SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number O-25030

PLAY CO. TOYS & ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)

Delaware 95-3024222
(State or Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification
No.)

550 Rancheros Drive, San Marcos, California 92069
(Address of principal executive offices)

(760) 471-4505
(Registrant's telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last
report)

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares of each of the issuer's classes of common equity
outstanding as of the latest practicable date: Common Stock, $.01 par value:
4,103,519 shares outstanding as of February 2, 1998.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

PLAY CO. TOYS & ENTERTAINMENT CORP.
TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Condensed balance sheets as of December 31, 1997 and March 31,
1997. 3

Condensed statements of operations for the three months and
nine months ended December 31, 1997 and 1996. 4

Condensed statements of cash flows for the nine months ended
December 31, 1997 and 1996. 5

Notes to condensed financial statements 6

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8-14

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS 14

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15

Item 3. DEFAULTS UPON SENIOR SECURITIES 15

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15

Item 5. OTHER INFORMATION 15

Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16

PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TOYS & TEXTILES CORP.)
CONDENSED BALANCE SHEETS

ASSETS

(unaudited)
December 31, March 31, 1997
1997

Current

Cash ................................................................................ $ 2,827,735 $ 177,722
Accounts receivable ................................................................. 317,121 60,206
Merchandise inventories ............................................................. 6,612,013 6,092,930
Other current assets ................................................................ 163,424 247,313
------------ ------------

Total current assets ............................... 9,920,293 6,578,171

Property and Equipment, net of accumulated
depreciation and amortization of $3,268,948
and $2,828,913, respectively ........................................................ 2,888,687 2,475,650

Deposits and other assets ...................................................................... 178,662 324,797
------------ ------------
$ 12,987,642 $ 9,378,618
============ ============

LIABILITIES & STOCKHOLDERS' EQUITY

December 31, March 31, 1997
1997

Current

Borrowings under financing agreement .................................................. $ 4,746,307 $ 4,438,875
Accounts payable ...................................................................... 3,439,489 3,259,176
Accrued expenses and other liabilities ................................................ 757,259 308,940
Current portion of notes payable ...................................................... 100,000 141,666
------------ ------------
Total current liabilities ..................................................... 9,043,055 8,148,657
Notes payable, net of current portion ........................................................... 25,000 100,000
Deferred rent liability ......................................................................... 155,998 126,925
Stockholders' equity:
Series E preferred stock, $.01 par, 10,000,000 shares authorized;
4,200,570 and 2,500,570 shares outstanding .......................................... 5,966,549 2,500,570
Common stock, $.01 par value, 40,000,000 shares
authorized; 4,103,519 and 4,083,519 shares outstanding .............................. 41,035 40,835
Additional paid-in-capital ............................................................ 6,675,398 6,512,107
Accumulated deficit ................................................................... (8,919,393) (8,050,476)

Total stockholders' equity .......................... 3,763,589 1,003,036
------------ ------------
$ 9,378,618 $ 12,987,642

See accompanying notes to condensed financial statements

PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended Nine Months Ended
December 31, December 31,

1997 1996 1997 1996
----

Net sales ............................................ $ 10,396,440 $ 9,374,440 $ 17,768,033 $ 16,225,561
Cost of Sales ........................................ 6,381,992 6,593,497 10,740,074 11,273,998
------------ ------------

Gross profit ........... 4,014,448 2,780,943 7,027,959 4,951,563
------------ ------------ ------------ ------------
Operating expenses:

Operating ............................. 2,716,212 2,872,492 6,773,188 6,431,190
expenses
Depreciation and amortization ......... 161,982 104,706 440,035 295,866
------------ ------------ ------------

Total operating expenses 2,878,194 2,977,198 7,213,223 6,727,056
------------ ------------ ------------

Operating profit (loss) .............................. 1,136,254 (196,255) (185,264) (1,775,493)

Interest expense ..................................... 254,586 218,735 683,653 593,572
------------ ------------ ------------
Net income (loss) .................................... $ 881,668 $ (414,990) $ (868,917) $ (2,369,065)
============ ============

Basic earnings (loss) per share:
Weighted average number of common
shares outstanding .................... 4,103,519 3,900,186 4,096,974 1,710,263
============ ============ ============
Basic earnings (loss) per share ...................... $ 0.21 $ (0.11) $ (0.21) $ (1.39)
============ ============ ============

Diluted earnings (loss) per share:
Weighted average number of common shares and
share equivalents outstanding ............... 24,904,765 3,900,186 4,096,974 1,710,263
============ ============ ============

Diluted earnings (loss) per share .................... $ 0.04 $ (0.11) $ (0.21) $ (1.39)
============ ============ ============

See accompanying notes to condensed financial statements

PLAY CO. TOYS & ENTERTAINMENT CORP.
(A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended
December 31,

1997 1996
-----

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss .................................................. $ (868,917) $(2,369,065)
Adjustments used to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization ...................... 440,035 295,866
Amortization of common stock options ............... 161,058 161,058
Deferred rent ...................................... 29,073 --
Increase (decrease) from changes in:
Accounts receivable ..................... (256,915) (161,024)
Merchandise inventories ................... (519,083) 628,089
Other current assets ...................... 83,889 78,336
Deposits and other assets ................. (14,923) 16,000
Accounts payable .......................... 180,313 446,740
Accrued expenses and other liabilities .. 448,319 219,570
----------- -----------

Net cash used for operating activities .. (317,151) (684,430)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment ....................... (853,072) (447,951)
----------- -----------
Net cash used for investing activities .. (853,072) (447,951)
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of preferred and common stock ...... 3,629,470 1,234,000
Net borrowings on line of credit .......................... 307,432 79,451
Repayments of notes payable ............................... (116,666) --
Redemption of preferred stock ............................. -- (87,680)
----------- -----------
Net cash provided by financing activities 3,820,236 1,225,771
----------- -----------
Net increase in cash .............................................. 2,650,013 93,390
Cash at beginning of period ....................................... 177,722 83,650
Cash at end of period ............................................. $ 2,827,735 $ 177,040

See accompanying notes to condensed financial statements

PLAY CO. TOYS & ENTERTAINMENT CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)

Note 1.

The interim accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, management
suggests that the reader refer to the audited financial statements for the year
ended March 31, 1997 included in its Annual Report on Form 10-KSB and the
Company's registration statement on Form SB- 2, which became effective on
October 2, 1997. Operating results for the nine month period ended December 31,
1997 are not necessarily indicative of the results of operations that may be
expected for the year ending March 31, 1998.

Note 2.

On December 29, 1997, the Company completed a public offering of Series E
Preferred Stock and Redeemable Series E Purchase Warrants. The offering was
managed by West America Securities Corp. The offering raised $3,150,000 in gross
proceeds. The Company estimates the net proceeds of the offering were $2,378,978
after discounts and commissions, legal expenses, Blue Sky fees, accounting fees,
printing expenses, other investment banking fees, and other miscellaneous costs
and expenses. The Company will finalize the net proceeds of the offering during
the audit process on its March 31, 1998 year end financial statements.

Note 3.

On January 21, 1997, the Company entered into a $7.1 million secured, revolving
Loan and Security Agreement with FINOVA Capital Corporation ("FINOVA" or "FINOVA
Agreement"). The FINOVA Agreement replaces the $7 million credit arrangement the
Company had with Congress Financial Corporation (Western) ("Congress
Financing"). The FINOVA Agreement is secured by substantially all of the
Company's assets and expires on August 3, 2000. It provides for automatic one
year renewal periods unless earlier terminated as provided therein. The interest
rate of floating prime plus one and one-half percent is the same in both credit
arrangements. FINOVA paid off Congress Financial Corporation (Western) on
February 3, 1998.

Under the Congress Financing and the FINOVA Agreement, the Company has
been, and shall continue to be, able to borrow $2.4 million against a
combination of $3 million in standby letters of credit and restricted cash
provided by a subordinated loan compared to a $2 million advance against $3
million in standby letters of credit under the Congress Arrangement. $1.5
million of the $3 million in additional borrowing support from the standby
letters of credit was provided by an institutional investor in the form of a
subordinated loan, $1.0 million was provided in the form of a standby letter of
credit by the principal stockholder of United Textiles & Toys Corp., the
Company's parent. The other $500,000 was provided by the Company.

Under both the Congress Financing and the FINOVA Agreement, the Company has
been, and shall continue to be, able to borrow against the cost value of
eligible inventory. The Company believes that its credit availability against
the cost value of its inventory under the FINOVA Agreement will be comparable to
its availability under the Congress Arrangement.

Note 4.

During the three months ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings Per Share, which
requires the Company to disclose both basic earnings per share and diluted
earnings per share. Diluted earnings per share is similar to basic earnings per
share except that common shares outstanding are increased to show the dilutive
effect of those potential common shares had they been issued. The reconciliation
of basic earnings per share to diluted earnings per share is as follows:

For the Three Months Ended December 31, 1997

Income Shares Per Share Amount

Basic Earnings Per Share
Income available to common
stockholders $881,668 4,103,519 $0.21
=====

Effect of Dilutive Securities:
Series E Preferred Stock 0 20,801,246

Diluted Earnings Per Share
Income available to common
stockholders plus assumed
conversion $881,668 24,904,765 $0.04
======== ========== =====

The financial statements for prior periods were restated to show the effect
of the new accounting standard. However, there is no difference between basic
and diluted earnings per share for the nine and three months ended December 31,
1996 and for the nine months ended December 31, 1997, as the convertible effects
of the Series E Preferred Stock and Redeemable Series E Purchase Warrants are
considered anti-dilutive.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.

The Company's operations are substantially controlled by United Textiles &
Toys Corp. ("UTTC"), the Company's parent. UTTC currently owns approximately
59.3% of the issued and outstanding shares of the Company's Common Stock.

For the three months ended December 31, 1997 compared to three months ended
December 31, 1996

The Company generated net sales of $10,396,440 for the three months ended
December 31, 1997. This represented an increase of $1,022,000, or 10.9%, from
net sales of $9,374,440 in the three months ended December 31, 1996. The
increase in sales is directly attributable to increased sales contribution from
its stores of $939,498 from its stores, representing a 10.4% increase over the
stores' sales contribution in the three months ended December 31, 1996. The
increase in sales contribution from th Company's stores occurred despite a
decrease of $607,432 in same store sales for the three months ended December 31,
1997. Sales from new stores contributed an additional $4,465,086 to the
Company's sales for the three months ended December 31, 1997.

The Company posted a gross profit of $4,014,448 for the three months ended
December 31, 1997, representing an increase of $1,233,505, or 44.4%, from the
gross profit of $2,780,943 for the three months ended December 31, 1996. This
represented an increase in the Company's gross margin from 29.7% for the
December 1996 period to 38.6% for the December 1997 period. This 8.9% gross
margin improvement was largely due to the ongoing implementation of the
Company's plan to augment its traditional product base of lower margin
promotional toys with a mix of specialty and educational toys, which generally
produce better margins than promotional toys.

Operating expenses for the three months ended December 31, 1997 were
$2,716,212. This represented a $156,280, or 5.4%, decrease in the Company's
operating expenses of $2,872,492 for the three months ended December 31, 1996.
The operating expense decrease was a result of a $369,725 reduction in
advertising expense that more than offset increases in rent expense of $98,537
and payroll expenses of $106,865.

During the three months ended December 31, 1997, the Company recorded
non-cash depreciation and amortization expenses of $161,982, representing a
$57,276 increase from $104,706 recorded for the period ended December 31, 1996.
This increase was largely due to depreciation on the Toys International assets
acquired in January 1997. Total operating expenses (operating expenses combined
with depreciation and amortization) for the December 1997 period were
$2,878,194, representing a $99,004, or 3.3%, decrease from total operating
expenses of $2,977,198 recorded for the December 1996 period.

As a result of the $1,233,505 increase in gross profit coupled with the
$99,004 decrease in total operating expenses, the Company's operating profit
improved by $1,332,509 from an operating loss of $196,255 during the three
months ended December 31, 1996 to an operating profit of $1,136,254 during the
three months ended December 31, 1997.

Interest expense totaled $254,586 for the three months ended December 31,
1997. This represented a $35,851, or 16.4%, increase over interest expense of
$218,735 for the three months ended December 31, 1996. The primary reason for
the increased level of interest expense was a higher level of borrowings in the
December 1997 period than in the December 1996 period.

As a result of the above mentioned factors, the Company recorded a net
profit of $881,668 for the three months ended December 31, 1997. This
represented a $1,296,658 improvement over the net loss of $414,990 recorded in
the three months ended December 31, 1996.

The basic earnings per share for the three month period ended December 1997
period was $0.21 compared to a net loss per share in the comparable December
1996 period of $0.11. The weighted average number of common shares outstanding
increased from 3,900,186 in the December 1996 period to 4,103,519 in the
December 1997 period.

The diluted earnings per share for the three month period ended December
1997 period was $0.04 compared to a diluted loss per share in the comparable
December 1996 period of $0.11. The weighted average number of common shares and
share equivalents outstanding increased from 3,900,186 in the December 1996
period to 24,904,765 in the December 1997 period. No effect was given to
conversion of preferred stock in the December 1996 period as such would have
been anti-dilutive.

For the nine months ended December 31, 1997 compared to nine months ended
December 31, 1996

The Company generated net sales of $17,768,033 for the nine month period
ended December 31, 1997. This represented an increase of $1,542,472, or 9.5%,
from net sales of $16,225,561 for the nine month period ended December 31, 1996.
The increase in sales is directly attributable to increased sales contribution
from its stores of $1,450,765, or an 9.4% improvement over the stores' sales
contribution for the nine month period ended December 31, 1996. The sales
contribution from the Company's stores came despite a decrease of $966,792 in
same store sales for the nine month period ended December 31, 1997. Sales from
new stores contributed an additional $6,639,132 to the Company's sales for the
nine month period ended December 30, 1997.

The Company posted a gross profit of $7,027,959 for the nine month period
ended December 31, 1997, an increase of $2,076,396, or 41.9%, from the gross
profit of $4,951,563 for the nine month period ended December 31, 1996. This
represented an increase in the Company's gross margin from 30.5% for the
December 1996 period to 39.6% for the December 1997 period. This 9.1% gross
margin improvement was largely due to the ongoing implementation of the
Company's plan to augment its traditional product base of lower margin
promotional toys with a mix of specialty and educational toys which generally
produce better margins than promotional toys.

Operating expenses for the nine month period ended December 31, 1997 were
$6,773,188, representing a $341,998, or 5.3%, increase over the Company's
operating expenses of $6,431,190 for the nine month period ended December 31,
1996. The primary reasons for the operating expense increase were an increase in
rent expense of $362,810, an increase in payroll and related expenses of
$286,408, and a decrease of rental and other income of $194,908. The above noted
expenses aggregated $844,126, which was partially offset by a $574,078 decrease
in advertising expense. A contributing factor to the increases in rent and
payroll related expenses was the acquisition of the three Toys International
stores in January 1997.

During the nine month period ended December 31, 1997, the Company recorded
non-cash depreciation and amortization expenses of $440,035, a $144,169 increase
from $295,866 for the period ended December 31, 1996. This increase was largely
due to depreciation on the Toys International assets acquired in January 1997.
Total operating expenses (operating expenses combined with depreciation and
amortization) for the December 1997 period were $7,213,223, a $486,167, or 7.2%,
increase from total operating expenses of $6,727,056 for the December 1996
period.

As a result of the $2,076,396 improvement in gross profit more than
offsetting the $486,167 increase in total operating expenses, the Company's
operating loss decreased by $1,590,229 from $1,775,493 during the nine month
period ended December 31, 1996 to $185,264 during the nine month period ended
December 31, 1997. This represented a 89.6% reduction in the Company's operating
loss.

Interest expense totaled $683,653 for the nine month period ended December
31, 1997. This represented a $90,081, or 15.2%, increase over interest expense
of $593,572 for the nine month period ended December 31, 1996. The primary
reason for the increased level of interest expense was a higher level of
borrowings in the December 1997 period than for the December 1996 period.

As a result of the above mentioned factors, the Company recorded a net loss
of $868,917 for the nine month period ended December 31, 1997. This represented
a $1,500,148 reduction from the net loss of $2,369,065 recorded in the nine
month period ended December 31, 1996.

The basic loss per share for the nine month period ended December 1997 was
$0.21 compared to a net loss per share in the comparable December 1996 period of
$1.39. The weighted average number of common shares outstanding increased from
1,710,263 in the December 1996 period to 4,096,974 in the December 1997 period.

The diluted loss per share for the nine month period December 1997 was
$0.21 compared to a diluted loss per share in the comparable December 1996
period of $1.39. The weighted average number of common shares and share
equivalents outstanding increased from 1,710,263 in the December 1996 period to
4,096,974 in the December 1997 period. No effect was given to conversion of
preferred stock in either period as such would have been anti-dilutive.

Liquidity and Capital Resources

At December 31, 1997, the Company had working capital of $877,238 compared
to a working capital deficit of $1,570,486 at March 31, 1997. The Company has
generated operating losses for the past several years and has historically
financed those losses and its working capital requirements through sales of
preferred stock. There can be no assurance that the Company will be able to
generate sufficient revenues or have sufficient controls over expenses and other
charges to achieve profitability.

During the nine month period ended December 31, 1997, the Company used
$317,151 of cash in its operations compared to $684,430 used in operations for
the nine month period ended December 31, 1996. The Company's net loss was
approximately $869,000 and $2,369,000, respectively, in those periods.

The Company used $853,072 of cash in its investing activities during the
nine month period ended December 31, 1997 compared to $447,951 for the nine
month period ended December 31, 1996. All of the Company's investing activities
related to purchases of property and equipment.

The Company generated $3,820,236 from its financing activities in the nine
month period ended December 31, 1997 compared to the generation of $1,225,771
from financing activities for the nine month period ended December 31, 1996. The
primary contributor to the Company's financing activities was the completion in
the current period of a public offering of Series E Preferred Stock and
Redeemable Series E Purchase Warrants as well as the private sale of Series E
Preferred Stock in both periods. Those proceeds were used to finance the
Company's working capital and capital expenditure requirements and operating
losses during the nine month period ended December 31, 1997.

As a result of the above factors, the Company had a net increase in cash of
$2,650,013 for the nine month period ended December 31, 1997 compared to a net
increase in cash of $93,390 for the nine month period ended December 31, 1996.

During the three months ended December 31, 1997, the Company opened three
new stores in highly trafficked shopping malls and also opened a temporary
short-term seasonal store. The three new stores are located in the South Bay
Galleria in Redondo Beach, California; in Ontario Mills in Ontario, California;
and in Arizona Mills in Tempe, Arizona. The Arizona Mills location is the
Company's first store located outside of Southern California. The temporary
seasonal store was located in the Crystal Court in Costa Mesa, California.

On January 21, 1997, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement with FINOVA Capital Corporation ("FINOVA"
or "FINOVA Agreement"). The FINOVA Agreement replaces the $7 million credit
arrangement the Company had with Congress Financial Corporation ("Congress
Arrangement"). The FINOVA Agreement is secured by substantially all of the
Company's assets and it expires on August 3, 2000. The interest rate of floating
prime plus one and one-half percent is the same in both credit arrangements.
FINOVA paid off Congress Financial Corporation on February 3, 1998.

Under the FINOVA Agreement, the Company will be able to borrow $2.4 million
against a combination of $3 million in standby letters of credit and restricted
cash provided by a subordinated loan compared to a $2 million advance against $3
million in standby letters of credit under the Congress Arrangement. $1.5
million of the $3 million in additional borrowing support from the standby
letters of credit was provided by an institutional investor in the form of a
subordinated loan, $1.0 million was provided in the form of a standby letter of
credit by the principal stockholder of United Textiles & Toys Corp., the
Company's parent. The other $500,000 was provided by the Company.

Under both credit agreements, the Company is able to borrow against the
cost value of eligible inventory. The Company believes that its credit
availability against the cost value of its inventory under the FINOVA Agreement
will be comparable to its availability under the Congress Arrangement.

The toy industry is seasonal with approximately 45% to 49% of the Company's
annual sales occurring during the months of October through December. As a
result, sources of funds to repay amounts due under inventory finance
arrangements with financial institutions and manufacturers are typically
generated from sales during the peak selling season.

The Company currently plans to open five new stores in highly trafficked
malls in 1998. Four of the Company's 19 stores are operating under leases that
either have expired or will expire in 1998. The Company currently plans to
relocate one of those stores. The fate of the remaining three stores will depend
upon lease negotiations with the owners of the store locations.

The costs involved in opening the five new stores and relocating the one
store will require a significant capital expenditure, estimated to be
approximately $1.2 million. The Company plans to finance the capital expenditure
via a combination of landlord tenant improvement contributions, borrowings on
its new credit line, and from capital leases. Any remaining expenditure will be
paid out of the Company's working capital. There can be no assurance that the
Company will be able to find five suitable store locations under acceptable
lease terms in 1998 or that the Company will be able to obtain landlord or lease
financing to partially offset the new store opening costs.

Trends Affecting Liquidity, Capital Resources and Operations

The Company's sales efforts are focused primarily on a defined geographic
segment consisting of the Southern California area and the Southwestern United
States. The Company's future financial performance will depend upon continued
demand for toys and hobby items and on general economic conditions within that
geographic market area, the Company's ability to choose locations for new
stores, the Company's ability to purchase product at favorable prices and on
favorable terms, and the effects of increased competition and changes in
consumer preferences.

The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. The domination of the toy industry by Toys R Us has resulted in
increased price competition among various toy retailers and declining gross
margins for such retailers. Moreover, the domination of Toys R Us has resulted
in the liquidation or bankruptcy of many toy retailers throughout the United
States, including some in the Southern California market. There can be no
assurance that the Company's business strategy will enable it to compete
effectively in the toy industry.

Management currently knows of no trends reasonably expected to have a
material impact upon the Company's operations or liquidity in the foreseeable
future. The Company's operating history has been characterized by narrow profit
margins; accordingly, the Company's earnings will depend significantly on its
ability to purchase its product on favorable terms, to obtain store locations on
favorable terms, to retail a large volume and variety of products efficiently,
and to provide quality support services. The Company's prices are, in part,
based on market surveys of its competitors' prices, primarily those of Toys R
Us. As a result, aggressive pricing policies, such as those used by Toys R Us,
have resulted in the Company reducing its retail prices on many items, thereby
reducing the available profit margin. Moreover, increases in expenses or other
charges to income may have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company will be able to generate
sufficient revenues or have sufficient control over expenses and other charges
to increase profitability.

Inflation and Seasonality

During the past few years, inflation in the United States has been
relatively stable. In management's opinion, this is expected to continue for the
foreseeable future. However, should the American economy again experience double
digit inflation rates, as was the case in the past, the impact on prices could
adversely affect the Company's operations.

The Company's business is highly seasonal with a large portion of its
revenues and profits being derived during the months of November and December.
Accordingly, the Company is required to obtain substantial short-term borrowing
during the first three quarters of the calendar year in order to purchase
inventory and to finance capital and operational expenditures. The Company's
past history of negative cash flows during the fiscal year are partially a
result of its seasonal business nature. The Company's cash flows are negative
for most months prior to the Christmas season. The Company's negative cash flow
for all months except November and December historically has been serviced via
the Company's line of credit, special credit terms with vendors, and from the
sale of equity instruments, principally preferred stock.

PART II

Item 1. Legal Proceedings

In June 1997, in the Superior Court of the State of California, Los Angeles
County, Shook Development Corp. commenced suit against the Company for breach of
contract pertaining to premises leased by the Company from South San Dimas, a
California Limited Partnership. See the Company's Form 10-QSB for the quarterly
period ended September 30, 1997 for more information concerning this matter.

Also in June 1997, in the Superior Court of the State of California, Orange
County, Prudential Insurance Company of America commenced suit against the
Company for breach of contract pertaining to premises leased by the Company. See
the Company's Form 10-QSB for the quarterly period ended September 30, 1997 for
more information concerning this matter.

In May 1997, in the Superior Court of the State of California, Los Angeles
County, PNS Stores, Inc. commenced suit against the Company and its former
guarantor for breach of contract pertaining to premises leased by the Company.
See the Company's Form 10-QSB for the quarterly period ended September 30, 1997
for more information concerning this matter.

In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against the Company and
its former guarantor for breach of contract pertaining to premises leased by the
Company. See the Company's Form 10-QSB for the quarterly period ended September
30, 1997 for more information concerning this matter.

No Director, Officer, or affiliate of the Company, nor any associate of
same, is a party to, or has a material interest in, any proceeding adverse to
the Company.

Item 2. Changes in Securities and Use of Proceeds: None

Item 3. Defaults Upon Senior Securities: None

Item 4. Submission of Matters to a Vote of Security Holders:

On January 28, 1998, the Company held its annual meeting during which it
proposed to elect four Directors to the Board. The proposal was adopted, and the
following were elected Directors of the Board for a term of one year: Harold
Rashbaum, Richard Brady, James Frakes, and Sheikhar Boodram.

The votes cast or withheld for the election of the Directors are set forth
as follows:

Votes Cast
For Abstentions

Harold Rashbaum 2,781,477 2,539
Richard Brady 2,782,623 1,393
James Frakes 2,782,241 1,775
Sheikhar Boodram 2,781,477 2,539

Item 5. Other Information:

On January 21, 1997, the Company entered into a $7.1 million secured,
revolving Loan and Security Agreement with FINOVA Capital Corporation ("FINOVA"
or "FINOVA Agreement"). The FINOVA Agreement replaces the $7 million credit
arrangement the Company had with Congress Financial Corporation (Western)
("Congress Financing"). The FINOVA Agreement is secured by substantially all of
the Company's assets and expires on August 3, 2000. It provides for automatic
one year renewal periods unless earlier terminated as provided therein. The
interest rate of floating prime plus one and one-half percent is the same in
both credit arrangements. FINOVA paid off Congress Financial Corporation
(Western) on February 3, 1998.

Item 6. Exhibits and Reports on Form 8-K:

Exhibit 10.90 - Finova Loan and Security Agreement
Exhibit 10.91 - Schedule to Loan and Security Agreement

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 3rd day of February 1998.

PLAY CO. TOYS & ENTERTAINMENT CORP.

By: /s/ Richard L. Brady
Richard L. Brady
President and Chief Executive Officer

By: /s/ James B. Frakes
James B. Frakes
Chief Financial Officer