSETS	1,499,276	2,637,715
NON-CURRENT ASSETS
Property, plant and equipment
(Written down value)	87,329	87,329
Patents and trademarks	8,699	8,699
Other assets (investments)	1,278,272	8,497,679
Intellectual property	-
TOTAL NON-CURRENT ASSETS	1,374,300	8,593,707
TOTAL ASSETS	2,873,576	11,231,422
CURRENT LIABILITIES
Trade and other payables	194,044	194,044
Other liabilities	1,180,858	3,042,464
Short term provisions	36,769	36,769
TOTAL CURRENT LIABILITIES	1,411,671	3,273,277
NON-CURRENT LIABILITIES
Vendors		1,001,105
Borrowings	242,777	242,777
TOTAL NON-CURRENT LIABILITIES	242,777	1,243,882
TOTAL LIABILITIES	1,654,448	4,517,159
NET ASSETS	1,219,128	6,714,263
EQUITY
Issued capital	11,911,164	16,657,672
Share based payments reserve	287,973	287,973
Option premium reserve	-	748,627
		-
Accumulated losses	-10,980,009	10,980,009
TOTAL EQUITY	1,219,128	6,714,263

2.4 Pro Forma Capital Structure of the Company

Upon completion of the Offer of Options under this Prospectus, the capital structure of the Company will be:

Pro-forma Structure	No. of securities
Shares
Shares on issue as at the date of this Prospectus	107,370,004
Total Number of Shares on issue on completion of the Offer	107,370,004
Options
Options on issue as at the date of this Prospectus	18,689,212
Options offered pursuant to this Prospectus	74,862,708

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Total Number of Options on issue on completion of the Offer (see additional Options*)

93,551,920

* Additional Options:

Pursuant to Agreements entered into with RM Capital Pty Ltd on 16 October 2007 and 18 March 2008, the Company has agreed to issue to RM Capital Pty Ltd 4,000,000 Options on 26 March 2008 exercisable at 20 cents each on or before 30 June 2012 at an issue price of 0.5 cents each to raise $20,000 (subject to the Company having the capacity to issue further Shares in accordance with ASX Listing Rule 7.1.

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3. RIGHTS ATTACHING TO OPTIONS AND UNDERLYING SECURITIES

3.1 Rights Attaching to Options

The Options entitle the holder to subscribe for Shares on the following terms and conditions:

• (a) Each Option gives the Optionholder the right to subscribe for one Share. To obtain the right given by each Option, the Optionholder must exercise the Options in accordance with the terms and conditions of the Options.

• (b) The Options will expire at 5:00pm (WST) on 31 March 2013 (Expiry Date). Any Option not exercised before the Expiry Date will automatically lapse on the Expiry Date.

• (c) The amount payable upon exercise of each Option will be $0.20 (Exercise Price).

• (d) The Options held by each Optionholder may be exercised in whole or in part, and if exercised in part, multiples of 1,000 must be exercised on each occasion.

• (e) An Optionholder may exercise their Options by lodging with the Company, before the Expiry Date:

• (i) a written notice of exercise of Options specifying the number of Options being exercised; and

• (ii) a cheque or electronic funds transfer for the Exercise Price for the number of Options being exercised,

(Exercise Notice).

• (f) An Exercise Notice is only effective when the Company has received the full amount of the Exercise Price in cleared funds.

• (g) Within 10 business days of receipt of the Exercise Notice accompanied by the Exercise Price, the Company will allot the number of Shares required under these terms and conditions in respect of the number of Options specified in the Exercise Notice.

• (h) The Options are transferable.

• (i) All Shares allotted upon the exercise of Options will upon allotment rank pari passu in all respects with other Shares.

• (j) The Company will apply for quotation of the Options on ASX.

• (k) If at any time the issued capital of the Company is reconstructed, all rights of an Optionholder are to be changed in a manner consistent with the Corporations Act and the ASX Listing Rules at the time of the reconstruction.

• (l) There are no participating rights or entitlements inherent in the Options and Optionholders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options. However, the Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least 7 business days after the issue is announced. This will give Optionholders the opportunity to exercise their Options prior to the date for determining entitlements to participate in any such issue.

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• (m) An Option does not confer the right to a change in exercise price or a change in the number of underlying securities over which the Option can be exercised.

3.2 Rights Attaching to Shares (being the underlying securities)

The following is a summary of the more significant rights and liabilities attaching to Shares. Full details of the rights attaching to Shares are set out in the Company’s Constitution, a copy of which is available for inspection at the Company’s registered office during normal business hours.

The rights, privileges and restrictions attaching to Shares can be summarised as follows:

(a) Notice of Meetings

Each Shareholder is entitled to receive notice of general meetings of the Company. Except in certain circumstances, Shareholders are entitled to be present in person, or by proxy, attorney or representative to speak or to vote at general meetings of the Company or to join in demanding a poll. Shareholders may requisition general meetings in accordance with the Corporations Act.

(b) Voting

At a general meeting, on a show of hands, every person present who is either a member, a proxy, an attorney or a representative of a Shareholder has one vote. At the taking of a poll, every Shareholder present in person or by proxy, attorney or representative has one vote for each Share held.

(c)

Dividends

The Directors may from time to time authorise and pay dividends out of the profits of the Company. Dividends are payable in proportion to the number of Shares held by Shareholders.

(d) Winding Up

If the Company is wound up, the liquidator may, with the sanction of a special resolution, divide among the Shareholders the whole or any part of the property of the Company. The liquidator may also, with the sanction of a special resolution, vest the whole or any part of the property in a trustee on trust for Shareholders.

(e)

Transfer of Shares

A Shareholder may transfer Shares by a written transfer or by a transfer effected under a computerised or electronic system recognised by the Listing Rules or by the Corporations Act. The Directors may refuse to register a transfer of Shares where the Listing Rules permit the Company to do so. On any refusal to register a transfer of Shares, the Company must give written notice to the transferee and the reasons for the refusal.

(f)

Allotment of Shares

The Directors may, subject to the Constitution, allot new Shares with such

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terms and conditions as they think fit.

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4. RISK FACTORS

4.1 General

The Options offered under this Prospectus should be considered speculative.

The business activities of the Company are subject to various risks that may impact on the future performance of the Company. Some of these risks can be mitigated by the use of safeguards and appropriate systems and controls, but some are outside the control of the Company and cannot be mitigated. Accordingly, an investment in the Company carries no guarantee with respect to the payment of dividends, return of capital or price at which Shares will trade.

A number of material risk factors are set out below. This list is not exhaustive and potential Applicants should examine the contents of this Prospectus and consult their professional advisers before deciding whether to apply for Options.

4.2 Economic Risks

General economic conditions, movements in interest and inflation rates and currency exchange rates may have an adverse effect on the Company’s development and commercialisation activities, as well as on its ability to fund those activities.

4.3 Market Conditions

The market price of the Shares can fall as well as rise and may be subject to varied and unpredictable influences on the market for equities in general and toys and games stocks in particular. Neither the Company nor the Directors warrant the future performance of the Company or any return on an investment in the Company.

4.4 Product Sales and Development

The Company can make no representations that the manufacture and sale of the Company’s products will be successful; that the Company’s sales and profit milestones will be achieved or that the Company will develop further products that are commercially exploitable. Product sales can be delayed or fail, or product/market development may cease to be viable for a range of unexpected commercial reasons.

4.5 Business Relationship Risks

The Company enters into business relationships with various parties for the sale of various products.

In these business relationships, there is the risk of an adverse impact on the Company associated with insolvency, default or other managerial failure or activities of any of the other parties involved.

4.6 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.

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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, and it 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.

4.7 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.

4.8 Uncertainty on Future Profitability

The Company’s ability to operate profitably in the future will depend on its ability to commercialise its products with other organisations on commercial terms. This will depend on the ultimate demand for its products by consumers, which cannot be guaranteed. There is no certainty therefore that the Company can successfully commercialise its projects.

Other 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 regulatory 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.

4.9 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

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company’s future business, operating results and financial position.

4.10 Potential Acquisitions

As part of its business strategy, the Company may make acquisitions of or significant investments in complementary companies, products or technologies, although no such acquisitions or investments are currently planned. Any such future transactions would be accompanied by the risks commonly encountered in making acquisitions of companies, products and technologies.

4.11 Additional Requirements for Capital

The Company’s capital requirements depend on numerous factors. Depending on the Company’s ability to generate income from its operations, the Company may require further financing in addition to amounts raised under the capital raising. 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 scale back its exploration programmes as the case may be.

4.12 Licensing, Manufacturing and Distribution Agreements

The Company is a party to a number of different licensing, manufacturing and distribution agreements. There can be no assurance given that there will be no detrimental impact on the Company if one or more of these agreements is either breached by another party or if, for reasons outside of the Company’s control, an agreement cannot be renewed or is terminated.

4.13 Reliance on Key Management

The responsibility of overseeing the day-to-day operations and the strategic management of the Company depends substantially on its senior management and its key personnel. There can be no assurance given that there will be no detrimental impact on the Company if one or more of these employees cease their employment.

4.14 Investment Speculative

The above 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 above 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, once exercised, the Options to be issued pursuant to this Prospectus carry no guarantee with respect to the payment of dividends, return of capital or the market value of Shares.

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

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5. ADDITIONAL INFORMATION

5.1 Continuous Disclosure Obligations

This document is issued pursuant to section 713 of the Corporations Act as a transaction specific prospectus.

Section 713 of the Corporations Act enables companies to issue transaction specific prospectuses where those companies are and have been for a period of 12 months disclosing entities.

The Company is a disclosing entity under the Corporations Act and, as such, is subject to regular reporting and disclosure requirements. As a listed company, the Company is subject to the Listing Rules that require it to immediately notify ASX of any information concerning the Company of which it is or becomes aware and which a reasonable person would expect to have a material effect on the price or value of Shares. Once the Options offered pursuant to this Prospectus are exercised, they will be Shares of a class that has been continuously quoted on ASX for at least 12 months prior to the date of issue of this Prospectus.

Copies of documents lodged in relation to the Company with the ASIC may be obtained from or inspected at any office of the ASIC.

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

The Company will provide a copy of each of the following documents free of charge, to any person on request during the application period in relation to this document:

• (a) the Annual Report of the Company most recently lodged with the ASIC;

• (b) any half year financial report lodged with ASIC by the body after the lodgement of the Company’s 2007 Annual Financial Report and before the lodgement of this Prospectus with the ASIC; and

• (c) any continuous disclosure given by the Company after the lodgement of that Annual Report and before lodgement of that annual report and before lodgement of this document with ASIC.

For details of documents lodged with the ASX since the date of lodgement of the 2007 Annual Report refer to the table set out below:

Date	Announcement
18/03/2008	Director Appointment/Resignation
28/02/2008	Half Yearly Report and Accounts
22/02/2008	Change in substantial holding
21/02/2008	Notice of Extraordinary General Meeting/Proxy Form
20/02/2008	Appendix 3B
19/02/2008	Progress on recent developments
12/02/2008	Results of Meeting
29/01/2008	Appendix 4C - quarterly (revised)

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29/01/2008	Appendix 4C - quarterly
14/01/2008	Master Toy Licensee Deal
14/01/2008	Acquisition of UK Business
11/01/2008	Notice of Extraordinary General Meeting/Proxy Form
09/01/2008	Acquisition of business
09/01/2008	Appendix 3B
09/01/2008	Placement
03/01/2008	Resolution of Potential Dispute
02/01/2008	BRT Appoints Group COO
21/12/2007	Master Toy License - Update
18/12/2007	Trading Halt
13/12/2007	Results of AGM
11/12/2007	Notice of Potential Dispute
07/12/2007	Initial Director’s Interest Notice
04/12/2007	Brainytoys Investor/Broker Presentation December 2007
30/11/2007	Brainytoys AGM 2007 Managing Director’s Address
30/11/2007	Brainytoys AGM 2007 Chairman’s Address
30/11/2007	Proposed Acquisition of UK Toy Distribution Business
30/11/2007	Merchandise Licensing Update
28/11/2007	Appointment of director
09/11/2007	Appendix 3B correction to lodgement 6 Nov 2007
09/11/2007	Enertec and Reveal Business Acquisitions Finalised
06/11/2007	Appendix 3B
06/11/2007	Notice under Section 708A
02/11/2007	Issue of Shares
31/10/2007	Outcome of Supplementary Prospectus
30/10/2007	Notice of Annual General Meeting/Proxy Form

5.2 Underwriting Agreement

On 19 March 2008, the Company entered into an underwriting agreement (Underwriting Agreement) with RM Capital (Underwriter).

Pursuant to the Underwriting Agreement, the Underwriter agreed to underwrite 50% of the Offer. In consideration for this, the Company has agreed to pay the Underwriter a fee equal to 5% of the underwritten amount. In addition, the Company will pay at a rate of 5%, placement fees to Australian Financial Service Licence holders (including the Underwriter) in relation to amounts raised by them over and above the underwritten amount.

The Company has also agreed to reimburse the Underwriter for all reasonable costs and expenses incurred in connection with the underwriting.

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The Underwriter may, prior to the issue of Options pursuant to the Offer, terminate its obligations under the Underwriting Agreement by written notice to the Company if any of the following events occur:

• (a) ASX listing: ASX does not give approval for the Options to be listed for official quotation, or if approval is granted, the approval is subsequently withdrawn, qualified or withheld;

• (b) Index fall: the S&P/ASX 200 Index is at any time after the date of the Underwriting Agreement 10% or more below its respective level as at the close of business on the Business Day prior to the date of the agreement;

• (c) Indictable offence: a director of the Company or any related corporation is charged with an indictable offence;

• (d) Return of capital or financial assistance: the Company or a related corporation takes any steps to undertake a proposal contemplated under section 257A or passes or takes any steps to pass a resolution under section 260B of the Corporations Act, without the prior written consent of the Underwriter;

• (e) Banking facilities: the Company’s bankers terminating or issuing any demand or penalty notice or amending the terms of any existing facility or claiming repayment or accelerated repayment of any facility or requiring additional security for any existing facility;

• (f) Change in laws: any of the following occurs:

• (i) the introduction of legislation into the Parliament of the Commonwealth of Australia or of any State or Territory of Australia; or

• (ii) the public announcement of prospective legislation or policy by the Federal Government, or the Government of any State or Territory; or

• (iii) the adoption by the ASIC, its delegates, ASX, the Reserve Bank of Australia or any other regulatory authority of any regulations or policy,

• (iv) which does or is likely to prohibit, restrict or regulate the principal business of the Company or the operation of stock markets generally;

• (g) Failure to comply: the Company or any related corporation fails to comply with any of the following:

• (i) a provision of its constitution;

• (ii) any statute;

• (iii) a requirement, order or request, made by or on behalf of the ASIC or any Governmental Agency; or

• (iv) any material agreement entered into by it;

• (h) Alteration of capital structure or constitution: the Company alters its capital structure or its constitution without the prior written consent of the

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Underwriter;

• (i) Hostilities: there is an outbreak of hostilities or a material escalation of hostilities (whether or not war has been declared) after the date of the agreement involving one or more of Australia, Indonesia, Japan, Russia, the United Kingdom, the United States of America, or the Peoples Republic of China, other than hostilities involving Afghanistan, any country bordering Afghanistan or any Arab country (being a country the majority of whose inhabitants are of Arab ethnicity);

• (j) Extended Force Majeure: a force majeure, which prevents or delays an obligation under the agreement, lasting in excess of 2 weeks occurs;

• (k) Default: the Company is in default of any of the terms and conditions of the agreement or breaches any warranty or covenant given or made by it under the agreement;

• (l) Adverse change: any adverse change occurs which materially impacts or is likely to impact the operational or financial position of the Company or a related corporation (including but not limited to an administrator, receiver, receiver and manager, trustee or similar official being appointed over any of the assets or undertaking of the Company or a related corporation);

• (m) Investigation: any person is appointed under any legislation in respect of companies to investigate the affairs of the Company or a related corporation;

• (n) Prescribed Occurrence: a prescribed occurrence occurs;

• (o) Suspension of debt payments: the Company suspends payment of its debts generally;

• (p) Litigation: litigation, arbitration, administrative or industrial proceedings are after the date of the agreement commenced against the Company or any related corporation;

• (q) Board and senior management composition: there is a change in the composition of the Board or a change in the senior management of the Company before the date of issue of the Options without the prior written consent of the Underwriter;

• (r) Breach of Material Contracts: any material contract to which the Company or a related corporation is a party is terminated or substantially modified;

• (s) Event of Insolvency: an event of insolvency occurs in respect of the Company or a related corporation; or

• (t) Judgment against a related corporation: a judgment in an amount exceeding $250,000 is obtained against the Company or a related corporation and is not set aside or satisfied within 7 days.

5.3 RM Capital Mandate

Pursuant to Agreements entered into with RM Capital on October 16 2007 and 18 March 2008, the Company has agreed to issue to RM Capital 4 million Options on 26 March 2008 exercisable at 20 cents each on or before 30 June 2012 at an issue price of 0.5 cents each to raise $20,000 (subject to the Company having the

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capacity to issue further Shares in accordance with Section 7.1 of the ASX Listing Provisions).

5.4 Consents

The following consents have been given in accordance with the Corporations Act and have not been withdrawn as at the date of lodgement of this Prospectus with the ASIC.

Steinepreis Paganin have given and have not withdrawn their written consent prior to the lodgement of this Prospectus with the ASIC to be named in this Prospectus as the solicitors to the Company.

RM Capital has given and has not withdrawn its written consent prior to the lodgement of this Prospectus with the ASIC to be named in this Prospectus as the Underwriter for the Offer.

None of the entities referred to in this Section 5.3 have authorised or caused the Offer of this Prospectus and do not accept any liability to any persons in respect of any false or misleading statement in, or omission from, any part of this Prospectus.

5.5 Directors’ Interests and Remuneration of Directors

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:

• (a) the promotion or formation of the Company;

• (b) property acquired or proposed to be acquired by the Company in connection with its formation or promotion or the offer of securities pursuant to this Prospectus; or

• (c) the offer of Options 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 or her to become, or to qualify him or her as, a Director or otherwise for services rendered by him or her or by the firm in connection with the promotion or formation of the Company.

The Directors’ interests in Shares and unlisted Options at the date of this Prospectus are:

Directors	Shares	Unlisted Options
Mr Charles MacKinnon	5,007,451	2,393,750
Mr Alex Aguero	5,675,806	5,121,450
Mr Graham Nicol	620,825	512,500
Mr Lawrence H. Bernstein	328,445	1,000,000
Mr Jean Pierre de la Valdene	nil*	nil

*A related party to Mr de la Valdene, Marshmallow Fun Company, LLC, holds 19,048,000 Shares. These Shares were issued as part of the acquisition of the business and assets of Marshmallow Fun Company, LLC.

The Constitution of the Company provides that the 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 (currently set at $150,000) to be divided among the Directors and in default of agreement then in equal shares.

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Directors, companies associated with the Directors or their associates are also reimbursed for all reasonable expenses incurred in the course of conducting their duties which include, but are not in any way limited to, out of pocket expenses, travelling expenses, disbursements made on behalf of the Company and other miscellaneous expenses.

No non-executive Director shall be paid as part or whole of his remuneration a commission on or a percentage of profits or operating revenue.

If any Director is called upon to perform extra services or make any special exertions on behalf of the Company or its business, the Directors may remunerate that Director in accordance with such services or exertions, and the remuneration may be either in addition to or in substitution for the remuneration provided in the form of Directors' fees.

In the two years prior to lodgement of this Prospectus, a total of $528,846 has been paid or is payable by the Company to executive and non-executive Directors, former directors, companies associated with the directors, or their associates.

5.6 Interests of Experts and Advisers

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

• (a) the promotion or formation of the Company;

• (b) property acquired or proposed to be acquired by the Company in connection with its formation or promotion or the offer of Options pursuant to this Prospectus; or

• (c) the offer of Options pursuant to this Prospectus,

and no amounts have been paid or agreed to be paid (in cash or shares or otherwise) to any expert or adviser or to any firm in which any such expert or adviser is a partner, either to induce him or her to become, or to qualify him or her as, an expert or adviser or otherwise for services rendered by him or by the firm in connection with the promotion or formation of the Company.

Steinepreis Paganin have acted as solicitor to the Company in relation to the Offer. The Company estimates it will pay Steinepreis Paganin $7,500 in respect of this work.

RM Capital has acted as Underwriter in respect of the Offer to the Company in relation to the Offer. The Company estimates it will pay RM Capital $18,715.70 in respect of this work. Further details in respect of the fees to be paid to RM Capital are set out in Section 5.2 of this Prospectus.

5.7 Expenses of the Offer

The estimated expenses of the Offer (excluding GST) are as follows:

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Item	Expense
ASIC fees	$2,010
Printing, mailing and other expenses	$3,113
ASX fees	$5,000
Legal fees	$7,500
Underwriting and Placement Fees	$37,431
Total	$55,054

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6. DIRECTORS’ AUTHORISATION AND CONSENT

This Prospectus is issued by the Company and its issue has been authorised by a resolution of the Directors.

In accordance with Section 720 of the Corporations Act, each Director has consented to the lodgement of this Prospectus with the ASIC.

---

Mr Charles MacKinnon For and on behalf of Brainytoys Limited

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GLOSSARY

Applicant means an investor who applies for Options pursuant to the Offer.

ASIC means the Australian Securities and Investments Commission.

ASX means, as the context requires, ASX Limited (ACN 008 624 691) or the Australian Securities Exchange

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 5:00pm (WST) on 18 April 2008 (unless varied by the Directors).

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 to subscribe for three (3) Options for every five (5) Shares held by Shareholders on the Record Date and Entitlements has a corresponding meaning.

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

Foreign Shareholder means a person registered as a Shareholder as at the Record Date whose registered address is outside Australia or New Zealand.

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

Offer or Entitlement Issue means the non-renounceable entitlement issue of three (3) Options for every five (5) Shares held.

Option means an option to acquire a Share.

Prospectus means this prospectus.

Record Date means 1 April 2008.

RM Capital or Underwriter means R M Capital Pty Ltd (ABN 065 412 820).

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

Share Registry means Computershare Investor Services Pty Limited (ABN 48 078 279 277).

Shareholder means a shareholder of the Company.

Shortfall means the Options (if any) not taken up under the Entitlement Issue.

Shortfall Application Form means the shortfall application form either attached to or accompanying this Prospectus.

Underwritten Options means 37,431,350 Options the subject of the Offer.

WST means Western Standard Time.

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ONLY COMPLETE THIS SHORTFALL APPLICATION FORM IF YOU ARE DIRECTED TO DO SO BY THE UNDERWRITER OR THE COMPANY.

SHORTFALL APPLICATION FORM Brainytoys Limited

ABN 28 001 894 033

REGISTERED OFFICE : 6-B Bowen Street

O'CONNOR WA 6163

APPLICANT’S DETAILS:

Full name (PLEASE PRINT)

Title, Given Name(s) & Surname or Company Name

Joint Applicant #2 or Joint Applicant #3 or

Postal Address (PLEASE PRINT) Street Number Street

Suburb/Town State Post Code

ABN, Tax File Number or Exemption

Applicant #2 Applicant #3

CHESS HIN or Existing SRN (where applicable)

Number of Options applied for Application Money enclosed at 1 cent per Option A$……………………………

I/We whose full name(s) and address appear above hereby apply for the number of Options shown above (to be allocated to me/us by the Company in respect of this Application) under the Prospectus on the terms set out in the Prospectus. Cheque Details:

PLEASE ENTER Drawer CHEQUE DETAILS THANK YOU My/Our contact numbers in the case of inquiry are: Telephone ( ) . . . . . . . . . . . . . . . . . . . . . . . . . Fax ( ) . . . . . . . .	Drawer	Bank	BSB or Branch	Amount
		. . . . . . . . . . . . . . .

NOTE: Cheques should be made payable to “ Brainytoys Limited – Entitlement Offer Account ”, crossed “NOT NEGOTIABLE” and forwarded to the Company’s Registered Office 6-b Bowen Street O’Connor WA 6163 to arrive no later than 5.00pm WST on that date which is 3 months after the Closing Date (or such earlier date as directed by the Company) .

Declaration

This Shortfall Application Form does not need to be signed. By lodging this Shortfall Application Form and a cheque for the application money this Applicant hereby:

(1) applies for the number of Options specified in the Shortfall Application Form or such lesser number as may be allocated by the Directors; (2) agrees to be bound by the constitution of the Company; and

(3) authorises the Directors to complete or amend this Shortfall Application Form where necessary to correct any errors or omissions.

INSTRUCTIONS TO APPLICANTS

Please post or deliver the completed Shortfall Application Form together with a cheque to the Company’s Registered Office 6-b Bowen Street O’Connor WA 6163. If an Applicant has any questions on how to complete this Shortfall Application Form, please telephone the Company on (08) 9331 8441. The Form must be received by the Company no later than 5.00pm (WST) on the date which is 3 months after the Closing Date (or such earlier date as directed by the Company).

A. Application for Options

The Shortfall Application Form must only be completed in accordance with instructions included in the Prospectus.

• B. Name of Applicant

• Write the Applicant’s FULL NAME. This must be either an individual’s name or the name of a company. Please refer to the bottom of this page for the correct form of registrable title. Applications using the incorrect form of registrable title may be rejected.

C. Name of Joint Applicants or Account Designation

If JOINT APPLICANTS are applying, up to three joint Applicants may register. If applicable, please provide details of the Account Designation in brackets. Please refer to the bottom of this page for instructions on the correct form of registrable title.

D. Address

Enter the Applicant’s postal address for all correspondence. If the postal address is not within Australia, please specify Country after City/Town.

E. Contact Details

Please provide a contact name and daytime telephone number so that the Company can contact the Applicant if there is an irregularity regarding the Shortfall Application Form.

F. CHESS HIN or existing SRN Details

The Company participates in CHESS. If the Applicant is already a participant in this system, the Applicant may complete this section with their existing CHESS HIN. If the applicant is an existing shareholder with an Issuer Sponsored account, the SRN for this existing account may be used. Otherwise leave the section blank and the Applicant will receive a new Issuer Sponsored account and statement.

G. Cheque Details

Make cheques payable to “ Brainytoys Limited – Entitlement Offer Account ” in Australian currency and cross them “Not Negotiable”. Cheques must be drawn on an Australian Bank. The amount of the cheque should agree with the amount shown on the Shortfall Application Form.

• H. Declaration

By completing the Shortfall Application Form, the Applicant will be taken to have made to the Company the declarations and statements therein. The Shortfall Application Form does not need to be signed.

If a Shortfall Application Form is not completed correctly, or if the accompanying payment is for the wrong amount, it may still be accepted. Any decision of the Directors as to whether to accept a Shortfall Application Form, and how to construe, amend or complete it, shall be final. A Shortfall Application Form will not however, be treated as having offered to subscribe for more Shares than is indicated by the amount of the accompanying cheque.

Forward your completed application together with the application money to:

Brainytoys Limited – Entitlement Offer Account 6-b Bowen Street O’CONNOR WA 6163

CORRECT FORMS OF REGISTRABLE TITLE

Note that ONLY legal entities are allowed to hold securities. Shortfall Application Forms must be in the name(s) of a natural person(s), companies or other legal entities acceptable to the Company. At least one full given name and the surname is required for each natural person. Shortfall Application Forms cannot be completed by persons under 18 years of age. Examples of the correct form of registrable title are set out below.

**Type of Investor **	**Correct Formof Registration **	**Incorrect Formof Registration **
Individual Usegiven names in full,not initials	Mr John Alfred Smith	J A Smith
CompanyUse the company’s full title,not abbreviations	ABC PtyLtd	ABC P/L or ABC Co
Joint Holdings Use full and complete names	Mr Peter Robert Williams & Ms Louise Susan Williams	Peter Robert & Louise S Williams
Trusts Use the trustee(s) personal name(s).	Mrs Susan Jane Smith	Sue Smith Family Trust
Deceased Estates Use the executor(s) personal name(s).	Ms Jane Mary Smith & Mr Frank William Smith	Estate of late John Smith or JohnSmith Deceased
Minor (a person under the age of 18) Use the name of a responsible adult with an appropriate designation.	Mr John Alfred Smith	Master Peter Smith
Partnerships Use the partners personal names.	Mr John Robert Smith & Mr Michael John Smith	John Smith and Son
Long Names.	Mr John William Alexander Robertson-Smith	Mr John W A Robertson-Smith
Clubs/Unincorporated Bodies/Business Names Use office bearer(s) personal name(s).	Mr Michael Peter Smith	ABC Tennis Association
Superannuation Funds Use the name of the trustee of the fund.	Jane Smith Pty Ltd	Jane Smith Pty Ltd Superannuation Fund