Small magnets are NOT OK to have around children. Whether as part of a magnetic play-set or just as a part to a non-magnetic toy, magnets have a bad habit of finding their way into the mouths of small children, which can be deadly.
In addition to another toy recall for lead-based pain, Mattel this morning issued a series of alerts to consumers regarding the recall of toys due to the potential for small magnets to come loose. This may not seem like a serious recall to some, but if you read the page linked to in bold above you will see how serious a swallowed magnet can be.
The following toys have been recalled by Mattel due to the potential for small magnets to come loose (Links go to CSPC Press Releases):
Doggie Day Care Magnetic Toys
Polly Pocket Play Sets
Barbie and Tanner Magnetic Toys
Batman and One Piece Magnetic Action Figure Sets
To see pictures of the recalled magnetic toys by Mattel, please follow the link above.