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Adultshop.com Limited

ABN 92 009 147 924

TARGET’S STATEMENT REJECT SEXYLAND’S OFFER IS INADEQUATE

This is an important document and requires your immediate attention. If you have any doubts as to what you should do, please consult your independent legal, financial or other professional adviser immediately.

LEGAL ADVISER

Key dates

Date of Sexyland’s Offer	7 December 2009
Date of this Target’s Statement	11 December 2009
Offer Close Date	28 January 2010

Important notices

Target’s Statement

This document is a Target’s Statement issued by Adultshop.com Limited ABN 92 009 147 924 (Adultshop) under Part 6.5 Division 3 of the Corporations Act in response to the replacement bidder’s statements issued by Sexyland Australia Pty Ltd ABN 11 099 522 933 (Sexyland) dated 7 December 2009.

A copy of this Target’s Statement was lodged with ASIC and sent to ASX on 11 December 2009. Neither ASIC, ASX nor any of its officers take any responsibility for the contents of this Target’s Statement.

This Target’s Statement contains important information. You should read this Target’s Statement carefully and in its entirety. If you have any doubts as to what you should do, please consult your independent legal, financial or other professional adviser immediately.

No account of personal circumstances

This Target’s Statement does not take into account your individual investment objectives, financial situation or particular needs. It does not contain personal financial or taxation advice. You may wish to seek your own independent legal, financial, taxation or other professional advice before making a decision as to whether or not to accept Sexyland’s Offer.

Forward looking statements

This Target’s Statement may contain forward looking statements. Any forward looking statements in this Target’s Statement reflect views held at the date of this Target’s Statement. All statements other than statements of historical fact are forward looking statements. You should be aware that such statements are only predictions and are based on general and specific assumptions relating to the future, many of which are subject to inherent risks and uncertainties which are beyond the control of Adultshop and its Directors.

Actual events or results may differ materially from the events or results expected or implied in any forward looking statement. None of Adultshop, any

of its officers, any person named in this Target’s Statement with their consent, or any person involved in the preparation of this Target’s Statement makes any representation or warranty (either express or implied) as to the accuracy or likelihood of fulfilment of any forward looking statement. You are cautioned not to place undue reliance on any forward looking statements.

Defined terms and interpretation

Capitalised terms used in this Target’s Statement are defined in section 8. That section also sets out certain rules of interpretation which apply to this Target’s Statement.

Sexyland’s Share Offer and Option Offers

Sexyland has made five separate Offers for securities in Adultshop, being the Share Offer, an Option Offer for the Listed Options and an Option Offer in each of three classes of Employee Options. In this Target’s Statement, a reference to Offer or Sexyland’s Offer or the Sexyland Offer means the Share Offer and the Option Offers, or one or more of them as the context requires.

Foreign jurisdictions

The distribution of this Target’s Statement in jurisdictions outside Australia and New Zealand may be restricted by law and persons who come into possession of it should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws.

Further information

If you have any questions in relation to Sexyland’s Offer, please call Adultshop on (08) 9227 6777.

The Directors are committed to ensuring Shareholders and Optionholders are kept informed of developments. Shareholders and Optionholders are encouraged to review releases made by Adultshop to ASX (which are available from ASX’s website – www.asx.com.au) as well as exercise their right under the Corporations Act to review copies of all documents lodged by Adultshop with ASIC.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page i

Contents
What You Should Do…		1
Letter from the Chairman of Adultshop		2
Section 1	Why You Should REJECT Sexyland’s Offer	3
Section 2	Frequently Asked Questions	11
Section 3	Your Choices as a Shareholder	17
Section 4	Your Choices as an Optionholder	18
Section 5	Other Important Information about Sexyland’s Offer	20
Section 6	Risk Factors	26
Section 7	Additional Information	28
Section 8	Glossary and Interpretation	34
Approval of Target’s Statement		37
Corporate Directory		38
Annexure	ASX Announcements	39

TO REJECT SEXYLAND’S INADEQUATE OFFER, DO NOTHING AND IGNORE

ALL DOCUMENTS SENT TO YOU BY SEXYLAND.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page ii

What you should do…

Why should you reject Sexyland’s Offer…

Sexyland’s Offer for your Shares is a discount to the current and recent market price[1]
Sexyland’s Offer for your Shares does not reflect the value of Adultshop’s net tangible assets[2]
Sexyland’s Offer for your Listed Options is a significant discount to current and recent market price[3]
Adultshop is taking positive steps to aim to unlock the value of its assets
Unless certain conditions are waived, Sexyland’s Offer will not meet its bid conditions and Sexyland’s Offer is highly conditional and uncertain
Adultshop disagrees with a number of statements made by Sexyland in its Bidder’s Statements

What you should do…

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To REJECT Sexyland’s inadequate Offer, simply 1. DO NOTHING. Ignore all documents sent to you by Sexyland.

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You should read this Target’s Statement which contains your Directors’ recommendation to REJECT Sexyland’s inadequate Offer and the reasons for this recommendation.

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1 The closing price on ASX of Shares on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 1.1 cents per Share. Further details of recent trading prices of Shares are set out in section 1.1.

2 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

3 The closing price on ASX of Listed Options on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 0.3 cents per Listed Option. Since the Listed Options were quoted on ASX they have, up to 10 December 2009 (being the last trading day prior to the date of this Target’s Statement), never traded below Sexyland’s Offer Price for Options of $0.0006 per Option.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 1

Letter from the Chairman of Adultshop

11 December 2009

Dear Shareholder and Optionholder

YOUR DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU REJECT SEXYLAND’S INADEQUATE OFFER

You will have recently received unsolicited offers from Sexyland seeking to acquire your Shares and/or Options.

Your Directors unanimously recommend that you REJECT Sexyland’s Offer. Your Directors intend to REJECT Sexyland’s Offer on its current terms in respect of the Shares (which collectively comprise 39.68% of the Shares) and Options (which collectively comprise 62.44% of the Options) in which they have a direct or indirect interest.

Briefly, the main objections of your Directors to Sexyland’s Offer are:

the Share Offer is at a discount to the current and recent market price;[4]
the Share Offer does not reflect the value of Adultshop’s net tangible assets;[5]
Sexyland’s Offer for Listed Options is at a significant discount to the current and recent market price;[6]
Adultshop is taking positive steps to aim to unlock the value of its assets for all Shareholders and provide a more attractive opportunity for Optionholders;
Unless certain conditions are waived, Sexyland’s Offer will not meet its bid conditions and Sexyland’s Offer is highly conditional and uncertain;
Adultshop disagrees with a number of statements made by Sexyland in its Bidder’s Statements.

Your Directors consider that Sexyland’s Offer undervalues Adultshop and, accordingly, your Directors unanimously recommend that you REJECT Sexyland’s Offer.

This Target’s Statement sets out your Directors’ formal response to Sexyland’s Offer, including the detailed reasons why your Directors recommend that you REJECT Sexyland’s inadequate Offer. We encourage you to read carefully all of the information contained in this Target’s Statement and seek independent advice if required. If you have any queries in relation to your Directors’ recommendation, please call Adultshop on (08) 9227 6777.

Optimising value for Shareholders and Optionholders is our primary objective. The Sexyland Offer falls well short of achieving this objective and your Directors recommend that you should therefore REJECT it.

Yours sincerely,

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Kimberley Heitman

Chairman

4 The closing price on ASX of Shares on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 1.1 cents per Share. Further details of recent trading prices of Shares are set out in section 1.1.

5 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

6 The closing price on ASX of Listed Options on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 0.3 cents per Listed Option. Since the Listed Options were quoted on ASX they have, up to 10 December 2009 (being the last trading day prior to the date of this Target’s Statement), never traded below Sexyland’s Offer Price for Options of $0.0006 per Option.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 2

Section 1 Why you should REJECT Sexyland’s Offer

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Why your Directors unanimously recommend that you REJECT Sexyland’s Offer…

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1.1 The Share Offer is at a discount to the current and recent market price

The Share Offer is at a discount to the current Share price and recent applicable volume weighted average ( VWAP ) Share prices as evaluated by the following:

Between the date Adultshop announced its recent non renounceable rights issue (9 September 2009) and the date prior to Sexyland announcing its Offer, the VWAP of the Shares was 0.88 cents per Share. Sexyland is seeking to acquire your Shares at a 4% discount to this price.
Between the date Sexyland announced its Offer on 8 October 2009 and 10 December 2009, being the last trading day prior to the date of this Target’s Statement, the VWAP of the Shares has been 1.03 cents per Share. Sexyland is seeking to acquire your Shares at a 18.36% discount to this price.
The closing price of the Shares on 7 October 2009 (being the date prior to Sexyland announcing its Offer) was 1 cent per Share. Sexyland is seeking to acquire your Shares at a 16% discount to this price.
The closing price of the Shares on 10 December 2009, being the last trading day prior to the date of this Target’s Statement was 1.1 cents per Share. Sexyland is seeking to acquire your Shares at a 23.64% discount to this price.

The Directors believe that the current Share price and recent applicable VWAP of the Shares referred to above are more appropriate comparisons than those contained in Sexyland’s Bidder’s Statement. The VWAPs referred to in Sexyland’s Bidder’s Statements included periods (eg calendar year 2009) during which global markets were depressed generally. Further, Sexyland seeks in its Bidder’s Statements to make a comparison to Adultshop’s market capitalisation in 1999 – a comparison that the Directors do not think is appropriate given the substantial period of time that has passed since 1999 and the significant changes in both global market dynamics and the adult entertainment industry in the last 10 years.

If you accept the Share Offer you will relinquish ownership of your Shares (subject to limited rights of withdrawal) in circumstances where a higher price may, subject to prevailing Share prices on ASX and liquidity, be available to you through ASX or which may arise through an alternative proposal (if any such alternate proposal is made).

As discussed in section 1.2, your Directors believe that the underlying value of the Shares based on the net tangible assets of Adultshop is also relevant information against which to measure the Share Offer.

1.2 The Share Offer does not reflect the value of Adultshop’s net tangible assets

The Share Offer of $0.0084 per Share is significantly below the net tangible asset backing of 2.4 cents per Share based on Adultshop’s 2009 Annual Report audited by Ernst & Young and released to ASX on 20 October 2009, and adjusted for the Shares issued, and net proceeds from,

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 3

Section 1 Why you should REJECT Sexyland’s Offer

the Entitlements Issue (completed subsequent to 30 June 2009).

The net tangible asset backing per Share is calculated based on the following pro-forma consolidated balance sheet adjusted to show the effect of the Entitlements Issue. It has been prepared based on the audited consolidated financial statements for Adultshop for the year ended 30 June 2009. The accounting policies adopted by Adultshop are set out in Adultshop’s financial report for the year ended 30 June 2009. Pro-forma adjustments have been made to reflect the net proceeds of the Entitlements Issue of approximately $1,109,000. Other than the Entitlements Issue, there have been no material changes to the financial position of Adultshop since 30 June 2009 so far is known to the Directors.

Pro Forma Balance Sheet at 30 June 2009

Current Assets Cash and cash equivalents Trade and other receivables Inventories Prepayments and deposits Total Current Assets Non-current Assets Property, plant and equipment Intangible assets and goodwill Total Non-current Assets TOTAL ASSETS Current Liabilities Trade and other payables Interest-bearing loans and borrowings Provisions Total Current Liabilities Non-current Liabilities Interest-bearing loans and borrowings Provisions Total Non-current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Equity attributable to equity holders of the Company Contributed equity Accumulated losses Reserves TOTAL EQUITY	Audited balance sheet 30 June 2009 Pro-forma adjustments to reflect Entitlements Issue Pro-forma balance sheet 30 June 2009 $’000 $’000 $’000 2,178 1,109 3,287 3,714 - 3,714 8,338 - 8,338 854 - 854
	15,084 1,109 16,193
	2,388 - 2,388 542 - 542
	2,930 - 2,930
	18,014 1,109 19,123
	2,308 - 2,308 91 - 91 642 - 642
	3,041 - 3,041
	15 - 15 665 - 665
	680 - 680
	3,721 - 3,721
	14,293 1,109 15,402
	68,217 1,109 69,326 (52,683) - (52,683) (1,241) - (1,241)
	14,293 1,109 15,402

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 4

Section 1 Why you should REJECT Sexyland’s Offer

Based on the above pro-forma consolidated balance sheet as at 30 June 2009 adjusted for Shares issued under, and the net proceeds from, the Entitlements Issue, the net tangible asset backing of 2.4 cents per Share is calculated as follows:

Total net assets at 30 June 2009 Less: Intangible assets at 30 June 2009 Add: Net proceeds from recent Entitlements Issue Total net assets at 30 June 2009 (adjusted for net proceeds from Entitlements Issue) Total number of ordinary shares on issue after the Entitlements Issue Net tangible asset value per share	14,293,000 (542,000) 1,109,000 $14,860,000	14,293,000 (542,000) 1,109,000 $14,860,000
	614,168,142
		2.4 cents

Based on the net tangible asset backing of 2.4 cents per Share, your Directors are of the view that the Share Offer significantly undervalues the Shares. In this regard, the Share Offer represents a significant discount of 65% to the net tangible asset backing per Share.

The Directors believe that Sexyland has failed to acknowledge the underlying value of Adultshop’s net tangible assets and the current Share Offer Price does not properly compensate the Shareholders and Optionholders for the disposal of their investment in Adultshop.

1.3 Sexyland’s Offer for Listed Options is at a significant discount to the current and recent market price

Sexyland’s Offer for Listed Options is at a significant discount to the current market price for Listed Options and the market price for the Listed Options at all times since the Listed Options were granted on the ASX to the date of this Target’s Statement. In this regard:

The Listed Options were quoted on the ASX on 28 October 2009. At all times since the Listed Options have traded on the ASX to the date of this Target’s Statement, the Listed Options have traded above Sexyland’s Offer Price for Listed Options of $0.0006 per Listed Option.
Between the date the Listed Options were quoted on the ASX and 10 December 2009, being the last trading day prior to the date of this Target’s Statement, the VWAP of the Listed Options has been 0.25 cents per Listed Option. Sexyland is seeking to acquire your Listed Options at a 76% discount to this price.
The closing price of Listed Options on 10 December 2009, being the last trading day prior to the date of this Target’s Statement was 0.30 cents per Listed Option. Sexyland is seeking to acquire your Listed Options at a 80% discount to this price.

If you accept Sexyland’s Offer for you Listed Options you will relinquish ownership of your Listed Options (subject to limited rights of withdrawal) where a higher price may, subject to prevailing prices for Listed Options on the ASX and liquidity, be available to you through the ASX or which may arise through any alternate proposal (if any such alternate proposal is made).

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 5

Section 1 Why you should REJECT Sexyland’s Offer

1.4 Adultshop is taking positive steps to unlock the value of it’s assets for all Shareholders

Your Directors are exploring alternatives to unlock value for Shareholders and provide a more attractive opportunity for Optionholders:

Under the Entitlement Issue (commenced prior to Sexyland’s Offer being announced), Adultshop raised approximately $1.1 million which will be used, in part, for considering strategic directions and alternatives for Adultshop and its businesses.
Since Sexyland’s Offer was announced, Adultshop has engaged Pitcher Partners to conduct a strategic review of Adultshop’s operations. That review has commenced and Shareholders will be kept informed as to its progress and outcomes. The Directors expect that Pitcher Partners’ strategic review will be completed before the end of the Offer Period.

In addition, Adultshop is currently considering options in respect to the potential sale of its noncore assets.

You should be aware that acceptance of Sexyland’s Offer will (subject to limited withdrawal rights and if Sexyland’s Offer proceeds) prevent you from participating in any benefit gained from pursuing such alternative opportunities and from sharing in Adultshop’s future.

Further, if you accept Sexyland’s Offer or sell your Shares or Options you will (subject to limited rights of withdrawal) lose any opportunity to obtain a higher price for your Shares or Options if:

any superior offer is made by another bidder for your Shares or Options; or
in respect of Shares and Listed Options, a higher price is available in due course on market.

If another takeover offer or other proposal relating to Adultshop is announced during the Offer Period, Adultshop will advise ASX accordingly.

1.5 Sexyland’s Offer will not meet the bid conditions and is highly conditional and uncertain

The Share Offer and each of the Option Offers are subject to a number of broad defeating conditions, including:

a Minimum Acceptance Condition (which will not be satisfied based on the current terms of Sexyland’s Offer); and also
that no Prescribed Occurrence occurs before the end of the relevant Offer Period.

Minimum Acceptance Condition

The Share Offer and each of the Option Offers are subject to a 50.1% minimum acceptance condition that before the relevant Offer Close Date, Sexyland and its Associates have a Relevant Interest in:

at least 50.1% (by number) of all Shares; and
at least 50.1% (by number) of all Options.

As at the date of this Target’s Statement, your Directors presently have a direct or indirect interest in 39.68% of the Shares and 62.44% of the Options. Your Directors do not intend to accept Sexyland’s Offer upon its current terms in respect of the Shares and Options in which they have a

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 6

Section 1 Why you should REJECT Sexyland’s Offer

direct or indirect interest. Accordingly, Sexyland will not receive acceptances in respect of at least 50.1% (by number) of Adultshop’s Options based on the current terms of Sexyland’s Offer. The Minimum Acceptance Condition is thus not capable of being satisfied based on the current terms of Sexyland’s Offer.

This means that, as the Minimum Acceptance Condition separately applies to the Share Offer and each of the Option Offers (ie it is a condition to the Share Offer and to each of the Option Offers):

the Share Offer (on its current terms) cannot succeed unless Sexyland waives the Minimum Acceptance Condition under the Share Offer; and
each Option Offer (on its current terms) cannot succeed unless Sexyland waives the Minimum Acceptance Condition under the relevant Option Offer.

There can be no certainty that Sexyland will waive the Minimum Acceptance Condition under the Share Offer or any of the Option Offers.

Accepting the Offer may limit your choices

As Sexyland’s Offer is conditional, if you accept the Offer in respect of your Shares and/or Options, you could potentially be placed in a situation where you will not (subject to limited withdrawal rights) be able to sell your Shares and/or Listed Options on market and will not (subject to limited withdrawal rights) be able to accept any alternative proposal in respect of your Shares and/or Options (if any such alternate proposal is made).

1.6 Adultshop disagrees with a number of statements made by Sexyland in its Bidder’s Statements

Sexyland’s claims

Adultshop’s response

Sexyland argues that by accepting its Offer, However, if you accept the Share Offer you will Shareholders and Optionholders will be able to be selling your Shares at a discount to the realise their investment quickly and easily and current and recent market value[7] and the net end their exposure to what appears to be an asset backing of the Shares.[8] uncertain future for Adultshop.

If you accept the Offer for your Listed Options you will be selling your Listed Options at a discount to the price at which Listed Options have traded at all times since they were quoted on the ASX until the day immediately preceding the date of this Target’s Statement.[9]

Further, by accepting Sexyland’s Offer you will (subject to limited withdrawal rights and if Sexyland’s Offer proceeds) forgo the potential

7 The closing price on ASX of Shares on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 1.1 cents per Share. Further details of recent trading prices of Shares is set out in section 1.1.

8 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from the Entitlements Issue. See section 1.2 for further details.

9 The closing price on ASX of Listed Options on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 0.3 cents per Listed Option. Since the Listed Options were quoted on ASX they have, up to 10 December 2009 (being the last trading day prior to the date of this Target’s Statement), never traded below Sexyland’s Offer Price for Options of $0.0006 per Option.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 7

Section 1 Why you should REJECT Sexyland’s Offer

Sexyland’s claims	Adultshop’s response
value upside that your Directors are aiming to create through its strategic review being conducted by Pitcher Partners.
Sexyland argues that the Share Offer represents an attractive premium to recent historic trading levels of Adultshop’s Shares. The Directors note that the Share Offer is made at a:  16% discount to Adultshop’s Share price on the day prior to Sexyland announcing its Offer;  4% discount to Adultshop’s VWAP per Share for the period between the date Adultshop announced its recent Entitlements Issue and the day prior to the date of this Target’s Statement;  18.36% discount to Adultshop’s VWAP per Share for the period between the date Sexyland announced its Offer and the day prior to the date of this Target’s Statement; and  23.64% discount to Adultshop’s Share price on the last trading day prior to the date of this Target’s Statement.
Sexyland argues that Adultshop’s Share price may fall below the volume weighted average price referred to at section 2 of its Bidder’s Statements if Sexyland’s Offer fails. Whilst there is a possibility that Adultshop’s Share price may fall from its current levels if Sexyland’s Offer is unsuccessful (there is also a possibility that it will not fall from its current levels), Shareholders and Optionholders should note:  This is no reason to accept Sexyland’s inadequate Offer which the Directors believe undervalues Adultshop based on the net tangible assets of Adultshop.10  Since the announcement of Sexyland’s Offer, Adultshop has:  raised approximately $1.1 million which will be used in part, for considering strategic directions and alternatives for Adultshop and its businesses; and  engaged Pitcher Partners to conduct a strategic review of Adultshop’s operations.  Acceptance of Sexyland’s Offer will (subject to limited withdrawal rights and if Sexyland’s Offer proceeds) prevent you from participating in any benefit gained from Adultshop pursuing any alternative

10 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 8

Section 1 Why you should REJECT Sexyland’s Offer

Sexyland’s claims	Adultshop’s response
opportunities and from sharing in Adultshop’s future.
Sexyland argues that the historical operating results of ASC are poor, including pre-tax losses for continued operations in each of the last five years and there appears to be no clear plan or basis on which this will change. Sexyland also states that it does not believe that the Directors are in a position to be able to adopt and implement a more meaningful and value accretive strategy for ASC in the future. Adultshop is exploring alternatives to unlock value for Shareholders and provide a more attractive opportunity for Optionholders. Prior to the announcement of Sexyland’s Offer, Adultshop commenced the Entitlements Issue to raise approximately $1.1 million. These funds will be used, in part, to consider strategic directions and alternatives for Adultshop and its businesses. In this regard, Adultshop has engaged Pitcher Partners to conduct a strategic review of Adultshop’s operations. The Directors expect that Pitcher Partners’ strategic review will be completed before the end of the Offer Period. Also, Adultshop is currently considering options in respect to the potential sale of its non-core assets.
Sexyland argues that various actions by the Directors, including challenges to the regulatory environment of the industry, in Sexyland’s opinion, call into question the historical strategy adopted by the Directors. Adultshop chose to challenge the regulation of Adult film classification in Australia as restrictions on Adultshop’s ability to sell explicit adult films (currently rated X18+) in the States of Australia adversely affected the growth potential of its wholesale and retail businesses. The Directors believed that regulation and changes to censorship laws in Australia would have significantly assisted Adultshop to grow those businesses. The Directors believed that Adultshop had a prospect of successfully challenging classification of X18+ films and if such a challenge was successful it would have significantly assisted Adultshop’s retail and wholesale divisions to achieve growth. The Directors are unable to respond to Sexyland’s wider criticism of the management of Adultshop as Sexyland has failed to specify any other actions of the Adultshop Board that “calls into question the historical strategy adopted by the directors of [Adultshop]”.
Sexyland argues that the low liquidity of ASC Shares suggests that your future ability to exit your investment may be limited. Adultshop’s Shares and Listed Options are freely tradeable on the ASX, subject to there being a purchaser for those Shares and Listed Options. As set out elsewhere in this Target’s Statement, Shareholders and holders of Listed Options have an option to, rather than accept Sexyland’s Offer, sell their Shares and Listed Options on market. The ability to sell Shares and Listed Options on market will continue whilst the Shares and Listed Options are quoted on the ASX, subject to liquidity.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 9

Section 1 Why you should REJECT Sexyland’s Offer

Sexyland’s claims

Adultshop’s response

Sexyland argues that independent experts commonly ascribe a value of a company based on its net realisable value where a company is not making an adequate return on its assets, when a company incurs substantial losses or when liquidation is anticipated.

Sexyland’s offer also states that “usually, the net realisable value of the assets of a company is a discount to written down value, includes reasonable costs of undertaking the asset realisation process and assumes the assets are readily saleable” and that “in Sexyland’s experience, inventories in a business of this nature consist predominantly of toys and DVDs, which have a limited shelf life. Stock obsolescence causes the value of these assets to be impaired and an orderly realisation of obsolete inventory items is difficult”.

Your Directors believe that the net tangible asset backing per Share is relevant information for Shareholders and Optionholders to take into account in considering a takeover offer for a company. Based on the net tangible asset backing of 2.4 cents per Share,[11] your Directors are of the view that the Share Offer significantly undervalues the Shares. In this regard, the Share Offer represents a significant discount of 65% to the net tangible asset backing per Share.[12]

The majority of Adultshop’s inventory is employed in operations that are profitable going concerns in their own right and delivering positive returns on assets. Inventory is valued by Adultshop at the lower of cost and net realisable value and provision is made for slow moving and obsolete stock. Unrealised profit in inventories arising from intergroup sales has been eliminated. The majority of Adultshop’s inventory is therefore recorded at the initial cost of that inventory to the group’s wholesale division, a value significantly lower than both the wholesale and retail price of that inventory.

‘

11 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

12 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 10

Section 2 Frequently Asked Questions

This section answers some commonly asked questions about Sexyland’s Offer. It is not intended to address all relevant issues for Shareholders and Optionholders. This section should be read together with all other parts of this Target’s Statement.

Question	Answer	Further information
What are the Bidder’s Statements? The Bidder’s Statements are the documents setting out the terms of Sexyland’s Offer. Sexyland lodged its original bidder’s statements with ASIC on 6 November 2009 and lodged its replacement bidder’s statements with ASIC on 3 December 2009. Sexyland has: (a) lodged and sent to Shareholders the Bidder’s Statement containing the Share Offer; and (b) lodged and sent to Optionholders a Bidders Statement containing the Option Offers. Bidder’s Statements
What is this Target’s Statement? This Target’s Statement has been prepared by Adultshop and provides Adultshop’s response to Sexyland’s Offer, including the recommendations of your Directors to REJECT Sexyland’s inadequate Offer.
What is the Offer for my Shares? Sexyland has made a conditional, unsolicited, Share Offer for your Shares. The Offer Price for the Share Offer is $0.0084 in cash for every Share if the Share Offer becomes or is declared unconditional by Sexyland. Section 5
What is the Offer for my Options? Sexyland has made conditional, unsolicited, Option Offers for your Options. The Options fall into four separate classes and each class is the subject of a separate Option Offer by Sexyland. The Offer Price for each of the Option Offers is $0.0006 in cash for every Option if the relevant Option Offer(s) in respect of your Options becomes or is declared unconditional by Sexyland. Section 5
What are my choices as a Shareholder? As a Shareholder you can:  REJECT Sexyland’s inadequate Share Offer by doing nothing. Your Directors recommend that youREJECT the Share Offer;  sell some or all of your Shares on market (unless you have previously accepted the Share Offer and have not validly withdrawn your acceptance); or  accept the Share Offer. Section 3
What are my choices as an Optionholder? As a Optionholder you can:  REJECT Sexyland’s inadequate Option Offer(s) by doing nothing. Your Directors recommend that you REJECT the Option Offer(s);  if you are a Listed Optionholder, sell some or all of your Listed Options on market (unless you have previously accepted Sexyland’s Offer for your Listed Options and have not validlywithdrawnyour Section 4

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 11

Section 2 Frequently Asked Questions

Question	Answer	Further information
acceptance);  exercise some or all of your Options to acquire Shares (in which case you will, upon being issued Shares, have choices as a Shareholder); or  accept the Option Offer(s) for your Options.
What are the Directors recommending? Your Directors unanimously recommend that you REJECT Sexyland’s inadequate Offer. If there is any change to this recommendation or any material development in relation to Sexyland’s Offer, Adultshop will inform you. Section 7.2
How do I reject Sexyland’s inadequate Offer? ToREJECT Sexyland’s inadequate Offer, you should do nothing. Disregard all documents sent to you by Sexyland. Page ii
What do the Directors intend to do with their Shares and Options? Each Director of Adultshop intends toREJECTSexyland’s inadequate Offer on its current terms in relation to those Shares and Options in which they have a direct or indirect interest. If your Directors do not accept Sexyland’s Offer the Minimum Acceptance Condition cannot be satisfied as your Directors together hold more than 50.1% of the Options on issue. This means that, as the Minimum Acceptance Condition separately applies to the Share Offer and each of the Option Offers (ie it is a condition to the Share Offer and to each of the Option Offers):  the Share Offer cannot succeed on its current terms unless Sexyland waives the Minimum Acceptance Condition under the Share Offer; and  each Option Offer cannot succeed on its current terms unless Sexyland waives the Minimum Acceptance Condition under the relevant Option Offer. Section 7.2
Why are the Directors recommending that I reject the Offer? Your Directors are recommending that youREJECT Adultshop’s Offer because:  the Share Offer is at a discount to the current and recent market price;13  the Share Offer does not reflect the value of Adultshop’s net tangible assets;14  Sexyland’s Offer for Listed Options is at a significant discount to current and recent market price;15 Section 1

13 The closing price on ASX of Shares on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 1.1 cents per Share. Further details of recent trading prices of Shares is set out in section 1.1.

14 The net tangible asset backing per Share is 2.4 cents per Share based on Adultshop’s 2009 Annual Report adjusted for the Shares issued under, and net proceeds from, the Entitlements Issue. See section 1.2 for further details.

15 The closing price on ASX of Listed Options on 10 December 2009 (being the last trading day prior to the date of this Target’s Statement) was 0.3 cents per Listed Option. Since the Listed Options were quoted on ASX they have, up to 10 December 2009 (being the last trading day prior to the date of this Target’s Statement), never traded below Sexyland’s Offer Price for Options of $0.0006 per Option.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 12

Section 2 Frequently Asked Questions

Question	Answer	Further information
 Adultshop is taking positive steps to aim to unlock the value of its assets for all Shareholders and provide a more attractive opportunity for Optionholders;  Unless certain conditions are waived, Sexyland’s Offer will not meet its bid conditions and Sexyland’s Offer is highly conditional and uncertain; and  Adultshop disagrees with a number of statements made by Sexyland in its Bidder’s Statements.
Why have the Directors not obtained an independent expert’s report? An independent expert’s report is not required under the Corporations Act and your Directors believe that one is not necessary at this stage. Your Directors do not consider that the benefits of obtaining an independent expert’s report would outweigh the costs having regard to the strong reasons why they consider you ought toREJECT Sexyland’s Offer as well as the costs involved.
What should I do? You should read this Target’s Statement in its entirety. To follow your Directors’ unanimous recommendation to REJECT Sexyland’s inadequate Offer, you shouldDO NOTHING. Disregard all documents sent to you by Sexyland. Page ii Section 1
What happens if the Offer Price increases? If Sexyland increases its Offer Price for your Shares and/or Options, your Directors will carefully consider the revised offer and advise you accordingly.
What are the consequences of accepting the Offer now?  If you accept Sexyland’s Offer now, you may be unable to accept a superior offer from another bidder if such an offer is made, unless any withdrawal rights apply at the applicable time and you withdraw your acceptance of Sexyland’s Offer. Section 5.8  If you accept Sexyland’s Offer now you may not, unless withdrawal right are available and you exercise those rights, have the opportunity to participate in any benefit arising from Adultshop’s strategic review which is currently being conducted by Pitcher Partners. Section 5.8  If you accept Sexyland’s Offer in respect of your Shares and/or Options now, then unless withdrawal rights are available at the applicable time and you exercise those rights, you will not be able to sell your Shares and/or Listed Options on market or sell your Shares and/or Listed Options to any other bidder that may make a takeover offer, or deal with them in any other manner. Section 5.8
When will I be paid if I accept the Offer If you validly accept Sexyland’s inadequate Offer, Sexyland has said that it will pay you the Offer Price by the earlier of:  7 Business Days after the relevant Offer Period; and  7 Business Days after the later of:  the date the Share Offer or Option Offer(as

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 13

Section 2 Frequently Asked Questions

Question	Answer	Further information
applicable) is accepted by you; and  whilst the Share Offer or Option Offer (as applicable) is subject to conditions, the date the takeover contract resulting from your acceptance of that Offer becomes unconditional.
If I accept the Offer now, can I withdraw my acceptance? There are a number of different circumstances in which you may have the right to withdraw your acceptance of Sexyland’s Offer. However, each is limited. Section 5.10
Can I be forced to sell my Shares? You cannot be forced to sell your Shares unless Sexyland and its Associates acquire a Relevant Interest in at least 90% of all Shares by the Offer Close Date for the Share Offer, and Sexyland proceeds to compulsory acquisition of your Shares. If that happens, you will be paid the last price offered by Sexyland for Shares before compulsory acquisition commenced. In its Bidder’s Statement (section 5.3 of Part 1), Sexyland has stated that it intends to compulsorily acquire all outstanding Shares if it becomes entitled to do so. However, your Directors have indicated that they do not intend to accept Sexyland’s Offer on its current terms in respect of the Shares and Options in which they have a direct or indirect interest, being 39.68% of the Shares and 62.44% of the Options. Accordingly, Sexyland will not acquire 90% or more of the Shares based on the current Offer. Section 5.11
Can I be forced to sell my Options? You cannot be forced to sell your Options in a class of Options unless:  Sexyland and its Associates acquire a Relevant Interest in at least 90% of all Options in that class of Options by the Offer Close Date for the Offer for that class of Options, and Sexyland proceeds to compulsory acquisition of those Options; or  Sexyland acquires a Relevant Interest in at least 90% of all Shares by the Offer Close Date for the Offer for that class of Options, and proceeds to compulsory acquisition of the remaining Shares, then as a 100% Shareholder Sexyland proceeds to compulsory acquisition of your Options. If the first scenario happens, you will be paid the last price offered by Sexyland for the Options in the relevant class of Options before compulsory acquisition commenced. In relation to the second scenario, you will be paid a fair value based on an independent expert’s report in accordance with the Corporations Act. Your Directors have indicated that they do not intend to accept Sexyland’s Offer on its current terms in respect of their Shares and Options in which they have a direct or indirect interest (being 39.68% of the Shares and 62.44% of the Options). As the Directors hold 64.79% of the Listed Options,Sexyland cannot acquire 90% or more of Section 5.11

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 14

Section 2 Frequently Asked Questions

Question	Answer	Further information
the Listed Options based on the current Offer.
When do I have to decide? If you wish to accept Sexyland’s inadequate Offer, you need to do so before its scheduled closing date at 5:00 pm (Perth time) on the Offer Close Date. It is possible that Sexyland may choose to extend the Offer Period under the Share Offer or one or more of the Option Offers in accordance with the Corporations Act. However, Sexyland cannot close the Share Offer or any of the Option Offers earlier than this date except in accordance with the Corporations Act. If you wish to reject Sexyland’s inadequate Offer, you do not need to do anything. Sections 5.5 & 5.6
What are the conditions of the Offer? Sexyland’s inadequate Offer is highly conditional. The conditions to Sexyland’s Offer include:  the Minimum Acceptance Condition (which will not be satisfied based on the current terms of Sexyland’s Offer); and  before the Offer Close Date, no Prescribed Occurrence occurs. If the conditions to the Share Offer are not satisfied or waived by Sexyland by the Share Offer Close Date, the Share Offer will lapse. This means that the Share Offer will not proceed. In that circumstance, Adultshop would continue to operate as a stand-alone ASX-listed entity focussed on its current strategies. The rights of Shareholders would remain unchanged. If the conditions to an Option Offer are not satisfied or waived by Sexyland by the Offer Close Date for that Option Offer, that Option Offer will lapse and that Option Offer will not proceed. Sections 1.5 & 5.2, 5.3 and 5.4
What is the status of the conditions to the Offer? The Minimum Acceptance Condition will not be satisfied based on the current terms of Sexyland’s Offer, as your Directors together have a direct or indirect interest in more than 50.1% of the Options on issue and your Directors have indicated that they will not be accepting Sexyland’s Offer on its current terms in respect of those Options. Accordingly, the Minimum Acceptance Condition will need to be:  waived by Sexyland under the Share Offer if it wishes to proceed with its Share Offer on its current terms; and  waived under each Option Offer if it wishes to proceed with that Option Offer on its current terms. Sections 1.4 & 5.2, 5.3 and 5.4
What are the tax implications of accepting the Offer? Sexyland discusses the taxation implications of Sexyland’s Offer in the Bidder’s Statements (clause 6 of Part 1). Shareholders andOptionholders should obtain their own

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 15

Section 2 Frequently Asked Questions

Question	Answer	Further information
independent taxation advice if they intend to accept Sexyland’s Offer.
Is there a phone number I can ring if I have any queries? If you have any queries in relation to Sexyland’s inadequate Offer, please call Adultshop on (08) 9227 6777 between 9.00 am and 5.00 pm (Perth time) Monday to Friday.
How can I find out how many Adultshop Shares have been sold into Sexyland’s Offer to date? Sexyland is required to notify ASX during the period in which its Share Offer is open every time there is a movement of 1% or more in its Relevant Interest in Shares. Sexyland is required to notify ASX by 9.30 am on the day following the relevant movement. Therefore, Shareholders and Optionholders can monitor Adultshop’s announcements section on the ASX website to determine Sexyland’s Relevant Interest in Shares.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 16

Section 3 Your choices as a Shareholder

As a Shareholder you currently have 3 choices available to you

3.1 Take no action

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If you do not wish to sell your Shares and do not wish to accept the Share Offer, you should take no action. This is the approach recommended by your Directors .

You should note that:

if you choose not to accept the Share Offer, Sexyland will not be able to acquire your Shares unless it holds 90% of all the Shares at the Offer Close Date for the Share Offer. In this event, Sexyland will become entitled to compulsorily acquire those Shares it does not already own (see section 5.11 for further information regarding compulsory acquisition).
If Sexyland acquires between 50.1% and 90% of all the Shares and you continue to hold Shares, you will be exposed to the risks associated with being a minority shareholder (see section 5.12 for further information regarding the risks associated with being a minority shareholder).

3.2 Sell your Shares on market

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The latest price for Shares may be obtained from the ASX website – www.asx.com.au. If you sell your Shares on market, you will receive the consideration for your Shares sooner than if you accept the Share Offer whilst it is subject to conditions. If you choose to sell your Shares during the currency of the Share Offer you should be aware that you:

will lose the ability to accept the Share Offer and receive the Offer Price (or an offer from another bidder, which may or may not eventuate) in relation to those Shares;
will lose the opportunity to receive any future benefits from being a holder of Shares;
may be liable for tax on the sale of your Shares; and
may incur a brokerage charge.
You should contact your broker for information on how to sell your Shares on the ASX and your tax adviser to determine the tax implications from such a sale.

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3.3 Accept Sexyland’s Offer

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Despite your Directors’ recommendation, you may choose to accept the Share Offer. The Offer Price that you will receive if you accept the Share Offer is set out in section 5.1 as well as in the Bidder’s Statement for the Share Offer. You will only receive the Offer Price if the conditions of the Share Offer are all either satisfied or waived. If you accept the Share Offer, you will not be able to sell your Shares (unless, at the time you decide that you no longer wish to accept the Share Offer, you have the right to withdraw your acceptance and you exercise that right). There are limited circumstances in which acceptances of the Share Offer may be withdrawn.

Before accepting the Share Offer, you should check the latest price of Shares (as applicable) which may be obtained from the ASX website www.asx.com.au to determine if you can sell your Shares on market at a higher price than the Share Offer.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 17

Section 4 Your choices as an Optionholder

As a Listed Optionholder you currently have 4 choices available to you (see sections 4.1 to 4.4)

&

As a holder of Employee Options you currently have 3 choices available to you (see sections 4.1, 4.2 and 4.4)

4.1 Take no action

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If you do not wish to sell your Options (to the extent you are able to do so, see section 4.4 below) and do not wish to accept the Offer(s) for your Options, you should take no action. This is the approach recommended by your Directors.

You should note that if you choose not to accept the Offer for your Options in a particular class of Options, Sexyland will not be able to acquire your Options in that class unless:

it holds 90% or more of all the Options in that class of Options at the Offer Close Date for that Option Offer; or
it holds 90% or more of all Shares by the Offer Close Date for that Offer, and proceeds to compulsory acquisition of the remaining Options,

in either event, Sexyland will become entitled to compulsorily acquire those of your Options in the relevant class of Options it does not already own (see section 5.11 for further information regarding compulsory acquisition).

4.2 Exercise your Options

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As an Optionholder you may exercise some or all of your Options in return for Shares in accordance with the terms of the Options. If you exercise your Options:

you will be eligible to participate in the Share Offer in respect of the resulting Shares, provided they are issued prior to the Offer Close Date; or
you will be able to sell the resulting Shares on ASX (in which case you should note the consequences discussed in section 3.2); or
you may hold on to your Shares.

Any number of your Options may be exercised. You can exercise your Options by giving written notice to Adultshop (in respect of Employee Options, the written notice must be in the form annexed to the rules of the Employee Incentive Scheme and the notice must also be accompanied by the certificate for the Employee Options being exercised), together with a cheque, money order or bank draft in Australian currency drawn on an Australian financial institution for an amount equal to the exercise price of the relevant Options multiplied by the number of Options to be exercised.

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4.3 Sell your Listed Options on market

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If you are a Listed Optionholder, you may sell your Listed Options on market. The latest price for Listed Options may be obtained from the ASX website – www.asx.com.au. If you sell your Listed Options on market, you will receive the consideration for your Listed Options sooner than if you accept the Offer for your Listed Options whilst it is subject to conditions. If you choose to sell your

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 18

Section 4 Your choices as an Optionholder

Listed Options during the currency of the Offer for your Listed Options you should be aware that you:

will lose the ability to accept the Offer for your Listed Options and receive the Offer Price (or an offer from another bidder, which may or may not eventuate) in relation to those Listed Options;
will lose the opportunity to receive any future benefits from being a holder of Listed Options;
may be liable for tax on the sale of your Listed Options; and
may incur a brokerage charge.

You should contact your broker for information on how to sell your Listed Options on the ASX and your tax adviser to determine the tax implications from such a sale.

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4.4 Accept Sexyland’s Offer

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Despite your Directors’ recommendation, you may choose to accept the Offer(s) for your Options. The Offer Price that you will receive if you accept the Offer(s) for your Options is set out section 5.1 as well as in the Bidder’s Statement for the Option Offers. You will only receive the Offer Price if the conditions of the relevant Offer(s) for your Options are either satisfied or waived. If you accept the Offer(s) for your Options, you will not be able to sell your Options the subject of such acceptance (unless, at the time you decide that you no longer wish to accept the Offer(s), you have the right to withdraw your acceptance and you exercise that right). There are limited circumstances in which acceptances of the Offer(s) may be withdrawn.

Before accepting the Offer for your Listed Options, you should check the latest price of Listed Options (as applicable) which may be obtained from the ASX website www.asx.com.au to determine if you can sell your Listed Options on market at a higher price than the Offer for your Listed Options.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 19

Section 5 Other Information about Sexyland’s Offer

5.1 Offer Price

On 8 October 2009, Sexyland announced a highly conditional, unsolicited, takeover offer for all of the issued capital of Adultshop. The consideration under:

the Share Offer is $0.0084 in cash for each Share; and
each of the Option Offers is $0.0006 in cash for each Option.

5.2 Conditions to the Offer

The Share Offer and each of the Option Offers are highly conditional, and include:
the Minimum Acceptance Condition (which will not be satisfied based on the current terms of Sexyland’s Offer); and
before the end of the Offer Period, no Prescribed Occurrences occurs.

The full terms of these conditions are set out in the Bidder's Statements (section 8 of Part 2).

If the conditions of the Share Offer are not satisfied or waived by Sexyland by the Offer Close Date for the Share Offer, the Share Offer will lapse. Similarly, if the conditions of an Option Offer are not satisfied or waived by the Offer Close Date for that Option Offer then that Option Offer will lapse.

The Minimum Acceptance Condition will not be satisfied based on the current terms of Sexyland’s Offer. The Directors presently hold 39.68% of the Shares and 62.44% of the Options, and do not intend to accept Sexyland’s Offer on its current terms in respect of their Shares and Options in which they have a direct or indirect interest. This means that, as the Minimum Acceptance Condition separately applies to the Share Offer and to each of the Option Offers (ie it is a condition to the Share Offer and to each of the Option Offers):

the Share Offer on its current terms cannot succeed unless Sexyland waives the Minimum Acceptance Condition under the Share Offer; and
each Option Offer on its current terms cannot succeed unless Sexyland waives the Minimum Acceptance Condition under the relevant Option Offer.

If the Share Offer lapses any contract resulting from acceptance of the Offer and any acceptance which has not resulted in a binding contract will automatically be void. If an Option Offer lapses any contract resulting from acceptance of the Option Offer and any acceptance which has not resulted in a binding contract will automatically be void.

5.3 Notice of Status of Conditions

The Bidder's Statements state that Sexyland will give its Notice of Status of Conditions to ASX and Adultshop on 21 January 2010 (which is 7 days before the Offer Close Date). If the Offer Period is extended before the time by which the Notice of Status of Conditions is to be given, the date for giving the Notice of Status of Conditions will be taken to be postponed for the same period. If there is such an extension, Sexyland is required, as soon as possible after the extension, to give a notice to ASX and Adultshop that states the new date for the giving of the Notice of Status of Conditions.

Sexyland is required to give a Notice of Status of Conditions for the Share Offer and each of the Option Offers, which must state:

whether the relevant Sexyland Offer the subject of the Notice of Status of Conditions (ie the Share Offer and each of Option Offers) is free of any or all conditions;

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 20

Section 5 Other Information about Sexyland’s Offer

 whether, so far as Sexyland knows, any of the conditions to the relevant Sexyland Offer have been fulfilled; and

Sexyland’s voting power in Adultshop.

5.4 Consequences of any waiver by Sexyland of any condition

In order to proceed with:

its Share Offer, Sexyland must waive all conditions to the Share Offer which have not been fulfilled;
an Option Offer, Sexyland must waive all conditions to that Option Offer which have not been fulfilled.

Sexyland may choose to waive some conditions at one time and reserve its position on whether to waive other conditions until a later date.

If the Minimum Acceptance Condition remains unsatisfied in respect of any of the Offers and the Offer Period for the relevant Offer has not been extended, then Sexyland will be required to, if it wishes to proceed with the Offer, waive that condition in respect of the relevant Offer not less than 7 days before the end of the Offer Period.

If the condition requiring that no Prescribed Occurrence occurs before the Offer Close Date remains unsatisfied in respect of the Share Offers or any of the Option Offers and the Offer Period for the relevant Offer has not been validly extended, then Sexyland will be required to waive that condition in respect of the relevant Offer not later than 3 business days after the Offer Close Date.

5.5 Offer Period

The Share Offer and each of the Option Offers are open for acceptance from 7 December 2009 until 5:00 pm (Perth time) on the Offer Close Date unless such Offer is extended or withdrawn earlier.

5.6 Extension of the Offer Period

To extend the Share Offer Period, Sexyland must lodge a notice of variation with ASIC and give a notice to each Shareholder to whom the Share Offer was made. To extend the Offer Period for an Option Offer, Sexyland must lodge a notice of variation with ASIC and give a notice to each Optionholder in the class of Options the subject of that Option Offer to whom that Option Offer was made.

Sexyland may extend the Share Offer and each of the Option Offers more than once.

The date by which Sexyland must give a notice of variation in respect of the Share Offer or one of the Option Offers depends on whether the relevant Offer is subject to one of the following conditions:

while the relevant Offer is subject to a defeating condition, Sexyland may extend the Offer Period for that Offer at any time before giving the Notice of Status of Conditions;
if all of the conditions of the relevant Offer are satisfied or waived, Sexyland may extend the Offer Period for that Offer at any time before the Offer Close Date;
after Sexyland has given a Notice of Status of Conditions, Sexyland’s right to extend the Offer Period for the relevant Offer will be more limited. In effect, Sexyland would only be able to extend the Offer Period for that Offer if, at that time, another bid is made or announced, or the consideration in an existing bid is improved;

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 21

Section 5 Other Information about Sexyland’s Offer

Since the Share Offer and each of the Option Offers are currently subject to defeating conditions, the last day on which Sexyland may extend its Share Offer or any of its Option Offers is 21 January 2010. However, if Sexyland declares the Share Offer or any of the Option Offers to be free of all defeating conditions before 21 January 2010, it may extend the Offer in respect of which such declaration is made at any time on or before Offer Close Date.

In respect of the Share Offer, there will be an automatic extension of the relevant Offer Period under the Share Offer if, within the last 7 days of the Offer Close Date for the Share Offer:

Sexyland improves the Share Offer Price; or
Sexyland’s voting power in Adultshop increases to more than 50%.

In respect of an Option Offer, there will be an automatic extension of the Offer Period under that Option Offer if, within 7 days of the Offer Close Date for that Option Offer:

Sexyland’s voting power in Adultshop increases to more than 50%; or
Sexyland improves the Offer Price under that Option Offer.

5.7 Withdrawal of Offer

Sexyland may not withdraw its Share Offer if it has received any acceptances under the Share Offer. Sexyland may not withdraw an Option Offer if it has received any acceptances under that Option Offer. Unaccepted Offers may be withdrawn with the written consent of ASIC and subject to the conditions (if any) specified in that consent.

5.8 Effect of acceptance

If you accept Sexyland's inadequate Offer in respect of your Shares and/or Options, subject to the withdrawal rights set out in section 5.10 below:

you will not be able to sell your Shares and/or Listed Options the subject of an acceptance on market or sell your Shares and/or Options the subject of an acceptance to any other bidder that may make an offer (if such an offer is made), or deal with them in any other manner;
you will not have the opportunity to participate in any benefit arising from Adultshop’s strategic review which is being conducted by Pitcher Partners; and
you will relinquish to Sexyland control of your Shares and/or Options the subject of an acceptance and you will not receive the Offer Price for your acceptance until after the relevant Sexyland Offer becomes unconditional or is declared unconditional.

The effect of acceptance is set out in detail in the Bidder's Statements (section 6 of Part 2). These sections of the Bidder’s Statements describe the rights attached to your Shares or Options that you will be giving up, the representations and warranties that you will be making and the irrevocable authorities and appointments that you will be giving Sexyland if you accept Sexyland’s inadequate Offer.

5.9 When will you be paid if you accept Sexyland’s Offer

If, despite the unanimous recommendation of your Directors to REJECT Sexyland’s inadequate Offer, you validly accept it, Sexyland has said it will provide the Offer Price for your Shares or Options (as applicable) on or before the earlier of:

7 Business Days after the relevant Offer Period; and

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 22

Section 5 Other Information about Sexyland’s Offer

7 Business Days after the later of:
the date the Share Offer or Option Offer (as applicable) is accepted by you; and
whilst the Share Offer or Option Offer (as applicable) is subject to conditions, the date the takeover contract resulting from your acceptance of that Offer becomes unconditional.

Full details of when you will be paid, including payment of consideration in circumstances where additional documents are required, and methods and delivery of payment is set out in section 2 of Part 2 of the Bidder’s Statements.

5.10 Your ability to withdraw your acceptance

You have only limited rights to withdraw your acceptance of Sexyland’s Offer. You may withdraw your acceptance of the Share Offer or one of the Option Offers only if both of the following are satisfied in respect of the relevant Offer:

the relevant Offer is still subject to a defeating condition; and
the relevant Offer is varied in a way that postpones, for more than one month, the time when Sexyland needs to meet its obligations under that Offer. This may occur if Sexyland extends the Offer Period under the relevant Sexyland Offer by more than one month and that Offer is still subject to a defeating condition.

5.11 Compulsory acquisition

Sexyland has stated in the Bidder's Statements (clause 5.3 of Part 1) that if it becomes entitled to proceed to compulsory acquisition of Shares and Options in accordance with the Corporations Act, then Sexyland intends to proceed to compulsory acquisition.

The two types of compulsory acquisition under Chapter 6A of the Corporations Act are discussed below.

Follow on compulsory acquisition

Share Offer

Under Part 6A.1 of the Corporations Act, Sexyland will be entitled to compulsorily acquire any outstanding Shares for which it has not received acceptances on the same terms as the Share Offer if, at the Offer Close Date for the Share Offer, Sexyland (together with its Associates):

has relevant interests in at least 90% (by number) of the Shares; and
has acquired at least 75% (by number) of the Shares that Sexyland offered to acquire under the Share Offer (whether the acquisitions happened under the Share Offer or otherwise).

If these thresholds are met, Sexyland will have up to one month after the Offer Close Date within which to give compulsory acquisition notices to Shareholders who have not accepted the Share Offer. Shareholders have statutory rights to challenge the compulsory acquisition, but a successful challenge will require the relevant Shareholders to establish to the satisfaction of a court that the terms of the Share Offer do not represent "fair value" for the Shares.

Option Offers

Sexyland will also be entitled to acquire outstanding Options the subject of an Option Offer under Part 6A.1 of the Corporations Act if, at the Offer Close Date for that Option Offer, Sexyland (together with its Associates):

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 23

Section 5 Other Information about Sexyland’s Offer

has relevant interests in at least 90% (by number) of the Options the subject of that Option Offer; and
has acquired at least 75% (by number) of the Options that Sexyland offered to acquire under that Option Offer.

The discussion regarding the follow on compulsory acquisition process set out above applies, with the necessary changes, to Optionholders who hold Options the subject of each Option Offer.

General compulsory acquisition

Share Offer

Under Part 6A.2 of the Corporations Act, Sexyland will be entitled to compulsorily acquire any outstanding Shares if Sexyland holds full beneficial interests in at least 90% of Shares (by number) (i.e. if Sexyland becomes a 90% holder).

If this threshold is met, Sexyland will have six months after Sexyland becomes a 90% holder within which to give compulsory acquisition notices to Shareholders. The compulsory acquisition notices sent to Shareholders must be accompanied by an independent expert's report and an objection form. The independent expert's report must set out whether the terms of the compulsory acquisition give a “fair value” for the Shares and the independent expert's reasons for forming that opinion.

If Shareholders with at least 10% of Shares covered by the compulsory acquisition notice object to the acquisition before the end of the objection period (which must be at least one month), Sexyland may apply to the Court for approval of the acquisition of the Shares covered by the notice.

Option Offer – compulsory acquisition of single class of Options

Under Part 6A.2 of the Corporations Act, Sexyland will be entitled to compulsorily acquire any outstanding Options in a particular class if Sexyland holds full beneficial interests in at least 90% of the relevant class of Options (by number) (ie if Sexyland becomes a 90% holder).

If this threshold is met, Sexyland will have six months after Sexyland becomes a 90% holder within which to give compulsory acquisition notices to holders of Options in that class of Option. The compulsory acquisition notices sent to those Optionholders must be accompanied by an independent expert's report and an objection form. The independent expert's report must set out whether the terms of the compulsory acquisition give a “fair value” for the Options and the independent expert's reasons for forming that opinion.

If Optionholders with at least 10% of the relevant class of Options covered by the compulsory acquisition notice object to the acquisition before the end of the objection period (which must be at least one month), Sexyland may apply to the Court for approval of the acquisition of the Options covered by the notice.

Option Offer – compulsory acquisition of all classes of Options

Sexyland will also be entitled to compulsorily acquire all outstanding Options if Sexyland holds full beneficial interests in at least

90% of the Shares; and
90% of all Adultshop securities.

If this threshold is met, Sexyland will have six months after Sexyland becomes a 90% holder within which to give compulsory acquisition notices to remaining Optionholders. The compulsory acquisition notices sent to Optionholders must be accompanied by an independent expert's report and an objection form. The independent expert's report must set out whether the terms of the

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 24

Section 5 Other Information about Sexyland’s Offer

compulsory acquisition give a “fair value” for the Options and the independent expert's reasons for forming that opinion.

If Optionholders with at least 10% of the Options covered by the compulsory acquisition notice object to the acquisition before the end of the objection period (which must be at least one month), Sexyland may apply to the Court for approval of the acquisition of the Options covered by the notice.

5.12 Minority ownership consequences

If Sexyland acquires more than 50% but less than 90% of the Shares then, assuming all conditions to the Share Offer are fulfilled or freed, Sexyland will acquire a majority shareholding in Adultshop.

In that case, Shareholders who do not accept the Share Offer will become minority shareholders in Adultshop. This has a number of possible implications, including:

Sexyland will be in a position to cast the majority of votes at a general meeting of Adultshop. This will enable it to control the composition of the Adultshop Board and senior management, determine Adultshop’s dividend policy and control the strategic direction of the businesses of Adultshop and its subsidiaries;
the Adultshop Share price may fall immediately following the Offer Close Date for the Share Offer and the Directors consider that it is unlikely that the Share price will contain any takeover premium;
the liquidity of Adultshop Shares may be lower than at present;
Sexyland has indicated in the Bidder’s Statements that it will seek to have Adultshop removed from the official list of the ASX. If this occurs, Adultshop Shares will not be able to be bought or sold on the ASX which may make it more difficult for Shareholders to sell their Shares and holders of Listed Options to sell their Listed Options;
if Sexyland holds 75% or more of the Adultshop Shares it will be able to pass a special resolution of Adultshop. This will enable Sexyland to, among other things, change Adultshop’s constitution.

On the other hand, if Sexyland holds less than 50% of the Adultshop Shares then, assuming all conditions to the Share Offer are fulfilled or freed, Sexyland will be a minority shareholder in Adultshop. In that case Sexyland will not be in a position to cast more than 50% of the votes able to be cast at a general meeting of Adultshop. Nor will Sexyland be able to control the composition of the Adultshop Board. However, Sexyland may attempt to use its influence as a minority shareholder to suggest changes to the Adultshop Board and/or influence the activities of Adultshop.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 25

Section 6 Risk Factors

6.1 Risk Factors

There are a number of risks both specific to Adultshop and general investment risks, which may potentially and adversely affect the future operating and financial performance of Adultshop and the value of Adultshop’s Shares.

The following summary, which is not exhaustive, sets out some of the major risks. Adultshop notes that some risks may not be known to Adultshop and some risks that Adultshop currently believe to be immaterial may be ultimately material. One or more of these risks could materially adversely impact on Adultshop’s business, revenues, operating income, cash flow, net assets, liquidity, or capital resources.

6.2 General Risks

As Adultshop is a company listed on the ASX, its Share price and the price for Listed Options are subject to numerous influences that may affect both the broad trend in the share market and the share prices of individual companies.

Economic conditions, both domestic and global, may affect the performance of Adultshop and ultimately the price of its Shares and Listed Options. Factors such as currency fluctuations, inflation, interest rates, commodity prices, customer preferences, supply and demand and political, taxation, and legal decisions could have an impact on operating costs, profit margins and stock market prices. Adultshop’s future revenues and Share price and price of Listed Options can be affected by such factors, which may be beyond the control of Adultshop.

6.3 Specific Risks

Risk factors specifically applicable to Adultshop, to the industry that it presently operates, and those areas of interest to Adultshop include:

Regulatory Environment The capacity to operate in the adult industry is affected by changes in government policy and legislation affecting the sale and distribution of Adultshop’s products and services.

Credit Card Processing Adultshop’s ability to sell products and services on the internet depends Companies on being able to process sales on line by the use of third party credit card processing companies. Adultshop’s ability to maintain these relationships is critical to its ability to derive revenue from the sale of products and services online.

Competition

Adultshop faces challenges to compete against businesses operating outside the laws that govern jurisdictions that it operates within.

Key Person Risk

The ability to retain and attract the calibre of staff and senior managers with the requisite skills and experience needed to successfully operate the various divisions of Adultshop and to source, review and operate new opportunities evaluated by Adultshop.

Strategic Review

Risks associated with Adultshop’s strategic review including whether the outcomes are positive and attractive for Adultshop, and the costs of implementing any recommendations arising out of the strategic review.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 26

Section 6 Risk Factors

Opportunity Risk

Risks ordinarily associated with identifying, acquiring and operating any new opportunities for Adultshop, including but not limited to:

future capital requirements to adequately fund the acquisition and operation of those opportunities;
research and development or exploration and feasibility risks, as the case may be, that determine the ultimate viability of a potential opportunity;
legislative and operational risks impacting on the development and viability of potential opportunities;
competition for potential opportunities that have the potential to deliver shareholder value.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 27

Section 7 Additional Information

7.1 Details of Directors

The Directors of Adultshop at the date of this Target’s Statement are:

Name	Position
Kimberley Heitman Non-Executive Chairman
Malcolm Day Managing Director
Hans-Rudolf Moser Non-Executive Director
Bradley Moore Non-Executive Director

7.2 Directors’ recommendation and intentions

In assessing Sexyland’s Offer, your Directors have had regard to a number of considerations, including the information set out in Sexyland’s Bidder’s Statements.

Based on this assessment, and for the reasons set out in this Target’s Statement (in particular, those set out in section 1), your Directors believe that the consideration offered by Sexyland of A$0.0084 cash per Share and A$0.0006 cash per Option is inadequate.

Each Director’s recommendation to Shareholders and Optionholders is to REJECT Sexyland’s inadequate Offer

Each of your Directors intends to reject Sexyland’s Offer on its current terms for all Shares and Options in which they have a direct or indirect interest.

Employee Options are “out of the money” and not freely transferrable and, accordingly, the prevailing Share price and Listed Option price on the ASX may be less relevant to holders of Employee Options in considering whether to accept Sexyland’s Offer for their Employee Options. Notwithstanding, the Directors recommend that holders REJECT Sexyland’s Offer for the Employee Options for the other reasons given in this Target’s Statement for the Directors’ recommendation that Shareholders and Optionholders REJECT Sexyland’s Offer.

7.3 Directors’ interests in Shares and Options

As at the date of this Target’s Statement, the Directors have the following interests, either directly or indirectly, in Shares and Options:

Director	Options	Options	Options
	Number	Price	Expiry
Malcolm Day 139,090,662	47,471,402 $0.008 31/12/2011 22.65%
Hans-Rudolf Moser 53,794,943	26,147,472 $0.008 31/12/2011 8.76%
Bradley Moore 50,794,943	25,397,472 $0.008 31/12/2011 8.27%
Kimberley Heitman Nil	Nil - - Nil

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 28

Section 7 Additional Information

7.4 Trading by Directors in Shares and Options in the last four months

Except as set out below, none of the Directors or their Associates acquired or disposed of Adultshop securities in the period of 4 months ending on the day immediately before the date of this Target’s Statement.

Director	Movement	Date
Malcolm Day Increase of 94,942,803 Shares (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Increase of 47,471,402 unlisted Options exercisable at 0.8 cents on or before 31/12/2011 (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Decrease of 5,000,000 unlisted Options exercisable at 5.7 cents on or before 30/06/2009 (expiry of Options) 1 July 2009
Hans-Rudolf Moser Increase of 52,294,943 Shares (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Increase of 26,147,472 unlisted Options exercisable at 0.8 cents on or before 31/12/2011 (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Decrease of 3,000,000 unlisted options exercisable at 5.7 cents on or before 30/06/2009 (expiry of Options) 1 July 2009
Bradley Moore Increase of 50,794,943 Shares (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Increase of 25,397,472 unlisted Options exercisable at 0.8 cents cents on or before 31/12/2011 (entitlement under the Entitlements Issue and under an underwriting agreement in connection with the Entitlements Issue) 23 October 2009 Decrease of 3,000,000 unlisted options exercisable at 5.7 cents on or before 30/06/2009 (expiry of Options) 1 July 2009
Kimberley Heitman Decrease of 3,000,000 unlisted options exercisable at 5.7 cents on or before 30/06/2009 (expiry of Options) 1 July 2009

7.5 Directors’ interests in Sexyland

Shares and other securities in Sexyland

No Director holds any Shares or other securities in Sexyland or a Related Body Corporate of Sexyland and no Director has acquired or disposed of Shares in the last four months.

Agreements with Sexyland

No Directors are party to any agreements with Sexyland or a Related Body Corporate of Sexyland or have an interest in any contract entered into by Sexyland or a Related Body Corporate of Sexyland.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 29

Section 7 Additional Information

Directorships

As at the date of this Target’s Statement, no Director of Adultshop is a director of Sexyland.

7.6 Issued capital

At the date of this Target’s Statement, Adultshop has the following issued securities:

614,168,142 quoted Shares;
152,823,193 Listed Options and
5,760,000 unquoted Options, with the following exercise prices and expiry dates:

Class of Options	Number	Exercise Price	Expiry Date
Series A Employee Options 1,920,000 $0.047 3 January 2012
Series B Employee Options 1,920,000 $0.067 3 January 2012
Series C Employee Options 1,920,000 $0.087 3 January 2012

7.7 Substantial Adultshop Shareholders

As at the date of this Target’s Statement, the substantial shareholders of Adultshop were as follows:

Substantial Holder	Shares	% of issued Capital
Malcolm Day 139,090,662 22.65%
Hans-Rudolf Moser 53,794,943 8.76%
Bradley Moore 50,794,943 8.27%

Note: The above holding is based on the latest substantial holder notices of Malcolm Day, Hans-Rudolf Moser and Bradley Moore. Copies of which is available from the ASX website – www.asx.com.au – or upon request to Adultshop.

7.8 Financial information

So far as is known to the Directors, there have been no material changes to the financial position of Adultshop since the date of the last balance sheet sent to Shareholders (being the balance sheet as at 30 June 2009 contained in Adultshop’s Annual Report for the period ended 30 June 2009) which have not been announced to ASX. A list of Adultshop’s recent announcements to ASX is set out as Annexure 1 to this Target’s Statement.

7.9 Material contracts or commitments

As a “disclosing entity”, Adultshop is required to immediately disclose to the market through ASX any information concerning it that a reasonable person would expect to have a material effect on the price or value of Adultshop’s securities. Adultshop has complied with its continuous disclosure obligations under the Corporations Act and the Listing Rules.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 30

Section 7 Additional Information

Except as set out elsewhere in this Target’s Statement, there have been no material contracts or commitments entered into by Adultshop, which would be expected to have a material effect on the price or value of Shares, which have not been announced to ASX.

A list of Adultshop’s recent announcements to ASX is set out as Annexure 1 to this Target’s Statement.

7.10 Employee Options and Effect of Sexyland’s Offer on the Employee Incentive Scheme and Employee Options

Employee Options are “out of the money” and not freely transferrable and, accordingly, the prevailing Share price and Listed Option price on the ASX maybe less relevant to holders of Employee Options in considering whether to accept Sexyland’s Offer for their Employee Options. Notwithstanding, the Directors recommend that holders REJECT Sexyland’s Offer for the Employee Options for the other reasons given in this Target’s Statement for the Directors’ recommendation that Shareholders and Optionholders REJECT Sexyland’s Offer.

If Sexyland become entitled to more than 50% of the Shares, then the Directors must give written notice to holders of Employee Options and immediately thereafter each holder of Employee Options shall become and remain entitled to exercise his Employee Options within 30 days of receipt of such notice.

Your Directors will notify holders of Employee Options in writing should Sexyland become entitled to more than 50% of the Shares.

In order to exercise any or all of the Employee Options, notice in writing (in the form annexed to the rules of the Employee Incentive Scheme) must be given by the Optionholder to the Company together with the certificate for the Employee Options to be exercised and a cheque, money order or bank draft in Australian currency drawn on an Australian financial institution for an amount equal to the exercise price of the relevant Employee Options multiplied by the number of Employee Options to be exercised.

Pursuant to the terms of the Offer, the Shares issued upon exercise of the Employee Options will become subject to the Share Offer provided that the Shares are issued prior to the Offer Close Date for the Share Offer.

7.11 Material litigation

As at the date of this Target’s Statement, Adultshop is involved in the following outstanding legal proceedings:

In a matter heard in the Supreme Court of the Australian Capital Territory, Adultshop.com Limited v Teo Tran, Adultshop was awarded $737,000 on 7 March 2008 plus costs. Costs of $204,000 remain unpaid to Adultshop with the defendant awaiting the court’s decision on an appeal.

7.12 Taxation consequences

Sexyland discusses the taxation implications of its Offer in its Bidder’s Statements (clause 6 of Part 1). Shareholders are strongly advised to obtain their own professional advice in the tax implications of taking up Sexyland’s Offer based on their own specific circumstances.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 31

Section 7 Additional Information

7.13 Continuous disclosure

Adultshop is a “disclosing entity” under the Corporations Act and therefore has continuous disclosure obligations under that legislation and also under the Listing Rules.

Adultshop’s announcements are available free from the ASX website (see www.asx.com.au – Adultshop’s ASX code is ASC).

The most recent financial information regarding Adultshop is the company’s Annual Report for the period ended 30 June 2009, released to ASX on 20 October 2009. A copy of this document is available free from Adultshop on request and is also available on Adultshop’s website – http://investor.adultshop.com.

A list of Adultshop’s recent announcements to ASX is set out as Annexure 1 to this Target’s Statements.

7.14 ASIC modifications and exemptions

Adultshop has not obtained, or applied to ASIC for any modifications of, or exemptions from, the Corporations Act in relation to this Target’s Statement.

However, ASIC has published various instruments providing for modifications and exemptions that apply generally to all persons, including Adultshop. In particular, but without limitation, Adultshop relies on ASIC Class Order 01/1543 in that this Target’s Statement may include, or be accompanied by, certain statements which are made, or based on, statements made in documents lodged with ASX in accordance with the Listing Rules or documents lodged with ASIC. As required by the Class Order, Adultshop will make available a copy of these documents free of charge to any Shareholder or Optionholder who requests a copy. To request a copy of any document, please contact Adultshop.

7.15 Consents

The following persons have given and have not, before the date of issue of this Target’s Statement, withdrawn their consent to:

be named in this Target’s Statement in the form and context in which they are named; and
the inclusion of other statements in this Target’s Statement which are based on or referable to statements made in the reports or statements noted next to their names, or which are based on or referable to other statements made by those persons, in the form and context in which they are included.

Name of person	Capacity	Reports or statements
Directors Directors of the Company Statements made by, or statements based on statements made by, the Directors
Middletons Legal advisers Nil
Ernst & Young Auditors Adultshop’s 2009 audited financial statements and statements based on these audited financial statements
Advanced Share Registry Services Share registry Nil

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 32

Section 7 Additional Information

Each of the persons named above:

does not make, or purport to make, any statement in this Target’s Statement other than those statements referred to above and as consented to by that person; and
to the maximum extent permitted by law, expressly disclaims and takes no responsibility for any part of this Target’s Statement other than as described in this section 7.15 with the person’s consent.

None of Middletons, Ernst & Young or Advanced Share Registry Services has authorised nor caused the issue of this Target’s Statement.

7.16 No other material information

This Target’s Statement is required to include all the information that Shareholders and Optionholders and their professional advisers would reasonably require to make an informed assessment whether to accept Sexyland’s Offer, but:

only to the extent to which it is reasonable for investors and their professional advisers to expect to find this information in this Target’s Statement; and
only if the information is known to any Director.

The Directors are of the opinion that the information that Shareholders and Optionholders and their professional advisers would reasonably require to make an informed assessment whether to accept Sexyland’s Offer is:

the information contained in the Bidder’s Statements (to the extent that the information is not inconsistent with or superseded by information in this Target’s Statement);
the information contained in Adultshop’s releases to ASX, and the documents lodged by Adultshop with ASIC, before the date of this Target’s Statement; and
the information contained in this Target’s Statement.

The Directors have assumed, for the purposes of preparing this Target’s Statement, that the information in the Bidder’s Statements is accurate (unless they have expressly indicated otherwise in this Target’s Statement). However, the Directors do not take any responsibility for the contents of the Bidder’s Statements and are not to be taken as endorsing, in any way, any or all of the statements contained in it.

In deciding what information should be included in this Target’s Statement, the Directors have had regard to:

the nature of the Shares and the Options;
the matters that Shareholders and Optionholders may reasonably be expected to know;
the fact that certain matters may reasonably be expected to be known to Shareholders’ and Optionholders’ professional advisers; and
the time available to Adultshop to prepare this Target’s Statement.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 33

Section 8 Glossary & Interpretation

8.1 Definitions

In this Target’s Statement, the following terms have the following meanings unless the context requires otherwise.

Adultshop means Adultshop.com Limited ABN 92 009 147 924.

Adultshop Board means the board of Directors of Adultshop.

ASIC means the Australian Securities & Investments Commission.

Associate has the meaning given to that term in the Corporations Act.

ASX means ASX Limited ACN 008 624 691 or the financial market which it operates as the context requires.

Bidder’s Statements means:

the replacement bidder’s statement containing the Share Offer; and
the replacement bidder’s statement containing the Option Offers,

both dated 3 December 2009 and lodged with ASIC by Sexyland on that date, and Bidder’s Statement means either one of them.

Business Day means a day that is not a Saturday, Sunday, public holiday or bank holiday in Perth, Australia.

Corporations Act means the Corporations Act 2001 (Cth).

Directors means the directors of Adultshop.

Employee Incentive Scheme means the 1999 Adultshop employee incentive scheme.

Employee Options means an Option issued to eligible employees under the Employee Incentive Scheme.

Entitlements Issue means the non-renounceable entitlements issue made under prospectus dated 16 September 2009 under which Adultshop raised $1,227,186 (before costs).

Listed Option means an Option which has been admitted to the official list of the ASX.

Listing Rules means the listing rules of ASX, as amended or replaced from time to time.

Minimum Acceptance Condition means the defeating condition of the Share Offer and each of the Option Offers being that before the end of the Offer Period, Sexyland and its Associates have a Relevant Interest in at least 50.1% (by number) of all Shares and at least 50.1% (by number) of all Options.

Notice of Status of Conditions means the notice required by section 630(3) of the Corporations Act.

Offer or Sexyland’s Offer or the Sexyland Offer means the Share Offer and the Option Offers, or one or more of them as the context requires.

Offer Close Date means 5:00 pm on the 28 January 2010 unless validly extended in respect of the Share Offer or any of the Option Offers in which case the Offer Close Date for such Offer will be as so extended.

Offer Period means the period from 7 December 2009 until the Offer Close Date, unless the Share Offer or any of the Option Offers is validly extended, in which case the Offer Period for any such extended Offer will be as so extended.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 34

Section 8 Glossary and interpretation

Offer Price means:

in respect of the Share Offer, $0.0084 in cash for each Share; and
in respect of the Option Offers, $0.0006 in cash for each Option.

Option means an option to subscribe for a Share.

Option Offers means the separate offers for each class of Options on the terms and conditions of the Bidder’s Statement containing the Option Offers, and Option Offer means any one of them, as the context requires.

Optionholder means a holder of one or more Options.

Prescribed Occurrences has the meaning given in the Bidder’s Statements.

Register Date means 9 November 2009 being the date set by Sexyland under section 633(2) of the Corporations Act (as may be varied under the Corporations Act).

Related Body Corporate has the same meaning as given to that term in the Corporations Act.

Relevant Interest has the same meaning as given by sections 608 and 609 of the Corporations Act.

Sexyland means Sexyland Pty Ltd ACN 009 522 933.

Share means a fully paid ordinary share in Adultshop.

Share Offer means the offer by Sexyland to acquire the Shares on the terms and conditions of the Bidder’s Statement containing the Share Offer.

Shareholder means a holder of one or more Shares.

Subsidiary has the meaning given to that term in the Corporations Act.

Target’s Statement means this target’s statement lodged by Adultshop.

VWAP means volume weighted average share price for a respective period of trading days.

8.2 Interpretation

Unless specified otherwise, or otherwise required by the context, all words and phrases in this Target’s Statement shall have the meanings given to them in the Corporations Act.

The following rules apply unless the context requires otherwise:

the singular includes the plural and vice versa;
a gender includes the other genders;
the headings are used for convenience only and do not affect the interpretation of this Target’s Statement;
other grammatical forms of defined words or expressions have corresponding meanings;
a reference to a page, section or annexure is a reference to a page or section of, or annexure to, this Target’s Statement;
a reference to a document includes the document as modified from time to time and any document replacing it;
if something is to be or may be done on a day that is not a Business Day then it must be done

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 35

Section 8 Glossary and interpretation

on the next Business Day;

the word “person” includes a natural person and any body or entity whether incorporated or not;
the word “month” means calendar month and the word “year” means 12 months;
the words “in writing” include any communication sent by letter, facsimile transmission or email or any other form of communication capable of being read by the recipient;
a reference to a thing includes a part of that thing;
a reference to all or any part of a statute, rule, regulation or ordinance (statute) includes that statute as amended, consolidated, re-enacted or replaced from time to time;
a reference to $, AUD or dollars is to the lawful currency of the Commonwealth of Australia;
wherever “include” or any form of that word is used, it must be construed as if it were followed by “(without being limited to)”;
a reference to any agency or body, if that agency or body ceases to exist or is reconstituted, renamed or replaced or has its powers or functions removed ( defunct body ), means the agency or body that performs most closely the functions of the defunct body.

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 36

Approval of Target’s Statement

This Target’s Statement has been approved by a resolution of the directors of Adultshop.com Limited.

Signed on behalf of Adultshop.com Limited

==> picture [112 x 76] intentionally omitted <==

Malcolm Day

Managing Director

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 37

Corporate Directory

Adultshop.com Limited

ACN 009 147 924

Directors

Kimberley Heitman Non-Executive Chairman Malcolm Day Managing Director Hans-Rudlf Moser Non-Executive Director Bradley Moore Non-Executive Director

Company Secretary

Share Registrar

Advanced Share Registry Services 150 Stirling Highway Nedlands WA 6009 +61 (8) 9389 8033

Auditors

Ernst & Young 11 Mounts Bay Road Perth WA 6000

John Burness

Quoted on

Registered office

118 Roe Street Northbridge, Western Australia +61 (8) 9227 6777 +61 (8) 9227 6788

Australian Stock Exchange Code: ASC and ASCO German Stock Exchange Code: WKN 873083

Legal Adviser

Website

http://investor.adultshop.com

Middletons Level 2, 6 Kings Park Road West Perth WA 6005

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 38

Annexure ASX Announcements

Date	Announcement

28/01/2009 Appendix 4C – quarterly
29/01/2009 Change of Director’s Interest Notice
26/02/2009 Half Yearly Report and Accounts
29/04/2009 Appendix 4C - quarterly
01/07/2009 Expiry of Unlisted Options
29/07/2009 Appendix 4C – quarterly
29/07/2009 Profit Announcement
13/08/2009 Change of Director’s Interest Notice
13/08/2009 Change of Director’s Interest Notice
13/08/2009 Change of Director’s Interest Notice
13/08/2009 Change of Director’s Interest Notice
25/08/2009 Response to ASX Query
31/08/2009 Preliminary Final Report
09/09/2009 Non-Renounceable Issue
17/09/2009 Letter to Shareholders re Non-Renounceable Entitlement Issue
17/09/2009 Appendix 3B
17/09/2009 Disclosure Document
22/09/2009 Letter to Shareholders
30/09/2009 Full Year Statutory Accounts
01/10/2009 Despatch of Non Renounceable Entitlement Issue Prospectus
08/10/2009 Directors’ Statement re Takeover
08/10/2009 Sexyland Intention to make Takeover Offer
09/10/2009 Sexyland Intention to make Takeover Offer – clearer copy
13/10/2009 Directors` Statement re Takeover
20/10/2009 Notice of Annual General Meeting/Proxy Form
20/10/2009 Annual Report to shareholders
21/10/2009 Non renounceable issue – completion
28/10/2009 Change in substantial holding
28/10/2009 Change of Director’s Interest Notice
28/10/2009 Change of Director’s Interest Notice
28/10/2009 Change of Director’s Interest Notice
29/10/2009 Appendix 4C – quarterly
30/10/2009 Becoming a substantial holder
05/11/2009 Becoming a substantial holder
09/11/2009 Directors’ Statement re Takeover

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 39

Annexure ASX Announcements

09/11/2009	Sexyland Australia Pty Ltd’s Bidder’s Statement – Options
09/11/2009	Sexyland Australia Pty Ltd’s Bidder’s Statement – Shares
09/11/2009	Becoming a substantial holder
10/11/2009	Notice of date for determining holders of securities
24/11/2009	Results of Meeting
25/11/2009	Appendix 3B
04/12/2009	Sexyland’s Replacement Bidder’s Statement (options)
04/12/2009	Sexyland’s Replacement Bidder’s Statement (shares)
04/12/2009	Sexyland’s Supplementary Bidder’s Statement (options)
04/12/2009	Sexyland’s Bidder’s Statement (shares)
04/12/2009	Directors’ Statement re Takeover – Take No Action
07/12/2009	Appendix 3B
08/12/2009	Dispatch of Bidders Statement

REJECT Sexyland’s inadequate Offer

Target’s Statement | Page 40

AI assistant

MOAB MINERALS LIMITED — M&A Activity 2009

65360_rns_2009-12-10_a174d0dd-4113-4553-bbde-3aee6f2e62ab.pdf

Adultshop.com Limited

TARGET’S STATEMENT REJECT SEXYLAND’S OFFER IS INADEQUATE

Key dates

Important notices

Target’s Statement

No account of personal circumstances

Forward looking statements

Defined terms and interpretation

Sexyland’s Share Offer and Option Offers

Foreign jurisdictions

Further information

Why should you reject Sexyland’s Offer…

What you should do…

Letter from the Chairman of Adultshop

YOUR DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU REJECT SEXYLAND’S INADEQUATE OFFER

Your Directors consider that Sexyland’s Offer undervalues Adultshop and, accordingly, your Directors unanimously recommend that you REJECT Sexyland’s Offer.

Kimberley Heitman

Section 1 Why you should REJECT Sexyland’s Offer

Why your Directors unanimously recommend that you REJECT Sexyland’s Offer…

1.1 The Share Offer is at a discount to the current and recent market price

1.2 The Share Offer does not reflect the value of Adultshop’s net tangible assets

Pro Forma Balance Sheet at 30 June 2009

Section 1 Why you should REJECT Sexyland’s Offer

1.3 Sexyland’s Offer for Listed Options is at a significant discount to the current and recent market price

Section 1 Why you should REJECT Sexyland’s Offer

1.4 Adultshop is taking positive steps to unlock the value of it’s assets for all Shareholders

1.5 Sexyland’s Offer will not meet the bid conditions and is highly conditional and uncertain

Minimum Acceptance Condition

Accepting the Offer may limit your choices

1.6 Adultshop disagrees with a number of statements made by Sexyland in its Bidder’s Statements

Sexyland’s claims

Adultshop’s response

Section 1 Why you should REJECT Sexyland’s Offer

Section 1 Why you should REJECT Sexyland’s Offer

Sexyland’s claims

Adultshop’s response

Section 2 Frequently Asked Questions

Section 2 Frequently Asked Questions

Section 2 Frequently Asked Questions

Section 2 Frequently Asked Questions

Section 2 Frequently Asked Questions

As a Shareholder you currently have 3 choices available to you

3.1 Take no action

3.2 Sell your Shares on market

3.3 Accept Sexyland’s Offer

As a Listed Optionholder you currently have 4 choices available to you (see sections 4.1 to 4.4)

&

4.1 Take no action

4.2 Exercise your Options

4.3 Sell your Listed Options on market

Section 4 Your choices as an Optionholder

4.4 Accept Sexyland’s Offer

5.1 Offer Price

5.2 Conditions to the Offer

5.3 Notice of Status of Conditions

Section 5 Other Information about Sexyland’s Offer

5.4 Consequences of any waiver by Sexyland of any condition

5.5 Offer Period

5.6 Extension of the Offer Period

5.7 Withdrawal of Offer

5.8 Effect of acceptance

5.9 When will you be paid if you accept Sexyland’s Offer

5.10 Your ability to withdraw your acceptance

5.11 Compulsory acquisition

Follow on compulsory acquisition

Share Offer

Option Offers

Section 5 Other Information about Sexyland’s Offer

General compulsory acquisition

Share Offer

Option Offer – compulsory acquisition of single class of Options

Option Offer – compulsory acquisition of all classes of Options

5.12 Minority ownership consequences

6.1 Risk Factors

6.2 General Risks

6.3 Specific Risks

Opportunity Risk

MOAB MINERALS LIMITED M&A Activity 2009