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

                                       OR

          [ ] 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]



<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>



                                                                                     PAGE

PART I.           FINANCIAL INFORMATION

Item 1.           FINANCIAL STATEMENTS
<S>                                                                                  <C>
                  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

</TABLE>

<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A SUBSIDIARY OF UNITED TOYS & TEXTILES CORP.)
                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>

                                     ASSETS

                                                                                              (unaudited)
                                                                                              December 31,         March 31, 1997
                                                                                                  1997

Current

<S>                                                                                                <C>             <C>         
           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
</TABLE>

            See accompanying notes to condensed financial statements


                                       4
<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A SUBSIDIARY OF UNITED TEXTILES & TOYS CORP.)

                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                           Three Months Ended               Nine Months Ended
                                                              December 31,                     December 31,


                                                         1997           1996            1997            1996
                                                         ----                                                                     

<S>                                                      <C>            <C>             <C>             <C>         
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)
                                                         ============    ============    ============

</TABLE>

            See accompanying notes to condensed financial statements


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

                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                           December 31,


                                                                         1997        1996
                                                                         -----       

CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                   <C>            <C>         
        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
</TABLE>

            See accompanying notes to condensed financial statements


                                       5




<PAGE>
                      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.


                                       6




<PAGE>
     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
<TABLE>
<CAPTION>

                                                     Income            Shares           Per Share Amount
<S>                                                  <C>                 <C>                     <C>  
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
                                                     ========          ==========                =====
</TABLE>

     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.
<PAGE>
     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.


                                       7




<PAGE>
     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.


                                       8

<PAGE>
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.
<PAGE>
     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.


                                       9




<PAGE>
     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 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 statement.

     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.
<PAGE>
     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.



                                       10
<PAGE>
         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.
<PAGE>
         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:
<TABLE>
<CAPTION>

                                                              Votes Cast
                                                              For                 Abstentions

<S>                                                           <C>                       <C>  
                  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

</TABLE>

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.
 
     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 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.

     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


                                       11




<PAGE>
                                   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


                                       12