U.S. 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, 1998

                                       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 Small Business Issuer as Specified in its Charter)

<TABLE>
<CAPTION>
<S>                                                                                     <C>       
         Delaware                                                                       95-3024222
         (State or Other Jurisdiction of                                                (IRS Employer Identification No.)
         Incorporation or Organization)
</TABLE>

                550 Rancheros Drive, San Marcos, California 92069
                    (Address of Principal Executive Offices)

                                 (760) 471-4505
                (Issuer'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) 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, $0.01 par value:
5,509,197 shares outstanding as of February 12, 1999.

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



<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                  <C>                                                                                              <C>
PART I. FINANCIAL INFORMATION                                                                                         Page Number

Item 1.              FINANCIAL STATEMENTS

                     Condensed Balance Sheets as of  December 31, 1998 (unaudited)                                    3
                     and March 31, 1998.

                     Condensed Statements of Operations and Comprehensive Net Loss 
                     for the Three Months and Nine Months Ended December 31, 1998 and 1997 (unaudited).               4 

                     Condensed Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 
                     1997 (unaudited).                                                                                5 

                     Notes to Condensed Financial Statements                                                          6-7

Item 2.              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS           8-15

PART II. OTHER INFORMATION

Item 1.              LEGAL PROCEEDINGS                                                                                16  

Item 2.              CHANGES IN SECURITIES AND USE OF PROCEEDS                                                        16

Item 3.              DEFAULTS UPON SENIOR SECURITIES                                                                  16

Item 4.              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                              16

Item 5.              OTHER INFORMATION                                                                                16

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

                     Signatures                                                                                       17


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

                                     ASSETS

                                           December 31, 1998   March 31, 1998
                                              (unaudited)         Restated
                                      ----------------------- ------------------------
Current
<S>                                            <C>             <C>         
Cash .......................................   $  1,219,989    $    648,986
Accounts receivable ........................        110,734          78,594
Merchandise inventories ....................     10,824,770       7,872,804
Other current assets .......................      1,736,769         433,928
                                               ------------    ------------
Total current assets .......................     13,892,262       9,034,312

Property and Equipment, Net of accumulated
Depreciation and amortization of $4,121,412
And $3,414,235, respectively ...............      4,343,204       2,782,386
Deposits and other assets ..................      2,385,027       2,323,189
                                               ------------    ------------
                                               $ 20,620,493    $ 14,139,887
                                               ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY


                                           December 31, 1998  March 31, 1998

Current
Accounts payable ...........................   $  5,218,239    $  3,505,230
Accrued expenses and other liabilities .....        781,371         726,601
Current portion of notes payable and
capital leases (Note 4) ....................        405,965         350,000
                                               ------------    ------------
Total current liabilities ..................      6,405,575       4,581,831

Borrowings under financing agreement .......      7,754,215       5,445,198

Notes payable, and capital leases, net
of current portion .........................        620,030       1,500,000

Deferred rent liability ....................        124,005         110,351
                                               ------------    ------------

Total liabilities ..........................     14,902,825       1,637,380
                                               ------------    ------------


Stockholders' equity
Series E convertible preferred stock, $1 par
10,000,000 shares authorized;
5,883,903 and 4,200,570 shares outstanding .      5,236,642       3,974,376
Common stock, $.01 par value,
40,000,000 shares
authorized; 5,509,197 and 4,103,519 shares
outstanding ................................         55,035          41,035
Additional paid-in-capital .................     15,087,422      12,927,918

Accumulated deficit ........................    (14,662,431)    (14,440,822)
                                               ------------    ------------
Total stockholders' equity .................      5,716,668       2,502,507
                                               ------------    ------------
                                               $ 20,620,493    $ 14,139,887
                                               ============    ============
</TABLE>

            See accompanying notes to condensed financial statements




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

                       CONDENSED STATEMENTS OF OPERATIONS
                           AND COMPREHENSIVE NET LOSS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                 Three Months Ended December 31,    Nine Months Ended
                                                                                       December 31,
                                                        1998            1997          1998             1997
<S>                                                  <C>            <C>             <C>             <C>         
Net sales ........................................   $ 14,715,952   $ 10,396,440    $ 27,171,662    $ 17,768,033

Cost of sales ....................................      8,545,336      6,381,992      15,665,721      10,740,074
                                                     ------------   ------------    ------------    ------------
Gross profit .....................................      6,170,616      4,014,448      11,505,941       7,027,959

Operating expenses:

Operating expenses ...............................      4,052,115      2,716,214       9,146,006       6,773,188

Depreciation and amortization ....................        324,975        161,982         707,186         440,035
                                                     ------------   ------------    ------------    ------------
Total operating expenses .........................      4,377,090      2,878,196       9,853,192       7,213,223

Operating profit (loss) ..........................      1,793,526      1,136,252       1,652,749        (185,264)

Interest expense:

Interest and finance charges .....................        221,860        165,933         517,172         415,445
Amortization of debt issuance costs ..............         73,032         88,653         127,434         268,208
                                                     ------------   ------------    ------------    ------------
Total interest expense ...........................        294,892        254,586         644,606         683,653

Net income (loss) ................................   $  1,498,634   $    881,666    $  1,008,143    $   (868,917)
                                                     ============   ============    ============    ============

Calculation of Basic and Diluted Income Per Share:

Net income (loss) ................................   $  1,498,634   $    881,666    $  1,008,143    $   (868,917)

Effect of non-cash dividends on preferred stock
                                                          477,973           --         1,229,752       1,200,000
                                                     ------------   ------------    ------------    ------------


Net income (loss) applicable to common shares
                                                     $  1,020,661   $    881,666    $   (221,609)   $ (2,068,917)
                                                     ============   ============    ============    ============
Basic income (loss) per common

Share and share equivalents ......................   $       0.22   $       0.21    $      (0.05)   $      (0.50)
                                                     ============   ============    ============    ============

Weighted average number of
Shares and share equivalents outstanding - basic
                                                        4,666,562      4,103,519       4,291,883       4,096,974
                                                     ============   ============    ============    ============

Diluted income (loss) per common
share and share equivalents ......................   $       0.03   $       0.04    $      (0.01)            n/a
                                                     ============   ============    ============    ============
Weighted average number of common
share and share equivalents outstanding - diluted
                                                       36,069,029     24,904,765      39,820,796             n/a
                                                      ===========  ============    ============    ============
</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,
                                                                      -------------------------------
                                                                         1998         1997
                                                                      ------------   ----------------
                      CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                    <C>            <C>         
Net Income (loss) ..................................................   $ 1,008,143    $  (868,917)

Adjustments  used to reconcile  net income (loss) to net cash used for operating
activities:


Depreciation and amortization ......................................       707,186        440,035
Amortization of debt issuance costs ................................       127,434        268,208

Deferred rent ......................................................         4,552         29,073

Stock compensation .................................................        32,814           --


Increase (decrease) from changes in:

Accounts receivable ................................................       (32,140)      (256,915)

Merchandise inventories ............................................    (2,951,966)      (519,083)

Other current assets ...............................................    (1,302,841)        83,889

Deposits and other assets ..........................................      (213,123)      (122,073)

Accounts payable ...................................................     1,713,009        180,313
Accrued expenses and other liabilities .............................        54,770        448,319
                                                                       -----------    -----------


Net cash used for operating activities .............................       852,162        317,151
                                                                       -----------    -----------

                      CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment ................................     1,917,810        853,072
                                                                       -----------    -----------
Net cash used for investing activities .............................     1,917,810        853,072
                                                                       -----------    -----------

                      CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of preferred and common stock ...............       706,148      3,629,470
Borrowings on line of credit, net ..................................     2,309,017        307,432

Borrowings under notes payable and capital leases, net .............       325,810       (116,666)
                                                                       -----------    -----------


Net cash provided by financing activities ..........................     3,340,975      3,820,236
                                                                       -----------    -----------


Net increase in cash ...............................................       571,003      2,650,013



Cash at beginning of period ........................................       648,986        177,722
                                                                       -----------    -----------


Cash at end of period ..............................................   $ 1,219,989    $ 2,827,735
                                                                       ===========    ===========
</TABLE>

            See accompanying notes to condensed financial statements




<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                December 31, 1998
                                   (Unaudited)


Note 1.           General

     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, 1998  included in its Annual  Report on Form  10-KSB.  Operating
results for the nine-month  period ended  December 31, 1998 are not  necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1999.

Note 2.           Capital Leases

     During the nine-month  period ended December 31, 1998, the Company  entered
into  several  capital  leases and loans to help finance the cost of opening its
new stores. The leases are for an aggregate  principal amount of $770,332.  They
generally carry terms of five years and bear interest at rates between 13.3% and
18.0%.

Note 3.           Breaking Waves Investment

     On November 24,  1998,  pursuant to a sales  agreement  entered into by and
between the Company and Breaking Waves, Inc. ("B.W."), a wholly-owned subsidiary
of Hollywood Productions,  Inc.  ("Hollywood"),  a related party, B.W. purchased
1.4  million  unregistered  shares of the  Company's  common  stock in a private
transaction.  The  President  of  Hollywood is also the Chairman of the Company.
Hollywood is a publicly traded company.  The shares purchased by B.W.  represent
approximately  25.4% of the total common stock issued and outstanding  after the
transaction.

     The  consideration  for  the  stock  was  $505,000,  which  represented  an
approximate  price of $0.36 per share.  This price was  discounted  50% from the
then current  market price  reflecting  a discount  for the  illiquidity  of the
shares,   which  do  not  carry  any  registration   rights.   $300,000  of  the
consideration  remitted was in cash, and the remaining  $205,000 was provided in
B.W.  product,  primarily girls' swimsuits.  The Company had previously  carried
swimsuits from B.W. in its stores on a trial basis.

Note 4.           Financing Agreements

     In  November  1998,  the  Company  borrowed  $250,000  from  Amir  under  a
Promissory Note. The Note bore interest at 12% and was repaid in January 1999.

     Also in November 1998, the Company  entered into  agreements with ZD Group,
L.L.C. ("ZD"), a related party, and Frampton Industries,  Ltd. ("Frampton"),  an
unaffiliated British Virgin Islands company, to secure additional financing.  ZD
is a New York limited liability company, the beneficiary of which is a member of
the family of the Company's Chairman.

     Pursuant  to the ZD  agreement,  ZD issued a $700,000  irrevocable  standby
letter of  credit  ("L/C")  in favor of  FINOVA  Capital  Corp  ("FINOVA"),  the
Company's  working capital lender.  FINOVA then lent a matching  $700,000 to the
Company in the form of a term loan,  pursuant to a Third  Amendment  to Loan and
Security  Agreement executed on February 11, 1999 by and between the Company and
FINOVA.  The term loan from FINOVA  expires on August 3, 2000 and bears interest
at prime plus one percent. As consideration for its issuance of the L/C, ZD will
receive a profit percentage after  application of corporate  overhead from three
of the Company's stores.


<PAGE>
     Under the Frampton agreement,  Frampton will loan $500,000 in the form of a
convertible,  subordinated  debenture due December 31, 1999.  The debenture will
bear a 5% interest  rate and will be  convertible  into the  Company's  Series E
preferred stock at a price of $0.10 per share at Frampton's  option.  This price
represents a 50% discount from the then current (November 13, 1998) market price
reflecting a discount for the illiquidity of the shares,  which do not carry any
registration rights. The Company expects to receive the proceeds of this loan in
the near future.

Note 5.           Subsequent Events

     In January  1999,  the Company  and  Frampton  executed a letter  agreement
pursuant to which  Frampton has agreed to act as the exclusive  placement  agent
and financial advisor for the Company in connection with a contemplated proposed
offering of  convertible  debentures.  The agreement is for a term of six months
(with a potential two month  extension at  Frampton's  option) and provides that
Frampton shall be provided an investment banking fee of 8% of the face amount of
each debenture funded.

     In February  1999,  the Company  borrowed  $100,000 from B.W. and issued an
unsecured 9% promissory note which calls for repayment of the note in four equal
monthly  installments,  comprising principal and interest,  commencing March 15,
1999 and ending June 15, 1999.





<PAGE>
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
45.1% of the issued and outstanding shares of the Company's common stock.

For the three months ended  December 31, 1998 compared to the three months ended
December 31, 1997

     The Company  generated net sales of  $14,715,952  in the three months ended
December 31, 1998. This  represented an increase of $4,319,512,  or 41.5%,  from
net  sales  of  $10,396,440  in  the  three  months  ended  December  31,  1997.
Approximately  $900,000 of this sales growth came from an 11.8% increase in same
store sales.  The remaining  sales increase of  approximately  $3.4 million came
from the Company's new stores.

     The Company  posted a gross profit of  $6,170,616 in the three months ended
December 31, 1998,  reflecting  an increase of  $2,156,168,  or 53.7%,  from the
gross profit of  $4,014,448  in the three months ended  December 31, 1997.  This
increase  was due to the above  noted  growth in sales and to an increase in the
Company's  gross  margin.  The gross margin of 41.9% in the December 1998 period
was 3.3% higher than the  Company's  gross margin of 38.6% in the December  1997
period.   This  gross  margin   improvement  was  largely  due  to  the  ongoing
implementation  of the  Company's  plan  to  sell  educational,  new  electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally  produce better margins than
traditional toys.

     Operating expenses (excluding  depreciation and amortization  expenses) for
the three months ended  December 31, 1998 were  $4,052,115.  This  represented a
$1,335,901,  or  49.2%,  increase  over  the  Company's  operating  expenses  of
$2,716,214 in the three months ended December 31, 1997. The primary  reasons for
the operating  expense increase were an increase in payroll and related expenses
of $712,812  and an increase in rent expense of  $405,514.  The payroll  expense
increase was due to the addition of several middle managers and employees at the
Company's  new  stores.  The  growth of rent  expense  was the  result of adding
additional stores.

     During the three months  ended  December  31,  1998,  the Company  recorded
non-cash  depreciation and amortization expense of $324,975, a $162,993 increase
from $161,982 in the period ended December 31, 1997.  Total  operating  expenses
(operating expenses combined with depreciation and amortization) in the December
1998 period were $4,377,090,  representing a $1,498,894, or 52.1%, increase from
total operating expenses of $2,878,196 in the December 1997 period.

     As a result of the $2,156,168  increase in gross profit less the $1,498,894
increase in total operating  expenses,  the Company's operating profit increased
by $657,274,  or 57.8%,  from $1,136,252  during the three months ended December
31, 1997 to $1,793,526 during the three months ended December 31, 1998.

     Interest  expense totaled  $294,892 for the three months ended December 31,
1998. This  represented a $40,306 increase from interest expense of $254,586 for
the three months ended  December 31, 1997.  The primary reason for the increased
level of interest  expense was a higher level of  borrowings in the three months
ended December 31, 1998 than in the December 1997 period.

<PAGE>
     As a result of the  above-mentioned  factors,  the  Company  recorded a net
income  of  $1,498,634  for the three  months  ended  December  31,  1998.  This
represented a $616,968  increase over the net income of $881,666 recorded in the
three months ended December 31, 1997.

     For the three months ended  December 31, 1998, net income of $1,498,634 was
reduced by non-cash  dividends of $477,973 in order to determine  the net income
applicable to common shares.  The non-cash dividends  represent  amortization of
the  discount  recorded  upon  issuance  of  Series  E  preferred  stock  with a
beneficial  conversion  feature. No dividends in the form of securities or other
assets were  actually  paid out.  There was no such  dividend  recorded  for the
December 1997 period.

     The basic income per share for the three months ended December 31, 1998 was
$0.22 compared to basic net income per share of $0.21 for the three months ended
December 31, 1997.  The weighted  average  number of common  shares  outstanding
increased  from  4,103,519  in the  December  1997  period to  4,666,562  in the
December 1998 period.

     The diluted  income per share for the three months ended  December 31, 1998
was $0.03 compared to diluted net income per share of $0.04 for the three months
ended  December  31,  1997.  The  weighted   average  number  of  common  shares
outstanding  increased from 24,904,765 in the December 1997 period to 36,069,029
in the December 1998 period.

         For the nine months ended December 31, 1998 compared to the nine months
ended December 31, 1997

     The Company  generated net sales of $27,171,662  in the  nine-month  period
ended December 31, 1998. This  represented an increase of $9,403,629,  or 52.9%,
from net sales of $17,768,033 in the nine-month  period ended December 31, 1997.
Approximately  $3.5 million of this sales  growth came from a 25.4%  increase in
same store sales during the nine-month  period,  with the remaining  increase of
approximately $2.4 million from the Company's new stores.

     The Company posted a gross profit of  $11,505,941 in the nine-month  period
ended December 31, 1998,  reflecting an increase of $4,477,982,  or 63.7%,  from
the gross profit of $7,027,959 in the nine-month period ended December 31, 1997.
This  increase  was due to the above noted growth in sales and to an increase in
the  Company's  gross  margin.  The gross margin of 42.3% in the  December  1998
period was 2.7% higher than the Company's  gross margin of 39.6% in the December
1997  period.  This gross  margin  improvement  was  largely  due to the ongoing
implementation  of the  Company's  plan  to  sell  educational,  new  electronic
interactive, and specialty and collectible toys and items in high traffic malls.
The mix of specialty and educational toys generally produces better margins than
traditional toys.

     Operating expenses  (excluding  depreciation and amortization  expenses) in
the nine-month period ended December 31, 1998 were $9,146,006.  This represented
a  $2,372,818,  or 35%,  increase  over  the  Company's  operating  expenses  of
$6,773,188 in the nine-month period ended December 31, 1997. The primary reasons
for the  operating  expense  increase  were an  increase  in payroll and related
expenses  of  $1,245,860  and an  increase  in rent  expense  of  $533,655.  The
increased  expenses were due to the lease  payments on the new stores opened and
the addition of several middle managers and of employees at the new stores.

     During the nine-month  period ended December 31, 1998, the Company recorded
non-cash depreciation and amortization expenses of $707,186, a $267,151 increase
from $440,035 in the period ended  December 31, 1997.  This increase was largely
due to depreciation  on the fixed assets  purchased for the newly opened stores.
Total operating  expenses  (operating  expenses  combined with  depreciation and
amortization)  in the December 1998 period were  $9,853,192,  a  $2,639,969,  or
36.6%, increase from total operating expenses of $7,213,223 in the December 1997
period.



<PAGE>
     As a result of the $4,477,982  increase in gross profit less the $2,639,969
increase in total operating  expenses,  the Company's operating profit increased
by $1,838,013 from an operating loss of $(185,264)  during the nine-month period
ended  December  31,  1997 to  $1,652,749  during the  nine-month  period  ended
December 31, 1998.

     Interest expense totaled $644,606 for the nine-month  period ended December
31,  1998.  This  represented  a $39,047,  or 5.7%,  decrease  from the interest
expense of $683,653 in the  nine-month  period  ended  December  31,  1997.  The
primary reason for the decreased level of interest expense was a higher level of
amortization of debt issuance costs in the nine-month  period ended December 30,
1997  than  in the  December  1998  period.  The  interest  expense  paid to the
Company's  lenders  actually  increased  in the  period  due to  higher  average
outstanding balances which financed increased levels of inventory.

     As a result of the above-mentioned factors, the Company recorded net income
of  $1,008,143  for  the  nine-month   period  ended  December  31,  1998.  This
represented a $1,877,060  increase  over the net loss of $(868,917)  recorded in
the nine-month period ended December 31, 1997.

     For the nine months ended  December 31, 1998,  net income of $1,008,143 was
reduced by non-cash dividends of $1,229,752 in order to determine the net income
(loss)   applicable  to  common  shares.   The  non-cash   dividends   represent
amortization of the discount  recorded upon issuance of Series E preferred stock
with a beneficial  conversion feature. No dividends in the form of securities or
other assets were actually paid out. For the December 1997 period,  the net loss
of $(868,917)  was reduced by non- cash dividends of $1,200,000 to determine the
net loss  applicable to common shares in a restated  calculation  of the diluted
income (loss) per common share.

     The basic loss per share for the nine months  ended  December  31, 1998 was
$(0.05)  compared to a net loss per share of $(0.50)  for the nine months  ended
December 31, 1997.  The weighted  average  number of common  shares  outstanding
increased  from  4,096,974  in the  December  1997  period to  4,291,883  in the
December 1998 period.

     The diluted loss per share for the nine months ended  December 31, 1998 was
$(0.01).  The diluted loss per share for the nine months ended December 31, 1997
was not calculated as the effect of share  equivalents  was  anti-dilutive.  The
weighted average number of common shares outstanding in the December 1998 period
was 39,820,796.

Liquidity and Capital Resources

     At  December  31,  1998,  the  Company  had a working  capital  position of
$7,486,687  compared to a working  capital  position of  $4,452,481 at March 31,
1998. The primary  factors in the $3,034,206  increase in working capital were a
$1,238,957  growth in the Company's net investment in  inventories  (increase in
inventories  less increase in accounts  payable),  which was financed  through a
$2,309,017  increase  under  the  Company's  financing  agreement,  a long  term
liability, and a $1,302,841 increase in other current assets.

     The Company has generated  operating  losses for the past several years and
has  historically  financed  those losses and its working  capital  requirements
through loans and sales of the Company's equity  securities,  primarily  through
the sale of the Company's Series E convertible  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, 1998,  the Company used
$852,162 of cash in its  operations  compared to $317,151  used in operations in
the  nine-month  period ended December 31, 1997. The Company's net income (loss)
was  $1,008,143 and  $(868,917),  respectively,  in those  periods.  The primary
reason the Company used cash in its operating  activities  during the nine-month
period ended December 31, 1998 was its net  investment  (increase in inventories
less increase in accounts  payable) in inventories of $1,238,957 and an increase
in other  current  assets of  $1,302,841.  The largest  single  component of the
increase  in  other  current  assets  was   approximately   $580,000  in  tenant
improvement  allowances  due to the  Company  from  several of the owners of the
malls in which the Company opened stores in December 1998.

<PAGE>
     The Company used $1,917,810 of cash in its investing  activities during the
nine-month period ended December 31, 1998 compared to $853,072 in the nine-month
period ended December 31, 1997.  Investing activity consisted of the purchase of
equipment and fixtures for new stores.

     The Company generated  $3,340,975 of cash from its financing  activities in
the  nine-month  period ended  December 31, 1998  compared to the  generation of
$3,820,236 from financing activities in the nine-month period ended December 31,
1997.  The primary  contributors  to the  Company's  financing  activities  were
borrowings  on the  Company's  line of credit  and under  notes  payable.  Those
proceeds were used to finance the Company's  working  capital  requirements  and
capital  expenditures  during the nine-month period ended December 31, 1998. The
primary  factor in the prior period was  $3,629,470 in proceeds from the sale of
preferred and common stock.

     As a result of the above factors, the Company had a net increase in cash of
$571,003 in the  nine-month  period ended  December  31, 1998  compared to a net
increase in cash of $2,650,013 in the nine-month period ended December 31, 1997.

     During the  three-month  period ended December 31, 1998, the Company opened
four new stores.  Those stores were all located in high traffic  shopping malls.
The  stores  were  located  in  Thousand   Oaks  and  Orange  (both  located  in
California),  Auburn Hills, Michigan and in Gurnee,  Illinois. These four stores
represented an aggregate capital investment of approximately  $1.1 million,  net
of landlord tenant improvement ("Landlord TI") contributions.

     The Landlord TI contributions  related to those four stores equal $587,440.
The Company has not yet received  those  contributions.  The Company  expects to
receive those contributions before the end of its fiscal year.

     The Company  had  planned to finance the costs of opening  those new stores
through a combination of capital lease financing,  use of the Company's  working
capital,  and the sale of additional equity. The Company received  approximately
$420,000 in lease financing on December 30, 1998 and recently  received  another
$150,000 in  commitments  for lease  financing.  The Company  continues  to seek
additional capital lease financing.

     On November  24,  1998,  Breaking  Waves,  Inc.  ("B.W."),  a  wholly-owned
subsidiary  of  Hollywood  Productions,  Inc.  ("Hollywood"),  a related  party,
purchased 1.4 million  unregistered  shares of the  Company's  common stock in a
private  transaction.  The  President  of  Hollywood is also the Chairman of the
Company.  Hollywood is a publicly traded company.  The shares  purchased by B.W.
represent  approximately  25.4% of the total common stock issued and outstanding
after the transaction.

     The consideration for the stock was $505,000,  which represented a price of
$0.36 per share.  This price was a 50%  discount  from the then  current  market
price  reflecting a discount  for the  illiquidity  of the shares,  which do not
carry any registration rights. $300,000 of the consideration was in cash and the
remaining  $205,000 was in product from B.W.,  primarily girl's  swimsuits.  The
Company  had  previously  carried  swimsuits  from B.W. in its stores on a trial
basis.

     In November  1998,  the Company  entered into  agreements ZD Group,  L.L.C.
("ZD"),  a  related  party,  and  Frampton  Industries,  Ltd.  ("Frampton"),  an
unaffiliated British Virgin Islands company, to secure additional financing.  ZD
is a New York trust,  the  beneficiary of which is a member of the family of the
Company's Chairman.

     Pursuant  to the ZD  agreement,  ZD issued a $700,000  irrevocable  standby
letter of  credit  ("L/C")  in favor of  FINOVA  Capital  Corp  ("FINOVA"),  the
Company's  working capital lender.  FINOVA then lent a matching  $700,000 to the
Company in the form of a term loan.  The term loan expires on August 3, 2000 and
bears interest at prime plus one percent.  As consideration  for its issuance of
the L/C, ZD will  receive a profit  percentage  after  application  of corporate
overhead from three of the Company's stores.

<PAGE>
     Under the Frampton agreement,  Frampton will loan $500,000 in the form of a
convertible,  subordinated  debenture due December 31, 1999.  The debenture will
bear a 5% interest  rate and will be  convertible  into the  Company's  Series E
preferred stock at a price of $0.10 per share at Frampton's  option.  This price
was a 50%  discount  from the then  current  market  price  (November  13, 1998)
reflecting a discount for the illiquidity of the shares,  which do not carry any
registration rights.

     The Company  has  entered  into leases to open eight new stores in calendar
year 1999.  The Company  anticipates  that the cost of opening  those new stores
will be approximately $3,000,000, net of landlord TI contributions.  The Company
plans to finance the costs of opening those new stores  through a combination of
capital lease financing,  use of the Company's working capital,  and the sale of
additional  equity.  In January 1999, the Company and Frampton executed a letter
agreement  pursuant  to  which  Frampton  has  agreed  to act  as the  exclusive
placement  agent and  financial  advisor  for the Company in  connection  with a
proposed offering of $5 million in convertible  subordinated debentures on terms
similar to the  debenture  discussed  above.  The agreement is for a term of six
months (with a potential two month extension at Frampton's  option) and provides
that  Frampton  shall be  provided an  investment  banking fee of 8% of the face
amount of each debenture funded. There can be no assurance that the Company will
be able to obtain  sufficient  financing  to  successfully  open the planned new
stores.

Year 2000

     In 1998,  the Company  developed a plan to upgrade its existing  management
information  system  ("MIS")  and  computer  hardware  and to  become  year 2000
compliant. The Company has now purchased the necessary hardware and software and
is in the process of  installing  the  software.  The Company has  completed the
hardware  upgrade  and  has  installed  a year  2000  compliant  upgrade  to its
accounting software. The Company expects to finish the year 2000 compliance work
in the first half of 1999.

     To finance the cost of the new  hardware in the computer  upgrade  project,
the Company  entered  into a lease in the amount of $82,472  bearing an interest
rate of 10.8%.  The total cost of the hardware and  software  purchased  for the
project was approximately $100,000.

     Beyond the above noted internal year 2000 system issue,  the Company has no
current  knowledge of any outside third party year 2000 issues that would result
in a material  negative  impact on its  operations.  Management has reviewed its
significant  vendors' (i.e.,  Mattel, Inc. and Hasbro, Inc.) and financing arm's
(FINOVA) recent SEC filings vis-a-vis year 2000 risks and uncertainties  and, on
the basis  thereof,  is confident that the steps the Company has taken to become
year 2000 compliant are sufficient.  In continuation of this review, the Company
shall continue to monitor or otherwise  obtain  confirmation  from the aforesaid
entities - and such other entities as management deems appropriate - as to their
respective  degrees of preparedness.  To date, nothing has come to the attention
of the Company  that would lead it to believe  that its  significant  customers,
vendors, and/or service providers will not be year 2000 ready.

     Year 2000 readiness is a priority of the Company. The Company believes that
it is taking such  reasonable and prudent steps as are necessary to mitigate the
risks associated with potential year 2000 difficulties;  however, the effect, if
any,  of year 2000  problems  on the  Company's  results  of  operations  if the
Company's  or its  customers,  vendors,  or  service  providers  are  not  fully
compliant  cannot be estimated  with any degree of certainty.  Nonetheless,  the
most likely  impact on the Company  would be a reduced  level of activity in the
fourth  quarter of the fiscal year ended March 31, 2000,  a time at which,  as a
result of the seasonality of the Company's business, its activities in sales and
sourcing of products, are at their low.



<PAGE>
Trends Affecting Liquidity, Capital Resources and Operations

     As a result of its current  merchandise mix which emphasizes  specialty and
educational toys, the Company enjoyed significant sales and gross profits in the
nine months ended December 31, 1998. This mix of specialty and educational  toys
includes  collectible die cast cars,  specialty  yo-yo's,  Rokenbok and Learning
Curve toys,  and Beanie  Babies(R)  and other plush and many  educational  toys.
There can be no assurance that these particular  specialty toys will continue to
contribute strongly to the Company' sales and gross profits.  The history of the
toy industry,  however,  indicates  that there is generally at least one or more
highly popular toy every year.

     The Company's current sales efforts focus primarily on a defined geographic
segment  consisting of the southern  California  area and the  southwestern  and
midwestern United States. The Company's future financial performance will depend
upon (i) continued demand for high-end specialty,  educational,  and traditional
toys  and  management's  ability  to  adapt to  continuously  changing  consumer
preferences  and the market for such items,  (ii)  general  economic  conditions
within the Company's geographic market area, as same may be expanded,  (iii) the
Company's ability to choose locations for new stores, (iv) the Company's ability
to purchase  products at favorable  prices and on favorable  terms,  and (v) the
effects of increased competition.

     The toy and hobby retail  industry  faces a number of  potentially  adverse
business  conditions  including  price and gross  margin  pressures  and  market
consolidation.  The  Company  competes  with a  variety  of mass  merchandisers,
superstores,  and other toy retailers,  including Toys R Us, Kay Bee Toy Stores,
Walmart and Kmart.  Competitors  that emphasize  specialty and educational  toys
include Disney Stores,  Warner Bros.  Stores,  Learning Smith,  Lake Shore, Zany
Brainy,  and  Noodle  Kidoodle.  There can be no  assurance  that the  Company's
business  strategy will enable it to compete  effectively in the toy industry or
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                   

     The impact of inflation on the Company's results of operations has not been
significant.  The Company  attempts  to pass on  increased  costs by  increasing
product prices over time.

     The Company's  operations are highly seasonal with approximately  30-40% of
its net sales  historically  falling within the Company's  third quarter,  which
coincides with the Christmas selling season.  The Company intends to open stores
throughout the year, but generally  before the Christmas  selling season,  which
will make the Company's  third  quarter sales an even greater  percentage of the
total year's sales.





<PAGE>
                                     PART II

Item 1. Legal Proceedings

         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 in Rialto,  California.  The lease for the  premises has a
term from February 1987 through  November 2003. The Company vacated the premises
in August 1997.  Under  California  State law and the  provisions  of the lease,
plaintiff  has a duty to mitigate its damages.  Plaintiff  seeks  damages,  of a
continuing  nature, for unpaid rent,  proximate  damages,  costs, and attorneys'
fees,  in the  approximate  amount of $300,000.  This action is in the discovery
phase.

         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: None

Item 5. Other Information: None

Item 6. Exhibits and Reports on Form 8-K

     (a) The following  exhibits are filed with this Form 10-QSB for the quarter
ended  December 31, 1998 except those  designated by an asterisk (*) which shall
be filed by amendment hereto: <TABLE> <CAPTION>

-----------------------------------------------------------------------------------------------------------------------
<S>                  <C>                                                                                           <C> <C>  
10.111               Agreement by and between the Company and ZD Group, L.L.C., dated November 11, 1998.
10.112               Intercreditor and Subordination Agreement by and between ZD Group, L.L.C. and FINOVA Capital Corporation, dated
                     February 11, 1999.
10.113               5% Convertible Secured Subordinated Debenture in favor of Frampton Industries, Ltd., dated November 11, 1998.
10.114               Subordinated Security Agreement by and between the Company and Frampton Industries, Ltd., dated November 11, 
                     1998.
10.115               Intercreditor and Subordination Agreement by and between Frampton Industries, Ltd. and FINOVA Capital 
                     Corporation, dated February 11, 1999.
10.116               Third Amendment to Loan and Security Agreement by and between the Company and FINOVA Capital Corporation, dated
                     February 11, 1999.
10.117               Letter of Intent by and between the Company and Frampton Industries, Inc., dated January 4, 1999.
27.01                Financial Data Schedule
</TABLE>

     (b) During the quarter ended December 31, 1998, no reports on Form 8-K were
filed with the Securities and Exchange Commission.



<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 19th day of February 1999.

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