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Brainytoys, Ltd – ‘20FR12G’ on 3/20/07

On:  Tuesday, 3/20/07, at 5:42pm ET   ·   As of:  3/21/07   ·   Accession #:  1318418-7-5   ·   File #:  0-52513

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/21/07  Brainytoys, Ltd                   20FR12G     3/20/07    8:1.9M                                   Secs Compliance … LLC/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20FR12G     Registration of Securities of a Foreign Private     HTML    629K 
                          Issuer                                                 
 2: EX-1        Exhibit 1.1 Historical Company Extract Dated        HTML    168K 
                          September 19, 2006 Provided by the                     
                          Australian Securities and Investments                  
                          Commission                                             
 3: EX-1        Exhibit 1.2 Constitution of Brainytoys Limited      HTML    268K 
                          Dated November 22, 2005                                
 4: EX-2        Exhibit 2 Form of Electronic Share Certificate      HTML     15K 
 5: EX-3        Exhibit 3.1 Agreement Between Alex Aguero and the   HTML     52K 
                          Company Dated June 28, 2004                            
 6: EX-3        Exhibit 3.2A Service Agreement Between Alex Aguero  HTML     49K 
                          and the Company Dated October 4, 2004                  
 7: EX-3        Exhibit 3.3 Underwriting Agreement Dated June 15,   HTML     44K 
                          2006 With Leadenhall Australia Ltd.                    
 8: EX-3        Exhibit 3.4 Convertible Note Agreement Between the  HTML     96K 
                          Company and Noble Investments Pty Ltd                  
                          Dated August 2, 2006                                   

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-FR12G

1

INTRODUCTION

CURRENCY

Brainytoys Limited (the "Company" or "Brainytoys" herein) uses the Australian dollar as its reporting currency.  All references in this Registration Statement to "dollars" or "$" are expressed in Australian dollars, unless otherwise indicated.  See also Item 3 - "Key Information" for more detailed currency and conversion information.

FINANCIAL STATEMENTS

The financial statements as required under Item #17 are attached hereto and found immediately following the text of this Registration Statement.  The Company’s consolidated financial statements are prepared in accordance with Australian Accounting Standards, Australian equivalents to International Financial Reporting Standards and the Corporations Act 2001, the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP (refer to Note 1 of the accounts included within item 18).  

FORWARD LOOKING STATEMENTS

Statements in this disclosure document concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and U.S. Federal Securities Laws. We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” and similar expressions are intended to identify forward-looking-statements. Forward-looking statements address matters that are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those in these statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under “Item 3D - Risk Factors”, Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects, as well as elsewhere in this disclosure document. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.

Unless the context indicates otherwise, the terms "Brainytoys Limited" the "Company", "Brainytoys", “we”, “us”, “our” are used interchangeably in this document and mean Brainytoys Limited and its subsidiary.

2

TABLE OF CONTENTS

PART I

3

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.  DIRECTORS AND SENIOR MANAGEMENT.  The following table provides the names and titles of our directors and senior management.

(1)

The business address for our directors and senior management is 6B Bowen Street, O’Connor, Western Australia, 6163 Australia.

B.  ADVISORS.  The legal advisor to the Company regarding this registration statement is:

The Law Offices of Gary L. Blum

3278 Wilshire Blvd, #603

Los Angeles, CA  90010

213.381.7450 phone

213.384.1035 fax

www.gblumlaw.com

C.  AUDITORS.  The following table provides the names and addresses of our auditors for the preceding three years.

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.

KEY INFORMATION

A.

Selected Financial Data

The following tables summarize selected financial data for the Company (stated in Australian dollars) prepared in accordance with Australian Accounting Standards (equivalent to International Financial Reporting Standards - Australian IFRS).  The information in the table was extracted from the more detailed financial statements and related notes included herein and should be read in conjunction with these financial statements and with the information appearing under the heading “Item 5 - Operating and Financial Review and Prospects”.   There is no material difference between USGAAP and Australian IFRS as advised in note 1 of the financial statements contained within item 18 of this document

4

INFORMATION IN ACCORDANCE WITH AUSTRALIAN IFRS AND US GAAP¹

*Dilutive earnings per share have not been disclosed as the entity does not have on issue any potential common shares which are dilutive.

Footnote 1:

Australian Equivalent to International Reporting Standards differs from International Financial Standards where the company has applied various exemptions under AASB.

EXCHANGE RATES

The following table sets forth, for the financial periods indicated, certain information concerning the Buying Rate for Australian dollars expressed in US dollars per AUD$1.00 as per the Reserve Bank of Australia’s “Daily Statistical Release”.

Five Most Recent Financial Years

Previous Six Months

Latest Practicable Date

At February 1  2007 the Australian dollar expressed in US dollars per AUD$1.00 was $0.7764.

(1)

Represents the average of the Noon Buying Rates on the last day of each month during the period.

(2)

Source www.rba.gov.au/statistics/Historical Exchange Rates

5

B.

Capitalization and Indebtedness

The following table summarizes our capitalization and indebtedness as of the date of this filing.  The information in the table should be read in conjunction with the more detailed combined financial statements and notes presented elsewhere in this registration statement.

(1)

Loan bearing interest at 10% p.a. and repayable by June 30, 2010 if not hitherto invested to shares.

(2)

Audited Financial Position as of June 30, 2006 adjusted to reflect capital rights issue raising in July,shares issued in relation to fees and shares issued in September and October and  shares issued on December 15 2006.

(3)

Balance as of June 30, 2006 as per Audited Financial Statements adjusted for unaudited losses for the 5 month period ended November 30,2006 that amounted to $602,132.

(4)

Balance as of  June 30, 2006 as per Audited Financial Statements adjusted for unaudited losses for the period to November 30, 2006 and capital issues during the period July 1 to December 14, 2006.

*

Balance as of June 30, 2006 as per Audited Financial Statements adjusted for subsequent capital issues.

**

Existing shares plus options outstanding together with $100,000 loan notes  converted to 1.666,667 shares

C.  

Reasons for the Offer and use of Proceeds

Not applicable.

6

D.

Risk Factors

Investing in our securities will provide you with an equity ownership interest in Brainytoys Ltd.  As one of our shareholders, your investment will be subject to risks inherent in our business.  If any of the following risks actually occur, our business could be harmed.  In that event, the trading price of our shares might decline and you could lose all or part of your investment.  You should carefully consider the following factors as well as other information contained in this registration statement before deciding to invest in shares of our securities.  Additional risks that are not currently known to us or that we deem immaterial may also harm us and the value of your investment.  An investment in our securities involves a high degree of risk.  When evaluating an investment in our shares or business and product opportunities investors should carefully review and consider the following risk factors in addition to the other information contained in this Registration Statement on Form 20-F.

Risks Related to Our Business

Brainytoys Ltd and its subsidiary operates in rapidly changing environments that involve numerous risks and uncertainties, many of which are beyond our control and which could have a material effect on our business, revenues, operating results and financial condition.  The following points highlight some, although not all, of these risks and uncertainties.

Product Sales and Development

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

Exchange Rate Risk

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

Economic and Government Risks

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

·

general economic conditions in US, Australia, and overseas markets;

·

changes in government policies, taxation and other laws;

·

the strength of the equity and share markets throughout the world;

·

movement in, or outlook on, interest rates and inflation rates; and

·

natural disasters, social upheaval or war.

Additional Requirements for Capital

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

Intellectual Property Rights

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

7

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

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

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

Reliance on Key Personnel, and Need to Attract Qualified Staff

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

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

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

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

Risk and Product Liability, and Uninsured Risks

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

Uncertainty on Future Profitability

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

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

Industry Risks

The Company’s current and future potential competitors include companies with substantially greater resources than it.  There is no assurance that competitors will not succeed in developing products that are more effective or

8

economic than the current products or any of those being developed by the Company, or which would render the products obsolete and/or otherwise uncompetitive.  In addition, the Company may not be able to compete successfully against current or future competitors where aggressive pricing policies are employed to capture market share.  Such competition could result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the company’s future business, operating results and financial position.

Potential Acquisitions

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

Changes to Accounting Standards

For reporting periods beginning on or after January 1, 2005, the Company must comply with Australian Equivalents to International Financial Reporting Standards (IFRS).  These changes will affect the way certain items are reported in the Company’s financial statements.  The most significant changes to accounting treatment under IFRS as it applies to the Company are provided in the notes to the Financial Statements herein.

Investment Speculative

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

Therefore, the Company’s shares carry no guarantee with respect to the payment of dividends, returns of capital or the market value of those Securities.

Company’s Officers and Directors Resident Outside US; Potential Unenforceability of Civil Liabilities and Judgments

The Company and all of its officers and all of its directors are residents of countries other than the United States.  Most of the Company’s assets are located outside the United Stares.  As a result, it may not be possible for investors to effect service of process within the United States upon such persons or enforce in the United States against such persons judgements obtained in United States courts, including judgments predicated upon the civil liability provisions of United States federal securities laws or state securities laws.

The Company believes that a judgment of a United States court predicated solely upon civil liability under United States securities laws would probably be enforceable in Australia if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that was recognised by an Australian court for such purposes.  However, there is doubt whether an action could be brought in Australia in the first instance on the basis of liability predicated solely upon such laws.

As a foreign private issuer we do not have to provide you with the same information as an issuer of securities based in the U.S.:

Because we are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended, commonly referred to as the Exchange Act, we are exempt from certain provisions of that law that are applicable to U.S. public companies, including (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a registered security; and (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time. Thus, you are not afforded the same protections or information, which would be made available to you, were you investing in a U.S. public corporation.

9

In accordance with the requirements of the Australian Stock Exchange, we disclose annual and semi-annual results. Our annual results are fully audited and our semi-annual results undergo a limited review by our independent auditors. We also endeavor to immediately disclose in the public media and to the Australian Stock Exchange all information which may have an effect on our stock price. We also disclose other relevant information pertaining to our company as required by Australian Stock Exchange regulations applicable to listed companies. We will provide our semi-annual results and other material information that we make public in Australia in the U.S. under the cover of SEC Form 6-K. Nevertheless, this information may not be the same or as much information as would be made available to you were you investing in a U.S. public corporation.

Risks related to our common stock:

Stock Volatility

The market price of Brainytoys shares has experienced fluctuations and may continue to fluctuate significantly.  The market price of Brainytoys shares may be adversely affected by various factors, including enforcement of existing laws, innovation and technological changes, the emergence of new competitors, quarterly variations in revenue and results of operations, speculation in the press or analyst community and general market conditions or market conditions specific to particular industries, including the toys and games industry.

THERE IS A LIMITED MARKET FOR BRAINYTOYS SHARES WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO DISPOSE OF YOUR SHARES

Brainytoys shares have been quoted on the ASX under the symbol “BRT” since March 24^th, 2005.  There is a limited trading market for Brainytoys shares.  Accordingly, there can be no assurance as to the liquidity of any markets that may develop for its common stock, the ability of holders of Brainytoys shares to sell its shares, or the prices at which holders may be able to sell Braintyoys shares.

BRAINYTOYS HISTORIC STOCKPRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR SHARES MAY CONTINUE TO BE VOLATILE.  FURTHER, THE LIMITED MARKET FOR BRAINYTOYS SHARES WILL MAKE ITS PRICE MORE VOLATILE.  THIS MAY MAKE IT DIFFICULT FOR YOU TO SELL BRAINYTOYS SHARES FOR A POSITIVE RETURN ON YOUR INVESTMENT.

Penny Stock Rules

As Brainytoys’ shares are subject to the US “Penny Stock” Rules, investors who purchase Brainytoys’ shares may have difficulty re-selling their shares as the liquidity of the market for Brainytoys’ shares may be adversely affected by the impact of the “Penny Stock” Rules.

Although Brainytoys’ stock is not currently deemed “penny stock”, its stock may be subject to US “Penny Stock” Rules in the future, which may make the stock more difficult to trade on the open market.  Brainytoys’ common shares have traded on the ASX since March 24, 2005.  For further details on the market performance of Brainytoys’ shares, see “Item 9A.”  A “penny stock” is generally defined by regulations of the US Securities and Exchange Commission (“SEC”) as an equity security with a market price of less than US$5.00 per share.  However, an equity security with a market price under US$5.00 will not be considered a penny stock if it fits within any of the following exceptions:

(i)

the equity security is listed on NASDAQ or a national securities exchange;

(ii)

the issuer of the equity security has been in continuous operation for less than three years, and either has (a) net tangible assets of at least US$5,000,000, or (b) average annual revenue of at least US$6,000,000; or

(iii)

the issuer of the equity security has been in continuous operation for more than three years, and has net tangible assets of at least US$2,000,000.

If an investor buys or sells a penny stock, SEC regulations require that the investor receive, prior to the transaction, a disclosure explaining the penny stock market and associated risk.  Furthermore, trading in Brainytoys’ common

10

stock is currently subject to rule 15g-9 of the Exchange Act, which relates to non-NASDAQ and non-exchange listed securities.  Under this rule, broker/dealers who recommend Brainytoys’ securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser, and receive the purchaser’s written agreement to a transaction prior to sale.  Securities are exempt from this rule if their market price is at least $5.00 per share.

In the event Brainytoys’ stock is deemed to be penny stock in the future, penny stock regulations will tend to reduce market liquidity of Brainytoys’ common stock, because they limit the broker/dealers’ ability to trade, and a purchaser’s ability to sell, the stock in the secondary market.

The low price of Brainytoys’ shares has a negative effect on the amount and percentage of transaction costs paid by individual shareholders.  The low price of Brainytoys’ common stock also limits Brainytoys’ ability to raise additional capital by issuing additional shares.  There are several reasons for these effects.  First, the internal policies of certain institutional investors prohibit the purchase of low-priced stocks.  Second, many brokerage houses do not permit low-priced stocks to be used as collateral for margin accounts or to be purchased on margin.  Third, some brokerage house policies and practices tend to discourage individual brokers from dealing in low-priced stocks.  Finally, brokers’ commissions on low-priced stocks usually represent a higher percentage of the stock price than commissions on higher priced stocks.  As a result, Brainytoys’ shareholders may pay transaction costs that are a higher percentage of their total share value than if Brainytoys’ share price was substantially higher.

The rules described above concerning penny stocks may adversely affect the market liquidity of Brainytoys’ securities.  Brainytoys believes its shares will likely continue to be thinly-traded and that its stock is a “penny stock” as its tangible assets are less than US$2 million.  For more information about penny stocks, contact the Office of Filings, Information and Consumer Services of the U.S. Securities and Exchange Commission, 450 fifth Street, N.W., Washington, D.C. 20549, or by telephone at (202) 272-7440.

ITEM 4.

INFORMATION ON OUR COMPANY

A.

History and Development of the Company

The Company was incorporated in the State of New South Wales, Australia on May 5, 1980 under the name Bevona Pty Ltd.  Thereafter, the Company changed its name on July 10, 1980 to Speedy Wheels (Aust) Pty Ltd; on November 18, 1986 to Speedy Wheels Ltd; on September 5, 1999 to Auto Enterprises Ltd; and, finally, on November 4, 2004 to Brainytoys Limited.

.  

Brainytoys is headquartered in Perth, Australia and employs six full time professional and support staff, and, at times, contracts selected specialist staff and consultants as needed.

The principal office of the Company is located at 6B Bowen Street, O’Connor, Western Australia, Australia 6163 and its telephone number is (61) 8 9331 8441.

The Company, under the name Speedy Wheels Ltd and then Auto Enterprises Limited, listed on the Official List of the Australian Stock Exchange Limited (“ASX”) beginning in 1987, but was suspended from quotation in 1999.  On October 15, 2004, Auto Enterprises acquired 100% of the issued capital of Brainytoys.com Pty Ltd. in consideration for the issue of shares for a value of approximately $2.2 million to vendors associated with the Brainytoys business founder, Mr.. Alex Aguero.  On November 5, 2004, the Company changed its name from Auto Enterprises Limited to Brainytoys Limited and was re-listed on the ASX on March 24, 2005.

As a result of the acquisition of Brainytoys.com Pty Ltd, the development and commercialization of the existing and future Brainytoys range of products became the Company’s main focus.  Since that time, approximately $3.5 million of new capital has been raised and applied toward product development.

11

B.

Business and Marketing Overview

Brainytoys' corporate aim is to position the Issuer as a significant and profitable participant in the world’s US$59 billion (2003 Sales - Source: US Department of Commerce 2005 Report) toys and games markets with a broad range of products covering key segments of the world market.

The Brainytoys business focus is aimed toward satisfying the large consumer demand for toy and game products, and the requirements of the world’s toy and game markets for the supply of creative, innovative, and new generation products.

Brainytoys has human resource and product innovation skills in the areas of software development, product design, product virtualization, prototype development, mass manufacture, and marketing systems in the toys and games industry.  It is proposed that these skills will be systematically applied in concluding marketing, manufacturing, product licensing, and distribution arrangements with the world’s leading toys and games industry participants.

Brainytoys currently has in excess of 50 products developed, or under development, at a cost of $3 million over the past three years.  Most of these products are expected to be released to the market in calendar year 2007.* Up to this point no product sales have occurred since business commencement.

* Products being released fromApril 1, 2007.

Marketing and Licensing

Brainytoys has entered into a number of agreements with three key distribution partners in Australia, USA and Europe.  These agreements will give Brainytoys the potential to reach up to 20,000+ independent and mass market retail stores across almost all key world markets.  One of the key elements of its marketing model is to consummate licensing agreements for significant brands in most major markets covered by its distribution partners.  This will help to facilitate rapid market penetration.  Major brand licensing arrangements have been finalized in Australasia for the Wiggles and Thomas the Tank Engine, both top-tier brands in the pre-school super-category.

In April and May 2006 Brainytoys made three important announcements regarding manufacturing, distribution and marketing agreements entered into with Hong Kong-based Enertec Enterprises Limited (Enertec), USA-based Reveal Entertainment Inc. (Reveal) and Australian/NZ-based Modern Brands Pty Ltd (Modern Brands).In December 2006 and January 2007 Brainytoys entered into Licensing agreements in relation to the United States market with Dreamworks Animation ( Bees Movie ),Porchlight Entertainment Inc (Jay Jay the Jet Plane ),Classic Media Inc ( Little Golden Books ) and Wiggles International Pty Ltd  ( the  Wiggles ).

These are major milestones in Brainytoys’ development as these agreements offer marketing and distribution channels for the Issuer’s products to a very large number of retail outlets in key world markets.

In aggregate terms, the potential number of outlets for Brainytoys’ products - which Enertec, Reveal and Modern Brands currently market and distribute to - is over 20,000 specialty and mass market retail stores.

These specialty and mass market retail stores are located in Brainytoys’ primary geographical markets, which together account for approximately 80% of worldwide toys and games sales, including the United States, Australia, New Zealand, Canada, UK, France, Germany, other European countries and Central and South America.

Subject to the final approval of a number of products currently being developed - using licensed properties, as per the announcement of the developmental partnership with Modern Brands - Brainytoys expects to deliver over 50 products to its distribution partners in the coming twelve months commencing in January 2007.  The anticipated sales may show seasonal consumer market influences such as the Christmas festive season.

·

Licensing Generally

Licensed toy and game products represent 30%+ of the toy industry (Source:  NPD Market Reports) and is therefore a significant market that Brainytoys must engage.

12

Accounting for approximately US$2.6 billion in royalty revenue in North America alone, entertainment licensing is big business (Source:  Video Age International).

Licensing, in the Brainytoys context, relates to the use of movie, TV, and published or other branded property that can be used to enhance a toy or game’s appeal.

Nearly all the products developed by Brainytoys have significant potential to use licensed properties.

Brainytoys is already developing products with licensed properties, as indicated in the Modern Brands agreement announcement in May this year.

In order to engage with this market Brainytoys announced, in June 13 2006, the appointment of USA-based Mr. Rand Brenner as a specialist Licensing and Marketing executive consultant.

Mr. Brenner will help the Issuer spearhead the expansion of licensed property product development.  He has over 20 years of marketing experience marked by licensing and promotion agreements with such Fortune 1000 companies as Hasbro, Bandai America, Hewlett Packard, Kellogg’s, Quaker Oats, Pepsi and others.

Holding executive positions at Saban Entertainment and Warner Bros., he was largely responsible for the licensing success of such entertainment properties as Mighty Morphin Power Rangers, Batman movies and Looney Tunes.

He also managed the advertising of such brands as Mattel's Hot Wheels at Ogilvy & Mather Advertising, as well as Yamaha electronics, Toshiba computers and Host International Restaurants at NW Ayer Advertising.

Mr. Brenner has a BA in Advertising from California State University in San Jose and an MBA from Pepperdine University.

·

Product Categories

Brainytoys has identified a number of opportunities in the toys and games markets, and has focused development on products for the following segments:

Brainytoys believes that it has the ability to combine a unique number of elements that will advance the Issuer’s success.  These are:

·

innovative products that bring new twists to existing toy categories;

·

management and technical skills;

·

leading volume manufacturing and marketing relationships; and

·

an understanding of the marketing dynamics and culture of the toys and games industry.

The Issuer’s management philosophy is to adopt a prudent and risk-averse approach to:

13

·

specific product development, by containing product development costs to a maximum of approximately $100,000 for each product;

·

manufacturing and inventory holdings, through the use of contract manufacturing (China and Hong Kong based) and by matching purchase and sales orders from distributors and licensees, thereby virtually eliminating Issuer owned inventories; and

·

product development strategy, through the development of a multi-segment product range ensuring that the Issuer’s success is not tied to the performance of any single product.

In order to commercialize its products, the Issuer is endeavoring to:

·

manufacture and market its products directly to distributors; and

·

use licensing arrangements with major brand names.

The operational matrix of the business includes:

·

develop a product concept;

·

evaluate potential for further development;

·

develop a prototype;

·

present prototype to distributors and obtain feedback;

·

develop marketing profile for product; and

·

sell the product worldwide via distributor partners.

It is anticipated that this development cycle will take from three to twelve months for most products in development.

·

Technology

Brainytoys has expertise in computer-assisted product development processes.

Powerful new computer tools can now be applied to many areas in the product development cycle.

Combining this technology with the availability of low-cost manufacturing opportunities is assisting the Issuer’s ability to develop products in a timely and cost effective manner.

These technology tools include:

·

3D visualization software - for the creation of “virtual” models of the product so that the functional and cosmetic elements can be visualized and assessed before the product is actually built.

·

3D printers - this technology is closely allied to the 3D visualization software listed above, but goes one step by enabling the creation of actual physical product prototypes, derived from 3D designs, in a matter of hours using devices that are no bigger than a large photocopier.

·

3D animation tools - broadcast-quality 3D animation tools are now widely available at low cost.  Combining these tools with the low cost of computing power allows Brainytoys to develop 3D animation dynamic displays of its products, and also 3D animation cartoon programs to support the marketing of its products.

Brainytoys use of this technology is enabling the Issuer to develop products in short time frames, thereby reducing cost and accelerating the product-to-market cycle.

·

Multimedia Product Extension

In its development processes, Brainytoys makes extensive use of software design tools and, specifically, 3D “virtual” design graphic and animation technologies.  In effect, this means that Brainytoys’ design skill set is the same as that required for the development of computer games and other software related products.

14

Brainytoys has determined that the Issuer has substantial opportunities to extend some of its current physical toy and game product lines into these “virtual” media segments as well as developing a number of new products.  For example, Brainytoys’ hand-held electronic games and board games could be developed as computer or mobile phone games.

These other media formats include:

·

3D Animation movies/cartoon series;

·

Computer games;

·

Internet/Web games and content;

·

Mobile phone games and content;

Brainytoys is aggressively pursuing these opportunities as they have the potential to deliver significant value to the Issuer.

Brainytoys has already initiated high level discussions with a number of substantial companies in Australia, the US and China to develop these opportunities further.

·

Global Markets

The toys and games industry is a substantial world industry generating an estimated US$59 billion in annual sales, with the North American market generating approximately US$21 billion in sales. (Sources: US Department of Commerce 2005 Report/NDP 2004/5 State of Industry Report)

The toys and games markets are constantly searching for innovative products, and are relatively resilient in economic terms, able to ride out most economic cycles.

One of the most interesting features of these markets is that nearly every “blockbuster” toy or game launched over the last 50 years has been brought forward by independent inventors and small companies.  

The Issuer is especially focused in developing potential blockbuster products.

With its projected production of 20 to 30 new products each year the prospects of achieving such products will be significantly improved.

In order to remain competitive, most of the big toys and games companies license products from other smaller companies and inventors.

C.  ORGANIZATIONAL STRUCTURE

The Company has only one subsidiary, Brainytoys.com Pty Ltd, which is wholly owned by the Company and holds nominal intellectual properties.

D.

PROPERTY, PLANT AND EQUIPMENT

The following table sets forth information concerning our facilities and equipment:

15

(1)

Premises

800 square feet of leased office/warehouse located at 6B Bowen Street, O’Connor, Western Australia 6163 on monthly lease at $1579.00 per month.

Additional warehouse facilities (400 sq ft) are rented at Park Place, Hamilton Hill, Western Australia 6163 at $324.00 per month.

(2)

Equipment

Computers, graphic design and rendering software, 3D printers are owned by the Company.  The approximate purchase value of this equipment was $243,000.

ITEM 4A.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following information should be read in conjunction with Brainytoys audited consolidated financial statements and related notes, which are prepared in accordance with Australian International Financial Reporting Standards (“Australian IFRS”), included elsewhere in this Form 20-F.  All amounts are expressed in Australian dollars unless otherwise indicated.  The summary of Significant Accounting Policies contained in Note 1 explains the diference between Australian IFRS and US GAAP and this discussion of results of operations and liquidity and capital resources.

The Company acquired 100% of Brainytoys.com Pty Ltd on 15^th October 2004 in consideration for the issue to Alex Aguero of 7,190,600 shares (post capital reconstruction) and a cash payment of $25,000.  A further payment in consideration for the completion of the capital raising and relisting was made in March 2005 to the vendor – this comprised 5 million shares and 2.5 million options and a cash payment of $50,000.  As such, the strategic direction of the Company changed from an investment company to a toy and game development company. Refer to note 15 in the financial statements for full details of the acquisition.

To assist with the acquisition of Brainytoys.com Pty Ltd, a total of 6,734,000 shares at 15 cents were issued as seed capital to raise a total of $1,010,100.  each of the seed capital investors received 1 option for every 2 shares acquired, resulting in 3,367,000 options being issued.

The Company lodged a prospectus dated 9 December 2004 for the offer of 8,750,000 shares at an issue price of 20 cents each to raise a total of $1,750,000, together with up to 2,187,500 free attaching options on a one for four basis.

Since the Company’s acquisition on October 15, 2004 and listing on the Australian Stock Exchange (“ASX”) on March 24, 2005, it has significantly advanced its business model as an innovative developer and wholesaler of contract manufactured toys and games products for world markets, however, in the process has incurred losses of $4.3 million reflecting a write down of virtually all product outlays and acquisition carrying values.  The past two years business activities have been focussed upon developing:

(i)

an extensive suite of products to release to the market;

(ii)

investing in and establishing the necessary production technology infrastructure to develop products; and

(iii)

arranging worldwide distribution networks for the product;

(iv)

negotiating or assisting distributors in the procurement of appropriate brand licences; and

(v)

arranging the accessing of contract manufacturers.

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The process has taken appreciably longer than anticipated, and has involved an outlay of approximately $5 million over the past 2.5 years.  In the process the Board of Directors has changed significantly, with the recent appointment of directors who share management’s strategic vision and had earlier been largely responsible for arranging the requisite capital.

The Company is now strategically well positioned to success for its business model:

(a)

the scheduled release of approximately 10 completed products over the next six months and potentially a further 50 products over the 2007 calendar year.

(b)

the formation of a distribution network enabling retail access to potentially 20,000 new outlets, and

(c)

the recent arrangement of $1.33 million in new capital raisings through an underwritten rights issue of $454,345, a placement to raise $100,000 and an $800,000 secured convertible loan note facility to be drawn down as and when required as to $700,000 ,and a placement to raise $80,000.

In the absence of the expected significant cash inflow arising from product sales the facility ensures that the Company has sufficient liquidity reserves for at least a further 12 months.

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A.

Operating Results

2005 and 2006

The consolidated entity (including the parent and its wholly owned subsidiary) revenues for the financial years ended June 30, 2005 and 2006 were $127,441 and $32,192 respectively, representing interest income.

The consolidated entity’s losses for the financial years ended June 30, 2005 and 2006 were $744,705 and $3,542,858 respectively.

The losses reflect the inclusion of a 2,198,063 Impairment of Intellectual Property asset write down.  No product development expenditure items have been capitalized.  The remaining increase in losses for the period was largely attributable to the conduct of a scaled up research and development program, higher people and other general costs.  As there was no firm sales contracts locked in as of 30 June 2006, this triggered the writedown of intellectual property under IFRS.

6 Months Ended December 31, 2006 ( Unaudited )

The Company has continued to incur final product development and  manufacturing costs in relation to several products to be released to the market at the commencement of the  June  quarter.

The economic entity is expected to incur losses of approximately $600,000 for the period.  Thereafter, the financial position is expected to be improved upon later in the Financial Year.

External Influences - Inflation, foreign Currency Fluctuation, Economic, governmental and political

During the periods in question none of the above considerations impacted upon or influenced the outcome of the Company’s results.

B.

Liquidity and Capital Resources

As of the date of this filing, the Company had cash  reserves of approximately $200,000.  We have financed our operations primarily through a series of private placements of equity securities and debt issuances as described in the following list:

·

5 million common shares issued to Mr Alex Aguero for a value of $1,000,000 to complete the acquisition of Brainytoys.com Pty Ltd in March 2005

·

2,097,333 shares issued for $0.15 per share (as adjusted for 1 for 5 share consolidation) for cash to various seed capital subscribers to raise $314,600 during the period November 2004 – January 2005

·

8.750,000 common shares issued for $0.20 per share cash pursuant to a public prospectus dated December 9, 2004 to raise $1,750,000

·

7,572,429 common shares issued for $0.06 per share cash pursuant to an underwritten 1 for 4 pro rata public prospectus rights issue dated June 23, 2006 to raise $454,346

·

On September 5, 2006, the Issuer entered into a Convertible Note Agreement with Noble Investments Pty Ltd relating to the issue by the Issuer at its option of a series of convertible loan notes to a value of $800,000 maturing on June 30, 2009.  The Issuer has drawn down on 1 convertible note issued at $100,000 which is convertible to 1,666,666 common shares at $0.06 per share

·

1,000,000 common shares issued for $0.08 per share pursuant to a placement to Upton Holdings Pty Ltd

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In the absence of any expected cash inflow arising from product sale during the ensuing financial year the Company is expected (through a drawdown of the note facility) to have sufficient cash resources to sustain its operation through to October 2007.  Notwithstanding that the Company is anticipating an appreciable cash inflow for the ensuing financial year and will only draw down the remaining $700,000 Noble undrawn facility on an as required basis.

The Company does not currently have, nor is it proposing to have, any borrowings aside from the Noble facility which through the date of this filing is $100,000.

C.

Research and Development, Patents and License

Following the acquisition on October 15, 2004 of Brainytoys.com Pty Ltd, the Company’s business has been exclusively directed to the research and development (“R & D”) of:

(i)

a high technology consumer market software focussed methodology for introducing products to the toys and games sector; and

(ii)

up to 68 toys and games products.

By September 30, 2006 Brainytoys will have expended almost $5.5 million in R&D and acquisition costs, an investment it expects to start recouping during the balance of the 2007 Financial Year.

D.

Trend Information

The Company is not yet in a position to identify indicative current or anticipated trends pending the outcome of the sales programs undertaken by the Company’s distributors.

E.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

F.

Tabular Disclosure of Contractual Obligations

The following table summarises our contractual obligations as of the date of this filing, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

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(1)

Represents a secured 10% interest bearing facility provided by Noble Investments Pty Ltd convertible into shares.  The facility is repayable by June 30, 2009 if not hitherto converted to shares.

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.

Directors and Senior Management

The following table sets forth certain information concerning our directors and senior management as of the date of this filing.  All of our directors are residents of Australia.

Set forth below is a biographical description of our directors and senior management based on information supplied by each of them.

Charles MacKinnon - Chairman and Chief Financial Officer

Mr. MacKinnon holds a Bachelor of Commerce degree from the University of Western Australia and thereafter qualified to become a member of the Australian Society of CPAs.

His expertise includes 35 years at a senior management level (principally at director level) in the UK, Australia, and South East Asia in the investment banking and various other industries.

In 1993, Mr. MacKinnon served as one of the four McCarrey Commissioners conducting a comprehensive efficiency/financial review of State Finances and Public Sector Agencies for the Government of Western Australia.

In recent times he has been Chairman of several public companies and government entities including 6 years as President of the Perth Zoo.  He has also had extensive experience in the agricultural, management consulting, financial, manufacturing and resources, construction, and property management sectors and is Executive Chairman and ultimate owner of Lothbury Advisory Pty Ltd, an Australian licensed investment banking corporate advisory business.

Alex Aguero - Managing Director

Mr. Aguero is the developer of the Brainytoys product range.  Mr. Aguero has been involved in the development of a number of innovative high-tech products and systems since 1981, when he first developed the successful labelling device now marketed world wide by the Casio, Brother and Dymo companies, with several million units held.  Mr. Aguero has worked on high level software and hardware development projects as follows:

·

managing the development and roll-out of national data broadcasting networks with ABC TV and Telstra; and

·

the development, manufacture and marketing of computer and hand-held electric games, interactive information systems, voice activated systems, robotic products, bio-feedback devices, visual stimulation systems and mobile phone data projects.

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With reference to Brainytoys, Mr. Aguero has management expertise in the development, manufacturing and marketing of advanced technologies, software, toys and games.

Graham Nicol – Director and Company Secretary

Mr. Nicol is a qualified accountant and a member of the ASCPA for 35 years with extensive financial, business and information systems experience at a senior level in diverse industries including motor vehicle distribution, building materials, primary industries, media, small business retail and property management.  Mr. Nicol is a director of Brainytoys Limited.

Stephen Zadarnowski - Technology Manager

Mr. Zadarnowski has an extensive background in IT and internet systems, and online data services (1997-2006), as well as management of information systems.  Mr. Zadarnowski has been employed in the computing industry since 1981, covering home, industrial and commercial projects.  His specific career includes PC games design (1981-2006), database (2001-2006), communications and information systems (1989-2001), electronic and mechanical toy design and programming in embedded systems and emulations (1994-2006).  Mr. Zadarnowski became Brainytoys Ltd’s Technology Manager in 2004; he manages all technical aspects of product design, development, testing, and production, as well as managing the Company’s technological requirements and applications.

Catherine Vann - Business Manager

Ms. Vann’s early career was in teaching business education and English to high school students, and as an Associate of the Imperial Society of the Teachers of Dancing (Cecchetti) teaching classical dance in country towns in South Western Australia.  Ms. Vann has extensive experience in Business Administration, having operated her own consulting business contracting her services to a range of clients including schools, radio production, state government, and software designers and developers.  The software development projects Ms. Vann was involved with include the development of electronic hand-held games, an Australia wide data distribution network using Australia’s national Broadcaster (ABC TV) and a national data distribution network using Telstra’s premium billing network, this last project being partly funded by Telstra, Australia’s premier phone network.  Ms. Vann was also the Business manager of Highforce Investments Pty Ltd from 1999 to 2001 when the company was managing the software development of a major Internet/Web project.  Ms. Vann joined Brainytoys in 2004 as its Business Manager and manages all aspects of daily administration including Human Resources, corporate health and risk management, policy and procedure, and financial and systems reporting.

B.

Compensation

During the financial year ended June 30, 2006, the Company paid or accrued a total of $396,720 in compensation to its directors and officers.  No other funds were set aside or accrued by the Company during the financial year ended June 30, 2006 to provide pension, retirement or similar benefits for directors or officers of the Company pursuant to any existing plan provided or contributed to by the Company under applicable Australian laws.

The Company is required, under applicable securities legislation in Australia, to disclose to its shareholders details of compensation paid to its executive officers.  The following fairly reflects all material information regarding compensation paid to the Company’s executive officers and directors which has been disclosed to the Company’s shareholders under applicable Australian law.

Cash and Non-Cash Compensation - Executive Officers and Directors

The Company currently has five executive officers and directors.  Charles MacKinnon, Alex Aguero, Graham Nicol, Stephen Zadarnowski and Catherine Vann.  The following table sets forth all annual and long term compensation for services in all capacities to the Company for the financial year ended June 30, 2006 in respect of the individuals who were, at June 30, 2006, the Company’s directors and members of management:

21

In addition, the table includes compensation for the following former directors and officers of the Company who no longer serve in that capacity.  The former directors and officers of the Company included in the schedule who no longer serve in that capacity are Brett Fraser, Ian Allen, Howard Read, and Jay Stephenson.

Directors and Key Management Personnel of the Parent Company

Fees paid to Mr. Fraser and Mr. Stephenson were paid to Wolfstar Group, a company controlled by Mr. Fraser and Mr. Stephenson.  Brett Fraser’s Directors fees for the year amounted to $22,016.

In order to attract and retain appropriate directors and management, Brainytoys provides incentives in the form of stock options to certain of our qualified employees, directors and officers on terms and conditions which are in accordance with the prevailing rules and policies of the ASX, and our Board of Directors.  As of June 30, 2006, we had issued  incentive stock options to the following directors and officers pursuant to our stock option plan approved by shareholders.All of the directors* have since resigned:The following table sets out certain information relating to share options not exercised by our employees, senior management and directors (including former directors) as at June 30, 2006:

22

Pension and Retirement Plan Disclosure

The Company does not provide retirement benefits for directors and executive officers.

Under Australian government regulations we are legally required to contribute 9% of employees' gross income to an approved superannuation fund. Employees are entitled to contribute additional amounts to the fund at their own discretion.

Termination of employment, Change in Responsibilities and Employment Contracts

Except for as disclosed below, there are no employment contracts, consulting agreements, or “change of control agreements” in place between the Company and any of its Executive Officers.

Alex Aguero, the Company’s Managing Director, is a party to a service agreement entered into on  November 15, 2004 by the Company for a 3 year period.  Under the service agreement Alex Aguero is engaged by the Company to provide services in the capacity of managing Director for an annual remuneration of $80,000 inclusive of statutory superannuation.

Charles MacKinnon was appointed as a director of the Company on May 26, 2006.  Lothbury Advisory Pty Ltd, (a related entity to Charles MacKinnon) has since been engaged by the Company to provide various investment, banking, corporate advisory and corporate administration services for a fee of $10,000 per month which includes the provision that Charles MacKinnon serve as Chairman and Chief Financial Officer.

C.

Board Practices

The term of office of each director is subject to re-election on a rotation basis in accordance with the Company’s Constitution.  Executive officers hold office until their successors are chosen and qualified, subject to earlier removal by the board of directors.

The general duty of the Board of Directors of the Company is to oversee the management of the business and affairs of the Company.  In particular, the Board of Directors is responsible for the following matters:

(a)

adopting a strategic planning process for the Company which establishes the Company’s long term goals and strategies, and monitoring the success of the Company’s management in achieving those goals and implementing the strategy.

(b)

identifying the principal risks with respect to all aspects of the Company’s business, ensuring that there are systems in place to effectively monitor and manage such risks with a view to the long-term viability of the Company, and achieving a proper balance between the risks incurred and the potential return to the Company’s members;

(c)

engaging in succession planning, including appointing, training and monitoring senior management (which includes ensuring that objectives are in place against which management’s performance can be measured, establishing and maintaining programs to train and develop management, providing for the orderly succession of management, and assessing the performance and contribution of the Chief Executive officer of the Company against mutually established objectives; and

(d)

ensuring that the Company has a policy in place to enable it to communicate effectively with its shareholders, other stakeholders and the general public, effectively interpreting the operations of the Company to shareholders, accommodating feedback from shareholders, and ensuring that there are effective controls and information systems in place for the Board of Directors to discharge its responsibilities, such as an audit

23

system which can inform the Board of Directors about the integrity of the data and the compliance of the financial information with appropriate accounting principles.

Committee of the Board of Directors

The Company maintains an Audit Committee, which oversees the accounting and financial reporting processes of the Company and all audits and external reviews of the financial statements of the Company on behalf of the Board, and has general responsibility for oversight of internal controls, accounting and auditing activities of the Company.  Currently, Charles MacKinnon serves as the Chair of the Audit Committee.

The Committee reviews, on a continuous basis, any reports prepared by the Company’s external auditors relating to the Company’s accounting policies and procedures, as well as internal control procedures and systems.  The Committee is also responsible for examining all financial information, including annual financial statements, prepared for securities commissions and similar regulatory bodies prior to filing or delivery of the same.  The Audit Committee also oversees the annual audit process, the Company’s internal accounting controls, any complaints and concerns regarding accounting, internal controls or auditing matters and the resolution of issues identified by the Company’s external auditors.  The Audit Committee recommends to the Board the firm of independent auditors to be nominated for appointment by the shareholders and the compensation of the auditors.  The Audit committee meets on an as needed basis.

D.

Employees

As of the date of this filing, the Company has 6 employees, all of whom work out of the Company’s head office.  The employees’ positions included managerial and support staff positions.  At times, the Company contracts selected specialist staff and consultants as needed.

E.

Share Ownership

The following table sets forth the share ownership of those persons listed in Items 6A and 6b above and includes the details of all options or warrants to purchase shares of the Company held by such persons:

*

Directors during year ended June 30, 2006 who have resigned during that period.

(2)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Unissued common shares

24

subject to options, warrants or other convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.  The percentage ownership figure is calculated according to the the number of outstanding common shares as of the date of this filing, which is40,241,489.

ITEM 7

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.

Major shareholders

As of the date of this filing, a total of 40,241,489 shares in our capital were issued and outstanding.

To the best of Brainytoys’ knowledge, no person, corporation or other entity is a beneficial owner of more than 5% of the common shares of Brainytoys, except for those listed below:

(1)

Alex Aguero, Managing Director.

(2)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Unissued shares subject to options, warrants or other convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.

(3)

Based on 40,241,489 shares issued and outstanding as of the date of this filing.

(4)

Noble Investments Pty Ltd (“Noble”) is a related party to Mr. Tim Lebbon.  Noble holds one secured convertible note of $100,000 which confers upon it a right to convert at its option up to 1,666,667 shares in the Company thereby increasing the number of shares beneficially owned to 9,718,103 representing 23.82% of the share class.

There are currently no voting rights arrangements among the Company’s shareholders and directors.

We are not aware of any direct or indirect ownership or control of the Company by another corporation(s), by any foreign government or by any other natural or legal person(s) severally or jointly. We do not know of any arrangements, the operation of which may at a subsequent date result in a change in control of the Company.

25

B.

Related Party Transactions

The Company has not, during the three most recently completed financial years and the subsequent period up to the date of this Registration Statement, entered into transactions or loans with any (a) enterprises that are directly or indirectly controlled by or under common control with us; (b) our associates; (c) individuals directly or indirectly owning voting rights which give them significant influence over us or close members of their respective families; (d) our directors, senior management or close members of their respective families or (e) enterprises in which a substantial interest in the voting power is held or significantly influenced by any of the foregoing individuals (a “Related Party”), except as shown directly below.

Alex Aguero

On 15^th November 2004, the Company entered into a service agreement with Alex Aguero, the Managing Director, for a 3 year period relating to the payment of an annual remuneration of $80,000 inclusive of statutory superannuation.  For the years ended 30^th June 2005 and 2006, Mr Aguero has been paid $55,384 and $87,273 respectively.

Wolfstar Group

A company owned by Brett Fraser (a former director) and Jay Stephenson (former Company Secretary and Chief Financial Officer) was paid $103,000 and $97,016 for the years ended June  30, 2005 and 2006 respectively for corporate and administrative services.

Graham Nicol

G.K. Nicol, CPA, will be paid $40,000 per annum commencing September 1, 2006 for accounting and Company Secretary service together with the provision of Graham Nicol’s services as a director of the Company.

Lothbury Advisory Pty Ltd (“Lothbury”) (Related to Charles MacKinnon)

Lothbury, an Australian licensed investment banker and corporate adviser, was paid $30,000 in September 2006 for the provision of investment banking services and other corporate advisory services relating to the Company’s completed $1.25 million and future capital raisings and various proposed corporate initiatives in addition to the provision of Charles Mackinnon’s services as Chairman, Chief Financial Officer and the provision of other management or administrative functions.  This arrangement is to continue at the rate of $10,000 per month. Lothbury received corporate advisory fees of approximately $100,000 from the Company during the year ended June 30, 2005 for various matters including the arrangement of the seed capital raising, IPO, and the acquisition of Brainytoys.com Pty Ltd.

Leadenhall Australia Limited (Related to Tim Lebbon)

During the year ended June 30, 2006, Leadenhall was paid an underwriting fee calculated at the rate of 6% of the value underwritten for the Company’s 1 for 4 pro rata rights for a raising of $454,348.  The fee was satisfied by the issue of shares.  The issue involved Tim Lebbon’s company, Noble Investments Pty Ltd taking up the $354,425 shortfall in shares.

On September 4, 2006, following the approval of the Company’s shareholders in general meeting the Company entered a Convertible Note Deed with a Tim Lebbon related company, (Noble Investments Pty Ltd) in relation to the provision by Noble of an $800,000 secured convertible note facility to be drawn down as to $100,000 at the Company’s option at any time up to June 30, 2010 for a fee calculated at the rate of 6% and satisfied by the issue of shares.

26

C.

Interests of Experts and Counsel

Not Applicable.

ITEM 8

FINANCIAL INFORMATION

A.

Consolidated Statements and Other Financial Information

The Company’s consolidated financial statements are stated in Australian dollars (A$) and are prepared in accordance with Australian International Financial Reporting Standards (“IFRS”), the application of which, in the case of the Company, confirms in all material respects for the periods presented with United States GAAP, except as discussed in Note 1 to the financial statements.

The financial statements as required under Item 17 are attached hereto and found immediately following the text of this Registration Statement.  The audit reports of the Company are included in the financial statements.

Audited Financial Statements

Fiscal 2006/2005 years ended June 30.

Legal/Arbitration Proceedings

The Directors and the Management of the Company do not know of any material, active or pending, legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation.

Policy on dividend distributions:

Brainytoys has not paid any dividends on its outstanding common shares since its incorporation and does not anticipate that it will do so in the foreseeable future.  All funds of Brainytoys are being retained for development and distribution of the Company’s toys and games products.

B.

Significant Changes

There have been no significant changes to the business of Brainytoys since June 30, 2006 except as otherwise disclosed herein.

ITEM 9

THE OFFER AND LISTING

A.

Offer and Listing Details

Our common shares trade on the Australian Stock Exchange Limited (“ASX”) under the symbol “BRT”.  Our shares began trading on the ASX under the symbol “BRT” on March 24, 2005.  Before we were listed as “BRT”, and prior to our name change, our common shares were traded on the ASX under the name Auto Enterprises Limited and under the symbol “AEL”.  As of February 1, 2007 the stock price on the ASX was A$0.125.  Prior to being re-listed

27

on the ASX on March 24, 2005, the Company had been suspended from trading since 1999.  Currently, our shares are not currently traded on any US trading market

The following information set forth, for the periods indicated, the highest and lowest market quotations for our common shares reported on the daily official list of the ASX.

As of the date of this filing, there were 40,241,489 shares outstanding; there were approximately 450 registered holders of our shares, of which none of the total outstanding shares were held by registered holders located in the United States.

B.

Plan of Distribution

Not Applicable.

C.

Markets

Our shares are quoted in Australia on the ASX under the trading symbol “BRT”.  

We intend to list our common stock on the Over-The-Counter Bulletin Board ("OTCBB").

There can be no guarantee that the Company’s application to list on the OTCBB will be accepted.

28

D.

Selling Shareholders

Not Applicable.

E.

Dilution

Not Applicable.

F.

Expenses of the Issue

Not Applicable.

ITEM 10

ADDITIONAL INFORMATION

A.

Share Capital

Shares.

We presently are authorized to issue an unlimited number of our shares, no par value per share.  As of the date of this filing, we have 40,241,489 shares issued and outstanding.

The holders of our shares will elect all directors and are entitled to one vote for each share.  All shares will participate equally in dividends if declared by our board of directors, and in net assets in the event of the liquidation of Brainytoys.  All shares presently outstanding are duly authorised, validly issued, fully paid and non-assessable by Brainytoys.  Our shares have no preference, conversion, exchange, pre-emptive or cumulative voting rights.  At present, no shares of Brainytoys are held by the Company or any of its subsidiaries.

Options.

Set forth below is a table summarising the 10,954,498 outstanding options to purchase shares as of February 1, 2007.

29

(1)

Current Directors

(2)

Former Directors or Officers

(3)

Management

(4)

Held by 350 option holders

Options

At the date of this report, the unissued ordinary shares of Brainytoys Limited under option are as follows:

No person entitled to exercise the option has or has any right by virtue of the option to participate in any share issue of any other body corporate.

Warrants

There are no warrants outstanding.

Convertible Loan Notes

·

1 Convertible Note issued at $100,000 and being convertible to 1,666,667 shares at $0.06 per share.

·

7 Convertible Notes issued at $100,000 and each being convertible to that number of Shares that is equal to the drawn down Face Value of each such Convertible Note divided by the higher of the following:

(i)

$0.05 per Share; or

(ii)

the three month volume weighted average price of the Company’s shares, as traded on ASX and discounted by 20%.  The maximum number of shares that may be issued if the 7 Convertible Notes are drawn down in full and converted to shares is 12,000,000 shares.

As the convertible notes have not been drawn down no options are outstanding in relation to the notes.

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History of Share Capital

*

Shares issued for cash consideration

Resolutions and Authorizations

Resolutions relating to shares sold are subject to the provisions of the Corporations Act 2001 and the ASX Listing provisions.

B.

Memorandum and Articles of Association

Summary of Constitution

1.

The Company was incorporated in the State of New South Wales, Australia on May 5, 1980 under the name Bevona Pty Ltd.  Following several name changes, the Company approved a name change from Auto Enterprises Limited to Brainytoys Limited.  

2.

(a)

a director who has a material interest in a matter that is being considered at a meeting of the directors must not vote on the matter and must not be present while the matter is being considered at the meeting, except where the material interest is an interest that the director has as a shareholder of the Company and in common with the other shareholders of the Company;

(b)

directors remuneration may only be varied by ordinary resolution of the shareholders in general meeting;

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(c)

the directors may exercise all such powers of the Company as are not required to be exercised by the Company in general meeting, including the borrowing of money;

(d)

there is no age limit requirement for the retirement or non-retirement of directors; and

(e)

a director is not required to hold shares in the Company.

3.

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

(a)

the Directors may from time to time declare and pay or credit a dividend, payable only from profits, in accordance with the Corporations Act.  Subject to any special right as to dividends attaching to a share, all dividends will be declared and paid according to the proportion of the amount paid to the total amount paid and payable in respect of the Shares.  All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by the directors for the benefit of the Company until claimed;

(b)

at general meetings of shareholders or classes of shareholders:

(i)

each shareholder entitled to vote may vote in person or by proxy, attorney or representative;

(ii)

on a show of hands, every person present who is a Shareholder or a proxy, attorney or representative of a shareholder has one vote; and

(iii)

on a poll, every person present who is a shareholder or a proxy, attorney or representative of a shareholder shall, in respect of each share held by him, or in respect of which he is appointed a proxy, attorney or representative, have one vote for each share held, but in respect of partly paid shares shall have a fraction of a vote equivalent to the proportion which the amount paid up bears to the total issue price for the share;

Directors retire by rotation, one-third at each annual general meeting, and are eligible for re-election.  There is no element of cumulative voting to effect this arrangement.

(c)

in addition to dividend rights (above at 3a.) shareholders may also share in the Company’s profits by way of capitalization of profits – paying up partly or in full unpaid amounts on shares and paying up partly or in full unissued shares;

(d)

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

(e)

the Company may purchase its own shares on such terms and at such times as may be determined by the directors from time to time;

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(f)

the Constitution does not contain a provision in relation to sinking funds;

(g)

the directors may by resolution make calls on shareholders of partly paid shares to satisfy the whole or part of the debt owing on those shares provided that the dates for payment of those shares were not fixed at the time of issue.  A shareholder to whom notice of a call is given must pay to the Company the amount called in accordance with the notice; and

(h)

the Constitution does not contain any provisions discriminating against any existing or prospective holder of securities as a result of that shareholder owning a substantial number of shares.

4.

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

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

5.

A public company must hold an annual general meeting once each calendar year and within 5 months after the end of the financial year.  The annual general meeting and extraordinary meetings of shareholders are held at such times and places as the board of directors shall determine, or by holders of not less than 5% of the securities issued by the Company who request that the directors call a meeting.  Notices of meetings are sent out to shareholders not less than 28 days before the date of such meeting and shareholders of the Company are entitled to receive notice of, attend and vote at, all meetings of shareholders.

6.

Each shareholder with a registered address outside Australia acknowledges the Company may arrange for a nominee to dispose of any of its entitlement to participate in any issue of shares or share options by the Company to its shareholders.

7.

The Constitution does not contain a provision in relation to a change in control of the Company.  

8.

There is no requirement in the Constitution to disclose ownership over a certain threshold.  However, under the Corporations Act a shareholder with a substantial holding (5% or more) must provide information where there is a movement of at least 1% in their holding.

9.

The Company may by ordinary resolution:

(a)

issue new shares of such amount specified in the resolution;

(b)

consolidate and divide all or any of its shares into shares of larger amount than its existing shares;

(c)

subdivide all or any of its shares into shares of smaller amount (keeping the proportion of paid and unpaid on each share the same);

(d)

cancel shares that have not been taken, or have been forfeited and reducing the amount of its share capital by the amount of the shares so cancelled; and

(e)

reduce its share capital in any way including, but not limited to, distributing to shareholders securities of any other body corporate.

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C.

Material Contracts

During the years ended June 30, 2005 and 2006, the Company has entered into the following material contracts.

(1)

On June 28, 2004, the Company entered into an agreement with the vendors of Brainytoys.com Pty Ltd (principally Alex Aguero) to acquire 100% of its share capital involving a cash payment of $25,000 and the issue of 35,953,000 shares (pre-consolidation).

(2)

On November 15, 2004, the Company entered into a 3 year agreement with Alex Aguero to provide his services as Managing Director of the Company.

(3)

On April 3, 2006, the Company entered into a memorandum of understanding relating to product distribution in the USA, (for certain segments) and certain parts of Europe with Enertec Enterprises Limited, a Hong Kong-based Company.

(4)

On April 23, 2006, the Company entered into a memorandum of understanding relating to product distribution in the USA with Reveal Entertainment Inc., a Texas-based corporation.

(5)

On April 28, 2006 the Company entered into a memorandum of understanding relating to product distribution in Australia and the United Kingdom with Modern Brands Pty Ltd.

(6)

On June 15, 2006, the Company entered into an agreement with Leadenhall Australia Limited relating to the underwriting by it of a 1 for 4 pro rata rights issue to raise $454,346.

(7)

On August 2, 2006, the Company entered into a Convertible Note Agreement (subject to shareholder approval) with Noble Investments Pty Ltd relating to the issue by the Company at its option of a series of secured convertible loan notes to a value of $800,000 maturing on 30 June 2009.

(8)     On  December 7,  2006,the Company entered into Merchandising Licensing agreement with Porchlight Entertainment,Inc. relating to the Jay Jay the Jet Plane brand and productions for the United States and Canadian markets.

(9)      On December 8,  2006,the Company entered into a Merchandising Licensing Agreement with Classic Media Inc. ( a division of Random House Publications ) relating to the Little Golden Books titles of the United States market.

(10)   On  December 15, 2006, the Company entered into a Merchandising Licensing  agreement with Dreamworks Animation relating to the Bees Movie for the United States market.

(11)   On January 23, 2007,the Company entered into a merchandising licensing agreement with Wiggles International Pty Ltd relating to the Wiggles brand for the United States market

D.

Exchange Controls

Exchange Controls and other limitations affecting security holders:

Australia has largely abolished exchange controls on investment transactions.  The Australian dollar is freely convertible into US dollars except that all payments and cash transactions in excess of $5,000 to non-residents must be reported to the Australian Cash Transactions Agency, which monitors such transactions, whether they are in the form of cash, dividends, capital or profits.

The Foreign Acquisitions and Takeovers Act (“Foreign Acquisitions Act”) sets forth limitations on the rights of non-Australian residents to own or vote the ordinary shares of an Australian company.  The Foreign Acquisitions Act permits the Commonwealth Treasurer to examine acquisitions and arrangements that could result in foreign persons controlling an Australian business.  The Commonwealth Treasurer may prohibit a proposed takeover if it would lead to a change of control of a business where the resultant control would be foreign and therefore considered to be against the national interest.  The Foreign Acquisitions Act contains divestiture provisions to ensure it can be enforced, as well as, stringent monetary-penalty provisions for breaches and the making of false or misleading statements.

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The Foreign Acquisitions Act requires the prior approval of the Commonwealth Treasurer for certain classes of persons to enter into an agreement to acquire shares of an Australian company, if, after the acquisition, such person or corporation would hold a substantial interest in such corporation, as explained herein.  The foregoing approval requirement applies to the following classes of persons:  (i) any natural person not ordinarily resident in Australia, (ii) any corporation in which either a natural person not ordinarily resident in Australia or a foreign corporation (as defined in the Foreign Acquisitions Act) holds a substantial interest, and (iii0 two or more such persons or corporations which hold an aggregate substantial interest.

The Foreign Acquisitions Act requires foreign persons or foreign-controlled entities to give forty (40) days notice to the Commonwealth Treasurer of a proposal to acquire or increase (or offer to acquire or increase) a single interest of 15% or more of the ownership or voting power of an Australian company.  If two or more foreign persons or foreign-controlled entities are acting together, the threshold is 40% in the aggregate.

The Constitution of the Company does not contain any additional limitations on a non-resident’s right to hold or vote the Company’s securities.

E.

Taxation

The following discussion summarizes US Federal and Australian tax consequences of the ownership of shares by a person (“US Portfolio Stockholder”) that: (i) is a citizen or resident of the US, a US corporation or that otherwise will be subject to US Federal income tax on a net income basis in respect of the Shares; (ii) is not a resident of Australia for Australian tax purposes; (iii) has not, within the preceding five years, beneficially owned 10% of the issued capital or voting stock in the Company; and, (iv) has not used the Shares in carrying on a trade or business, wholly or partly through a permanent establishment in Australia.

The statements regarding US and Australian tax laws set forth herein are based on those laws as in force on the date of this document that may affect the tax consequence described herein (some of which may have retroactive effect).  This summary is not exhaustive of all possible tax consideration and investors are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US, state, local and other laws, of the acquisition, ownership and disposition of Shares by consulting their own tax advisers.

Taxation of Gains on Sale

A US Portfolio Stockbroker is not subject to Australian income tax on the sale of its Shares in the Company.

Passive Foreign Investment Company Status

A foreign corporation is classified as a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries pursuant to the applicable US Internal Revenue Code “look-through” rules, either (i) at least 75% of its gross income is passive income, or (ii) at least 50% of the average value of its assets is attributable to assets that produce passive income from cash holdings and profits from the sale of marketable securities, even if derived from an active business.

If the Company were a PFIC during any year in which a US Portfolio Stockholder owned Shares, that US Portfolio Stockholder would be subject to additional taxes on any gain realised from the sale of any other disposition of the Shares, or any excess distribution received from the Company.

A US Portfolio Stockholder will have an excess distribution to the extent that distributions on Shares during a taxable year exceeded 125% of the average amount received during the three preceding taxable years (or, if shorter,

35

the US Portfolio Stockholders’ holding period for the shares).  To compute the tax on gain or on an excess distribution, (i) the excess distribution or the gain is allocated rateably over the US Portfolio Stockholder’s holding period for the Shares, (ii) the amount allocated to the current taxable year at the highest applicable marginal rate in effect for each year and (iii) an interest charge is imposed to recover the deemed benefit from the deferred payment of the tax attributable to each year.

If the Company is a PFIC, US persons that own an interest in another entity that owns shares in the Company may be treated as indirect holders of their proportionate share of that entity’s Shares, and may be taxed on their proportional share of any gain or excess distribution from that entity attributable to the entity’s in the Company.  A US person that owns an interest in the entity that if an actual holder of Shares will be treated as an indirect holder if (i) the actual holder is itself a PFIC, (ii) the actual holder is a foreign corporation other than a PFIC in which the US person who owns an interest in the actual holder owns (directly or indirectly) at least 50% in value of the actual holder’s shares, or (iii) the actual holder is a partnership, trust or estate in which the US Portfolio Stockholder is a partner or beneficiary.  An indirect holder must take into income its portion of any excess distribution received by the actual holder or any gain recognised by the actual holder on the Shares.  An indirect holder also must treat an appropriate portion of its gain on the sale or disproportion of its interest in the actual holder as gain on the sale of the Shares.  If the Company were a PFIC, a US Portfolio Stockbroker of Shares would generally be subject to similar rules with respect to distribution by, an disposition of the shares of, any direct or indirect subsidiaries of the Company that were PFIC’s.

The Internal Revenue Code provides each US stockholder in a PFIC with an election whereby the additional US tax burden imposed on gain on sale of PFIC stock and receipt of excess distributions from a PFIC, as described above, can be avoided.  This election generally requires that the PFIC stockholder include in its income, its pro-rata share of the PFIC’s distributed and undistributed income, as computed under US tax accounting principles, on an current basis.  In certain cases, a further election is available to an electing PFIC stockholder to defer the tax payable with respect to the stockholder’s pro-rata share of the PFIC’s undistributed income, although in this case interest applies on the deferred tax.  Thus, even if the first or both of these elections are made, a US stockholder of a PFIC loses the tax benefit, which is available with respect to investment in a non-PFIC corporation, of deferring and converting to capital gain the investor’s personal US tax liability with respect to the Company’s undistributed income.  These elections also generally require that the PFIC annually provide the electing PFIC shareholder, for inspection by the Internal Revenue Service, an analysis of the PFIC’s income computed under US tax accounting principles.

The Company does not intend to furnish any US Portfolio Stockholder with the information that it would need in order to avoid the PFIC tax treatment described by electing to include its share of the Company’s income on a current basis.  Therefore, these elections may not be available to the Company’s US Portfolio Stockholders.

There are other adverse US tax rules associated with holding Shares in a company that has been a PFIC during any part of a US Portfolio Stockholders holding period.  These include a denial of a step-up in a tax basis on the death of a US individual stockholder, and burdensome reporting requirements.

If the Company ceases to be a PFIC, a US Portfolio Stockholder may avoid the contained application of the tax treatment described above by electing to be treated as if it sold its Shares on the last day of the last taxable year in which the Company was a PFIC.  Any gain is recognised and subjected to tax under the rules described above.  Loss is not recognised.  The US Portfolio Stockholder’s basis in the Shares is increased by the amount of gain recognised on the deemed sale.  This election is not available to a Us Portfolio Stockholder that previously elected to include its share of the Company’s income on a current basis.  The US Congress recently has considered legislation that would alter the PFIC rules substantially.  Prospective investors should consult their own tax advisors as to the potential application of the PFIC rules, as well as, the impact of any proposed legislation that could affect them.

Taxation of Dividends

36

The Company does not expect to pay cash dividends for the foreseeable future, but, rather, to retain earnings, if any, to finance expansion of its business.  Should the Company begin paying dividends, however, the Company’s dividends to its US Portfolio Stockholders would be exempt from Australian dividend withholding tax to the extent such dividends are considered to be “franked” for Australian tax purposes.  A dividend is considered to be “franked” to the extent that such dividend is paid out of the Company’s income on which Australian corporate tax has been levied.  Even if not “franked”, a dividend will be exempt from Australian dividend withholding tax if it is paid out of the Company’s non-Australian source dividend income and the Company specifies a “foreign dividend account declaration percentage” for such purpose.  The Company anticipates that if it pays dividends, such dividends would likely be either “franked”, or paid from the Company’s non-Australian source dividend income as specified in the foreign dividend account declaration percentage, and therefore would be exempt from Australian dividend withholding tax.

If, however, dividends are paid by the Company that are not “franked”, nor paid from the initial Company’s non-Australian source dividend income as specified in the foreign dividend account declaration percentage, such dividend would then be subject to Australian dividend withholding tax.  However, in accordance with the provisions of the Australia/United States Income Tax Treaty, Australian withholding tax on dividend income derived by a US stockholder would be limited to 15% of the gross amount of the dividend.  Subject to certain limitations, any Australian dividend withholding tax may be claimed as a credit against the federal income tax liability of the US stockholder.  The overall limitation on non-US taxes eligible for US credit is calculated separately with respect to specific clauses, or “baskets” of income.  For this purpose, dividends distributed by the Company will generally constitute “passive income” or, in the case of certain US Portfolio Stockholder, “financial service income”.  The US tax credits allowable with respect to each income basket cannot exceed the US federal income tax payable with respect to such income.  The consequences of the separate limitation calculation will depend on the nature and sources of each US Portfolio Stockholder’s income and the deductions allocable thereto.

Distributions on the Shares will constitute dividends for US Federal income tax purposes to the extent paid out of current or accumulated earnings and profits, if any of the Company, as determined for US federal income tax purposes.  If the Company pays a dividend, such dividend would likely be paid in Australian dollars.  The amount of dividend income for a US Portfolio Stockholder will be the US dollar value of the dividend payment on the date of receipt, even if the dividend is not converted into US dollars gain or loss, if any, realised on a sale or other disposition of Australian Dollars will be ordinary income or loss to the US Portfolio Stockholder.  Dividends paid by the Company will not be eligible for the “inter-corporate dividends received” deduction allowed to US corporations.

Estate and Gift Tax

Australia does not impose any estate, inheritance or gift taxes.  Therefore, no Australian estate tax, inheritance tax or gift tax will be imposed on the death or upon a lifetime gift by, a US Portfolio Stockholder.

F.

Dividends and Paying Agents

Not applicable.

G.

Statement by Experts

Not applicable.

37

H.

Documents on Display

Persons having a right of inspection of the Company’s records under the Australian Corporations and Securities Legislation can inspect such records by contacting the Company’s registered office at 6B Bowen Street, O’Connor W.A. Australia 6163, Telephone: (61 8) 9331 8441, Facsimile: (61 8) 9331 8452.

I.

Subsidiary Information

For more information on the Company’s subsidiaries, see “Item 4.  Information on the Company - Organizational Structure”.

ITEM 11

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

ITEM 12

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.

PART II

ITEM 13

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not Applicable.

ITEM 14

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not Applicable.

ITEM 15

CONTROLS AND PROCEDURES

Not Applicable.

ITEM 16

[Reserved]

ITEM 16A

Audit Committee Financial Expert

Not Applicable.

38

ITEM 16B

Code of Ethics

Not Applicable.

ITEM 16C

Principal Accountant Fees and Services

Not Applicable.

ITEM 16D

Exemptions Form the Listing Stands for Audit Committees

Not Applicable.

ITEM 16E

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not Applicable.

PART III

ITEM 17

FINANCIAL STATEMENTS

Our financial statements filed as part of this registration statement are listed in Item 19 Financial Statements and Exhibits.

All financial statement in this Form 20-F, unless otherwise stated, are presented in accordance with Australian IFRS.  

ITEM 18

FINANCIAL STATEMENTS

The Company has elected to provide financial statements pursuant to Item 17.

ITEM 19

EXHIBITS

Exhibit No.

Description

1.1

Historical Company Extract dated September 19, 2006 provided by the Australian Securities and Investments Commission

1.2

Constitution of Brainytoys Limited dated November 22, 2005

2

Form of electronic share certificate.

3.1

Agreement between Alex Aguero and the Company dated June 28, 2004.

3.2

Service Agreement between Alex Aguero and the Company dated October 4, 2004.

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3.3

Underwriting Agreement dated June 15, 2006 with Leadenhall Australia Ltd.

3.4

Convertible Note Agreement between the Company and Noble Investments Pty Ltd dated August 2, 2006.

40

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration statement on its behalf.

41

BRAINYTOYS LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

AS AT 30TH JUNE 2006

42

The accompanying notes form part of these financial statements.

43

44

45

46

47

48

49

50

51