SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 FORM 10-KSB/A-2
                                   (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended March 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 Registrant as Specified in its Charter)

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

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

                                 (760) 471-4505
              (Registrant's Telephone Number, Including Area Code)

                            Securities  registered  pursuant to Section 12(b) of
                                    the Act:

         Title of Each Class Name of Each Exchange on Which Registered
                                      NONE

               Securities registered pursuant to Section 12(g) of
                                    the Act:

                          Common Stock, $0.01 par value
                    Series E Preferred Stock, $0.01 par value
                   Series E Preferred Stock Purchase Warrants
                                (Title of Class)


     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 [ ]

     Check if no  disclosure  of  delinquent  filers in  response to Item 405 of
Regulation S-B is contained in this form,  and no disclosure  will be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB [ X].

     The  Registrant's  revenues  for its fiscal  year ended March 31, 1998 were
$22,568,527.

     The  aggregate  market  value  of  the  voting  stock  on  March  31,  1998
(consisting of Common Stock,  par value $0.01 per share) held by  non-affiliates
was approximately $1,241,018, based upon the closing price for such Common Stock
on said date ($.75),  as reported by a market  maker.  On such date,  there were
4,103,519 shares of Registrant's Common Stock outstanding.


<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

History

         Play Co. Toys &  Entertainment  Corp.  (the  "Company")  was founded in
1974,  at which  time it  operated  one store  under  the name Play Co.  Toys in
Escondido,  California.  The  Company  now  operates  19 stores:  18 are located
throughout Southern California in the Los Angeles, Orange, San Diego, Riverside,
and San Bernardino Counties,  and one is located in Tempe,  Arizona. The Company
has executed  leases to build and open six  additional  stores  during  calendar
1998.  The Company  expects  that by the end of  calendar  1998 it shall have 25
stores,  18 of which (the "New  Stores")  shall follow the Company's new concept
and seven of which (the "Original Stores") shall follow its old format.

         In 1996,  the Company  redefined  its corporate  goals and  philosophy,
changing its focus from the sale of traditional  toys in stores located in strip
shopping  centers to the sale of educational,  new electronic  interactive,  and
specialty and collectible  toys and items in high traffic malls. In light of its
new  focus,  the  Company  has  redesigned  four of its  Original  Stores to the
Company's new format,  opened five new  locations,  and acquired three stores in
its acquisition of Toys International, Inc. ("Toys"). Two of the five New Stores
operate under the tradename  "Toy Co." In  conformance  with its new goals,  the
Company's New Stores shall be smaller  (5,000 to 10,000 square feet in size) and
shall operate  exclusively  in high traffic malls rather than in strip  shopping
centers.

         The  Company's New Stores have produced and are expected to continue to
produce  higher gross  profits since they focus on the sale of  educational  and
electronic interactive games and toys, specialty products, and collector's toys,
which generally carry higher gross margins than traditional toys.

Ownership of the Company

         At  fiscal  year  end  March  31,  1998,  approximately  60.1%  of  the
outstanding  shares of the Company's  common stock, par value $0.01 (the "Common
Stock"),  were held by United  Textiles & Toys  Corp.  ("UTTC"),  the  Company's
parent corporation.  UTTC is a Delaware corporation and public company which was
organized in March 1991 and  commenced  operations  in October 1991. It formerly
designed,  manufactured, and marketed a variety of lower priced women's dresses,
gowns,  and  separates  (blouses,  camisoles,  jackets,  skirts,  and pants) for
special  occasions and formal events.  In April 1998,  UTTC ceased all operating
activities;  it now operates solely as a holding company.  The President of UTTC
is Mr. Ilan Arbel who is also the  president,  chief  executive  officer,  and a
director of Multimedia Concepts International, Inc. ("MMCI"), the parent company
of UTTC (owning  78.5% of same).  MMCI is owned 62.2% by U.S.  Stores  Corp.,  a
company of which Ilan Arbel is the president and a director.  U.S.  Stores Corp.
is owned 100% by American Telecom PLC, a British corporation.



Subsidiaries

     The Company has two operating subsidiaries,  each of which is wholly-owned:
Toys and Play Co. Toys Canyon Country,  Inc. ("Canyon  Country").  Toys operates
three stores (one in each of Redondo  Beach and Ontario,  California  and one in
Tempe,   Arizona);   Canyon  Country  operates  one  store  (in  Santa  Clarita,
California).


<PAGE>
Acquisition of Toys International

         In January 1997, the Company acquired  substantially  all of the assets
of Toys. The acquisition,  in principal,  included the assignment to the Company
of the three store leases then held by Toys and Toys' entire inventory.  As part
of the  purchase  agreement,  the  Company  obtained  the  rights  to the  "Toys
International"  and "Tutti  Animali"  operating name trademarks and also assumed
the existing leases at its three store locations:  two of such locations operate
under the  tradename  "Toys  International,"  and the third  operates  under the
"Tutti  Animali"  tradename.  The  total  purchase  price was  $1,024,184  which
consisted  mainly of inventory and certain  prepaid  expenses and deposits.  The
purchase  price was tendered in the form of a $759,184 cash payment  remitted in
January 1997 and the execution of two promissory  notes,  aggregating  $265,000,
payable  over a two  year  period.  In order to  ensure a smooth  transition  in
operations,  the former  president of Toys,  Mr. Gayle  Hoepner,  continued  his
relationship as a consultant to the Company for a period of ninety days,  during
which time he advised  the Company  regarding  Toys' then  operations,  vendors,
policies, employees, etc.

Series E Preferred Offering

         On December 29, 1997,  through West America  Securities Corp. as agent,
the  Company  completed a public  offering of its Series E Preferred  Stock (the
"Series E Stock") and Redeemable Series E Stock Purchase Warrants (the "Series E
Warrants").  The offering  raised  $3,150,000  in gross  proceeds from which the
Company realized net proceeds of $2,303,441 after  discounts,  commissions,  and
expenses of the offering. The proceeds were apportioned as follows: (i) $500,000
was placed in a restricted certificate of deposit to secure a stand-by letter of
credit in favor of FINOVA Capital Corporation ("FINOVA"),  the Company's working
capital  lender and a  nonaffiliate  (see "--  Financing"),  (ii)  approximately
$140,000 has been expended for the relocation  and  enlargement of the Company's
Toys store located in the Century City shopping  center (the Company  expects to
expend an additional  $100,000 to complete the  renovation),  (iii) $250,000 was
placed in a restricted  short-term  certificate  of deposit as collateral  for a
facility to issue letters of credit,  (iv) approximately  $1,050,000 was used to
pay  down  the  FINOVA  credit  line  to  reduce  interest  expenses,   and  (v)
approximately  $363,000  was  used  to  reduce  trade  accounts  payable  or  to
opportunistically purchase inventory from vendors on advantageous terms.

Series F Preferred Offering and Termination Thereof

         In May 1998,  the Company  commenced  an  offering of Units,  each Unit
comprising one share of the Company's  Series F Preferred Stock, par value $0.01
per share (the  "Series F Stock"),  and one Series F  Preferred  Stock  Purchase
Warrant  (the  "Series  F  Warrants"),  at a  purchase  price of $3.00 per Unit,
through  Morgan  Grant  Capital  Group,  Inc. as  placement  agent.  The Company
terminated the offering in June 1998, and no funds were raised thereby.

Merchandising Strategy; Refocusing of Corporate Direction

         Traditionally,  the  Company's  merchandising  strategy was to offer an
alternative,  less intimidating environment than that provided by the larger toy
retailers who are in competition  with the Company.  In particular,  the Company
stocks all of its items at eye level (not vertically, as other stores often do),
provides  clerks to assist  customers,  and  implements a policy of treating its
customers with courtesy and respect.  The Company's  merchandise is stacked from
the ground to the eye level of an adult, no more than six feet high. The Company
has  augmented  its product lines in its New Stores and will continue to provide
these quality services to patrons of all its stores.


<PAGE>
         Beginning  in 1996,  management  of the Company  realized  the inherent
value in, and thus the demand for, a retail outlet which  provides a combination
of (i) educational,  new electronic  interactive,  and specialty and collectible
toys and items and (ii) traditional  toys. In addition,  the Company  determined
that it should  place its stores in high  traffic  malls,  rather  than in strip
shopping centers where most of its Original Stores have operated. To achieve its
goals,  the Company  developed a new store  design and  marketing  format  which
provides an interactive  setting together with a retail  operation.  This format
and design has formed the  foundation  for the  Company's  future  direction and
growth  plans,  thereby  allowing  the Company to meet what it believes  are the
industry's  current and future demands.  The Company has thus far remodeled four
Original  Stores  to fit its New  Store  design,  opened  five New  Stores,  and
acquired  three New Stores (the Toys stores).  By the end of calendar year 1998,
the Company intends to open six additional New Stores, the leases for which were
executed in the first calendar  quarter of 1998, and thereby  operate a total of
twenty-five  stores. In calendar 1999, the Company expects to open an additional
six stores,  bringing its total to 31. The Company shall continue to operate its
Original Stores until their leases expire, except with respect to certain stores
for which it is negotiating  lease  extensions,  which stores it may redesign to
fit the New Store  concept.  The Company  periodically  reviews each  individual
store's  sales  history and  prospects on an  individual  basis to decide on the
appropriate  product  mix.  As part of its  business  plan,  the  Company  shall
continue to assess current and future trends and demands in the industry, refine
its new format,  and analyze and  evaluate  markets for future  store  openings,
product lines, and marketing  strategies.  The Company shall continue to operate
its  stores  under the names it  currently  utilizes  - "Play Co.  Toys,"  "Toys
International,"  "Toy Co.," and "Tutti  Animali"  - and shall  continue  to open
stores  with such names  contingent  upon the  product  mix and  location of the
store.

         To a certain extent,  mostly with respect to its Original  Stores,  the
Company  offers a broad  in-stock  selection  of  products  at prices  generally
competitive  within the industry.  While the Company does not stock the depth or
breadth  of  selection  of toys for its  Original  Stores as some of its  larger
competitors  do, the Company does strive to stock all basic  categories  of toys
and all  television  advertised  items.  The Company also offers a special order
program for many items; this program is free to its customers. In June 1994, the
Company began to sell toy and hobby items on a wholesale basis to military bases
located in Southern California.  In accordance with its new corporate focus, and
given  that  wholesale  sales to  military  bases were  minimal  in fiscal  1998
(approximating  $444,000,  or 2% of sales),  whereas they totaled  approximately
$619,000  (or 3% of sales) for the year ended  March 31,  1997,  the Company has
decided to cease such sales as of July 1998.

Product Lines

         The Original  Stores sell children's and adult toys,  games,  bicycles,
and other wheel goods,  sporting  goods,  puzzles,  Nintendo and Sony electronic
game systems and cartridges for such game systems,  cassettes,  and books.  They
offer over  15,000  items for sale,  most of which are major brand name toys and
hobby products.

         The New  Stores  also  carry  some of the items  found in the  Original
Stores;  however,  they  focus on  selling  educational  toys,  Steiff and North
America Bears, Small World toys, LBG trains, CD-ROMs, electronic software games,
and Learning Curve and Ty products.  The Company's Tutti Animali store,  located
in the Crystal  Court Mall in Costa Mesa,  California,  is a unique  store which
sells only stuffed animals.

Warehousing, Shipping and Inventory Systems

         The Company's stores are serviced from one distribution  facility which
is  approximately  37,000  square  feet.  Inventory  and  shipment  of  products
continues  to  be  monitored  by  a  computerized   point-of-sale   system.  The
point-of-sale system is a sophisticated scanning, inventory control, purchasing,
and warehouse  system which allows each store manager to monitor sales  activity
and inventory at each store and enables the Company's officers to obtain reports

<PAGE>
on all  stores.  It  monitors  sales at all store  locations  and  automatically
notifies the warehouse and shipping  department  each time stock of a particular
item is low or out, depending upon the item and the instructions programmed into
it.  Through  this  system,  management  continuously  analyzes the sales of its
product  lines  and  adjusts  product  mix  in  order  to  maximize  return  and
effectively  manage  its  retail  space.  The  Company's  stores  generally  are
restocked on a weekly basis,  although  certain  stores and certain items may be
restocked at more  frequent  intervals.  In addition,  restocking of products is
increased  during the fourth  quarter,  during the  holiday  season.  During the
holiday  season some stores and some items are  restocked on a daily basis.  All
shipments to stores in  California  are made by vehicles  owned or leased by the
Company.

Suppliers and Manufacturers

         The  Company  purchases  all of its  products  from  manufacturers  and
wholesalers and ships them to its stores from its distribution center. There are
no written  contracts  and/or  agreements  with any individual  manufacturer  or
supplier;  rather,  all orders are on a purchase  order basis only.  The Company
relies on credit terms from suppliers and  manufacturers  to purchase nearly all
of its  inventory.  Credit terms vary from company to company and are based upon
many  factors,  including the ordering  company'  financial  condition,  account
history,  type of product, and the time of year the order is placed. Such credit
arrangements  vary for  reasons  both  within  and  outside  the  control of the
Company.  In  past  years,  the  Company's  credit  lines  decreased  due to the
Company's  then poor  financial  condition.  Recently,  the  Company  has seen a
significant  increase  in its  credit  lines  based  on its  improved  financial
condition and its ability to remain current with its accounts payable.

Seasonality 

         Since inception,  the Company's business has been highly seasonal, with
the majority of its sales and profits being  generated in the fourth  quarter of
the calendar year, particularly during the November and December holiday season.
However,  during  fiscal 1998 and during the first  quarter of fiscal 1999,  the
Company has seen a  significant  increase in sales  during the  remaining  three
quarters,  giving a lesser effect to the fourth quarter holiday season, although
the Company does expect that the holiday  season  shall  continue to represent a
significant  (30-40%) portion of the Company's annual sales.  This adjustment in
revenues is due to the Company's new store design and refocused product lines.

Trademarks                                                                     

     In 1976 and  1994,  the  Company  received  federal  registrations  for the
trademarks "Play Co. Toys" and "TKO." "Play Co. Toys" is a trademark utilized by
the  Company in  connection  with its  marketing  and sales.  "TKO" was used for
certain items the Company previously manufactured.  In addition, the Company has
applied for the federal registration of the name "Toy Co." as a tradename of the
Company:  this  application is pending.  Two of the Company's New Stores,  those
located  in Arizona  Mills and  Ontario  Mills,  operate  under  this  name.  In
accordance with its acquisition of Toys, the Company  acquired the rights to the
tradenames "Toys International" and "Tutti Animali."

Financing

     On January 21,  1998,  the Company  entered  into a $7.1  million  secured,
revolving Loan and Security Agreement (the "FINOVA  Agreement") with FINOVA. The
credit line offered under the FINOVA  Agreement  replaced the $7 million  credit
line the Company had with Congress Financial Corporation (Western) ("Congress").
(Neither  FINOVA nor Congress is affiliated  with the Company.) The Company paid
off the Congress loan on February 3, 1998. 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  loan.  The FINOVA
credit line is secured by substantially  all of the Company's assets and expires
on August 3, 2000. It accrues  interest at a rate of floating prime plus one and
one-half percent.
<PAGE>
     Under the FINOVA Agreement,  the Company is able to borrow against the cost
value of eligible  inventory and is able to borrow up to $2.4 million  against a
combination  of $3 million  in standby  letters of credit in favor of FINOVA 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  loan.  $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  issued  by MMCI,  an  affiliate  of the  Company  by virtue of its 78.5%
ownership of UTTC, the Company's parent;  the other $500,000 was provided by the
Company.

     The Company relies on credit terms from its suppliers and  manufacturers to
purchase nearly all of its inventory.  While its accounts  payable to vendors is
current as of March 31, 1998, there can be no assurance that the Company will be
able to keep such payables current in the future.  Credit  arrangements vary for
reasons  both within and outside the control of the Company.  See "--  Suppliers
and Manufacturers."

     The Company has entered into one fixture financing agreement, with Pacifica
Capital, for the leasing of fixtures for its remodeled store in the Century City
Shopping Center located in west Los Angeles. The agreement is for a term of five
years and provides fixture financing in the approximate  amount of $85,000.  The
financing  is secured by the store  fixtures.  The  Company is  negotiating  two
additional fixture financing arrangements which it hopes to consummate by August
1998.  There can be no assurance,  however,  that either such  financing will be
consummated.

Competition

     The toy and  hobby  products  market  is  highly  competitive.  Though  the
Company's  New Stores  offer a  combination  of  traditional,  educational,  new
electronic interactive,  specialty,  and collectible toys and items, the Company
remains in direct competition with local,  regional,  and national toy retailers
and  department  stores,  including Toys R Us (considered to be the dominant toy
retailer in the United States),  Kay Bee Toy Stores,  K-Mart, and Wal Mart. Most
of the Company's  larger  competitors are located in free-standing  stores,  not
malls. Kay Bee stores,  however, are located in malls, though their product line
is different than the Company's.  In addition, the toy and hobby products market
is  particularly  characterized  by large  retailers  and  discount  stores with
intensive advertising and marketing campaigns and with deeply discounted pricing
of such products. The Company competes as to price, personnel, service, speed of
delivery,  and breadth of product line. Many of the Company's  competitors  have
greater financial and marketing resources than those of the Company.

     As a result  of the  continually  changing  nature of  children's  consumer
preferences  and tastes,  the success of the Company is dependent on its ability
to  change  and  adapt  to such  changing  tastes  and  preferences.  Children's
entertainment  products are often  characterized by fads of limited life cycles.
Combining the  traditional  and  educational toy segments of the market into one
retail  location  is  believed  to be a  unique  concept  that  should  prove to
differentiate  the  Company's  stores from those of any of its larger or similar
size  competitors.  Management  has been  unable  to locate  any other  retailer
currently using this combined  marketing  concept.  The Company will compete for
the educational toy customer with other specialty  stores such as Disney Stores,
Warner Bros.  Stores,  Learning  Smith,  Lake Shore,  Zainy  Brainy,  and Noodle
Kidoodle.

     Most of the companies  with which the Company  competes have more extensive
research and  development,  marketing,  and customer  support  capabilities  and
greater financial, technological, and other resources than those of the Company.
There can be no assurance that the Company will be successful or that it will be
able to  distinguish  itself  from such  larger,  more well known  entities.  In
addition,  the Company does not believe  there are any  significant  barriers to
entry to discourage new companies from entering into this industry.
<PAGE>
Employees

         As of March  31,  1998,  the  Company  has  three  executive  officers,
approximately 65 full time employees, and approximately 259 part time employees.
None of the employees of the Company is represented by a union,  and the Company
considers employee relations to be good. Each store employs a store manager,  an
assistant  manager,  and between fifteen to twenty-five  full-time and part-time
employees.  Each of the Company's  store managers  reports to the Company's Vice
President of Retail  Operations and Vice President of Merchandising  who in turn
report directly to the Company's executive officers.

ITEM 2.           DESCRIPTION OF PROPERTY

         Until  recently,  the Company's  stores were serviced from two adjacent
distribution facilities (one 37,000 square feet in size, the other 18,000 square
feet in size) encompassing an aggregate of approximately  55,000 square feet, at
550 Rancheros Drive, San Marcos,  California. As of April 15, 1997, however, the
Company returned  approximately  15,400 feet of the 18,000 square foot warehouse
space to the landlord. The Company now leases (i) 40,000 square feet of combined
office and warehouse space (approximately 3,000 square feet is office space, and
the  remaining  37,000  square feet is warehouse  space) and (ii)  approximately
2,600 square feet of separate  space which houses  defective  merchandise  until
same is either returned to the manufacturers or the Company is authorized by the
manufacturers to destroy the goods. The former space is leased at an approximate
annual cost of  $247,000,  from a  partnership  of which one of the  partners is
Richard Brady, the President and a Director of the Company. The lease expires in
April  2000,  and  the  Company  believes  that it is on  terms  no more or less
favorable than terms it might  otherwise have  negotiated  with an  unaffiliated
party. The latter space is leased at an approximate annual cost of $31,572, from
Dunlop/Townley Holdings. The lease expires in March 2000.

         In  addition,  the  Company  currently  leases 18  stores  in  southern
California and one store in Arizona.  During the last calendar  quarter of 1997,
the Company opened a temporary  short-term seasonal store (in Crystal Court Mall
in Costa Mesa,  California) and three new stores in high traffic shopping malls:
one in South Bay Galleria in Redondo Beach, California;  one in Ontario Mills in
Ontario,  California;  and one in Arizona Mills in Tempe, Arizona (the Company's
first store outside of southern California). The Company has executed six leases
to open additional locations within the 1998 calendar year.

         The Company has recently  completed  the  enlargement  of one of its 19
stores,  the Toys store located in Los Angeles,  California.  The lease for this
store  expired in January 1998 and was  extended,  at a new location  within the
same mall, through and until March 31, 2001. Three of the Company's other stores
are operating under leases that either also have expired or will expire in 1998,
the fate of such stores to depend upon the Company's  intentions and concomitant
lease negotiations with the landlords of same.

         The  following  table  sets forth the  leased  properties  on which the
Company's (and its subsidiaries') currently operating stores are located:


<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
                                                    SIZE IN SQUARE FEET
                                                                                 LEASE                     BASE RENT
                 STORE LOCATION                                               EXPIRATION                  ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                        <C>                           <C>        
Play Co. Toys                                            12,000                July 2006                          $108,000.00
Santa Clarita
19232 Soledad Canyon Rd
Santa Clarita, CA  91351
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                  7,800         January 2001                          $84,840.00
Santa Margarita
27690-B Santa Margarita
Mission Viejo, CA  92691
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                  8,250         December 1999                         $87,550.44
Chula Vista
1193 Broadway
Chula Vista, CA  91911
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 10,030           June 2000                          $127,880.64
El Cajon
327 N. Magnolia
El Cajon, CA  92020
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 11,323         November 1999                         $95,040.48
Simi Valley
1117 E. Los Angeles, Suite C
Simi Valley, CA  93065
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 10,000        September 2005                        $116,751.60
Encinitas
280 N. El Camino Real
Encinitas, CA  92024
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                  9,800         December 2004                         $96,000.00
Pasadena
885 S. Arroyo Parkway
Pasadena, CA  91105
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 13,125         January 2001                          $96,360.00
Orange
1349 E. Katella
Orange, CA  92513
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                            10,478             Month to Month                         $95,941.80
Redlands
837 Tri-City
Redlands, CA  92373
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 10,156          August 2002                         $108,365.00
Clairemont
4615-A Clairemont Drive
San Diego, CA  92117

<PAGE>
===============================================================================================================================

                 STORE LOCATION                     SIZE IN SQUARE FEET          LEASE                     BASE RENT
                                                                              EXPIRATION                  ANNUAL COST
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 10,097        Month to Month                         $79,236.00
Rancho Cucamonga
9950 W. Foothill Blvd, Suite U
Rancho Cucamonga, CA 91730
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                 10,000         October 2004                          $64,926.60
Corona
1210 W. Sixth Street
Corona, CA  91720
-------------------------------------------------------------------------------------------------------------------------------
Play Co. Toys                                                  9,400         December 2003                        $178,980.00
Woodland Hills
19804 Ventura  Blvd., #366
Woodland Hills, CA 90278
-------------------------------------------------------------------------------------------------------------------------------
Toys International                                             5,183         January 2004                         $159,900.00
South Coast Plaza
3333 Bristol Street, Suite 1030
Costa Mesa, CA  92626
-------------------------------------------------------------------------------------------------------------------------------
Toys International                                             3,869         January 2001                         $145,920.00
Century City
10250 Santa Monica Blvd
Los Angeles, CA  90067
-------------------------------------------------------------------------------------------------------------------------------
Tutti Animali                                                  1,220         January 2000                         5% of Sales
Crystal Court
3333 Bear Street
Cost Mesa, CA  92626
-------------------------------------------------------------------------------------------------------------------------------
Toys International                                             3,620          August 2007                          $83,260.08
Galleria @ South Bay
1815 Hawthorne Blvd., #366
Redondo Beach, CA  90278
-------------------------------------------------------------------------------------------------------------------------------
Toy  Co.                                                       5,642         January 2003                         $112,840.00
Ontario Mills
One Mills Circle, #302
Ontario, CA  91764
-------------------------------------------------------------------------------------------------------------------------------
Toy Co.                                                  7,103               October 2002                         $163,369.00
Arizona Mills
5000 Arizona Mills Circle, #689
Tempe, AZ  85282
===============================================================================================================================
</TABLE>
<PAGE>
ITEM 3.           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.  In addition, 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. 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.  These actions  settled for an aggregate of $469,600 during fiscal year
1998.

     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.

     Neither the Company's officers, directors,  affiliates, or owners of record
or beneficially  of more than five percent of any class of the Company's  Common
Stock is a party to any  material  proceeding  adverse  to the  Company or has a
material interest in any such proceeding adverse to the Company.

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:  Richard
Brady, James Frakes, Harold Rashbaum, and Sheikhar Boodram.

     The votes cast or withheld for the election of the  directors are set forth
as follows:
<TABLE>
<CAPTION>

         Nominees                                             Votes For                          Votes Withheld

<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>

     On March 16, 1998, Mr. Boodram resigned as Director.  On March 18, 1998, in
order to fill the vacancy left by Mr. Boodram,  the Board of Directors appointed
Moses Mika as a Director. Mr. Mika is the father of Ilan Arbel.

     An  Information  Statement  was  mailed  on May 8,  1998  to the  Company's
stockholders  of record on April 15, 1998 in connection with the proposed action
to be taken by the  Company  pursuant to the  written  consent of the  Company's
majority stockholder.  The Company received  authorization to effect an increase
in the total number of shares of all classes of capital  stock which the Company
has  authority  to issue from forty  million  (40,000,000)  shares to  sixty-six
million five hundred thousand (66,500,000) shares, consisting of (i) an increase
in the  number  of  authorized  shares  of  Common  Stock,  from  forty  million
(40,000,000)  shares to fifty-one million  (51,000,000)  shares of Common Stock;
(ii) ten  million  (10,000,000)  shares  of the  Series  E Stock  as  previously
authorized;  and (iii) the  authorization  of 5,500,000 shares of a new class of
preferred stock,  par value $0.01 per share,  designated the "Series F Preferred
Stock." The increase in the  authorized  capital stock was  undertaken to enable
the  Company to  commence  its Series F private  offering,  which  offering  was
terminated  without  generation  of  proceeds  thereby.  The action was taken by
amendment to the Company's  Certificate of Incorporation  filed on May 29, 1998.
See "-- Series F Preferred Offering and Termination Thereof."
<PAGE>
                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Until  September  24, 1997,  the  Company's  common stock was quoted on the
Nasdaq  SmallCap  Stock  Market  ("Nasdaq").  The  following  table  sets  forth
representative  high and low closing  bid quotes as  reported by a market  maker
during the periods stated below. The Company's  Securities are quoted on the OTC
Bulletin Board. Bid quotations  reflect prices between  dealers,  do not include
resale  mark-ups,   mark-downs,  or  other  fees  or  commissions,  and  do  not
necessarily represent actual transactions.
<TABLE>
<CAPTION>

         Calendar                                                                             Series E (2)          Series E (2)
          Period                  Stock(1 Common)                  Warrants (1)              Preferred Stock          Warrants

                                  Low            High           Low           High          Low        High      Low         High
           1996
<S>                                    <C>          <C>              <C>           <C>
01/01/96 - 03/31/96                    7/8          2 3/8            1/8           1/4
04/01/96 - 06/30/96                  1 1/8              3            1/8           1/4
07/01/96 - 09/30/96                   3/4            21/2
10/01/96 - 12/31/96                  1 1/8          1 3/8

           1997

01/01/97 - 03/31/97                      1            11/4            1            11/4
04/01/97 - 06/30/97                      1          1 1/8
07/01/97 - 09/23/97(3)                   1          1 1/8
10/14/97 - 12/31/97                      2              3

           1998

01/01/98 - 03/31/98                    .68              2                                   1          4.75      .5          1.75
04/01/98 - 06/19/98                   1.37           1.75                                    .87       3.5       .5          1.25
</TABLE>

(1) The  Common  Stock and  Warrants  issued  in the  Company's  initial  public
offering in November 1994 started to trade  separately on February 6, 1995.  The
Warrants  expired in February 1997.  (2) The Company  consummated an offering of
its Series E Stock and Series E Warrants  in  December  1997.  These  securities
commenced  trading  on the OTC  Bulletin  Board  on  January  5,  1998.  (3) The
Company's  Common Stock was  delisted  from Nasdaq  effective  with the close of
business on September 23, 1997.  It began  trading on the OTC Bulletin  Board in
October 1997.

     As of June 24,  1998,  there were 344  holders  of record of the  Company's
Common  Stock,  although  the  Company  believes  that there are 636  additional
beneficial  owners of shares of Common Stock held in street name. As of June 24,
1998,  the  number of  outstanding  shares  of the  Company's  Common  Stock was
4,103,519.  (This  number is  subject  to change,  nominally,  as the  7,521,563
pre-July  1997 reverse  split  shares  which have not been  exchanged as yet are
offered for such exchange by the Company's shareholders.)

     Effective  with the close of business on September 23, 1997,  the Company's
Common  Stock was  delisted  from  trading on Nasdaq.  The  Company  appealed an
earlier  Nasdaq  determination  and  presented its argument in August 1997 at an
oral hearing before the Nasdaq  Qualifications Panel (the "Panel"). On September
23, 1997, the Company received a decision from the Panel that based its decision
to delist on its belief that the Company did not meet the  stockholders'  equity
maintenance  requirement  of  $1,000,000  and  based on  transactions  it deemed
"detrimental  to the  investing  public  and  the  public  interest"  concerning
transactions  undertaken in February  1996 with respect to options  issued to an
investor  which  provided  a  $2,000,000  Letter of Credit as  security  for the
Congress credit line. See  "Business-Financing and Supplier Credit." The Company
appealed this matter to the Nasdaq  Listing and Hearing  Review  Committee  (the
"Review   Committee")   which,  on  October  29,  1997,   remanded  the  Panel's
determination for  reconsideration by a new Nasdaq analyst and a new Panel, this
remand due in part to the Company's allegations of bias.
<PAGE>
         In December 1997,  the Company  presented  written  evidence to the new
Panel which, in a determination  dated January 20, 1998, affirmed the delisting.
The  Company  appealed  said  determination  to  the  Review  Committee.   In  a
determination  dated May 21, 1998, the Review  Committee  affirmed the delisting
citing as its basis therefor, inter alia, as follows: ". . . given the Company's
history  of  losses,  we do not have  confidence  in the  Company's  ability  to
maintain  compliance  [with the capital and  surplus  requirement]  for the long
term." In addition,  the Review Committee determined that "substantial  dilution
to the public  shareholders  by stock  issuance . . . and by the  conversion  of
preferred  stock issued . . . at prices  substantially  below the market  price"
supported the Review Committee's  argument of purported affiliate  self-dealing.
In  further  support  of its  determination,  the  Review  Committee  cited  the
Company's  failure to provide  information  requested  with  respect to entities
which  were  not  affiliated  with  the  Company.  (In  response  to the  Review
Committee's request for such information,  the Company informed same that it did
not believe it appropriate to make representations regarding the transactions or
the composition of any entities with which it was not affiliated and recommended
that the Review Committee redirect such inquiries directly to such entities.)

     The Company sought all  administrative  remedies  available from Nasdaq and
believes  that  Nasdaq  erred  in its  determination.  Given  the  extreme  cost
associated  with  appealing  Nasdaq's  decision to the  Securities  and Exchange
Commission, however, the Company determined not to file such an appeal.

Recent Sales of Unregistered Securities

     Except where  otherwise  indicated,  the sales of securities of the Company
described below were exempt from registration  under the Securities Act of 1933,
as amended (the "Act"), in reliance upon the exemption  afforded by Section 4(2)
of the Act for transactions  not involving a public  offering.  All certificates
evidencing such sales bear an appropriate restrictive legend.

     In March  1996,  the  Company  was  indebted  to  Europe  American  Capital
Corporation  ("EACC"),  an affiliate,  in the amount of $528,070 for a loan EACC
provided to the Company.  In April 1996,  the Company  issued  528,070 shares of
Series E Stock to EACC  pursuant to a  conversion  into equity of the  aforesaid
debt.

     In August 1996,  the Company's one  authorized and issued share of Series D
Preferred Stock was converted into 385,676 shares of the Company's  Common Stock
based on the  initial  amount of the debt  divided by the  average  price of the
shares for a 90 day period prior to the conversion.  This was performed in order
for the Company's then parent,  American Toys,  Inc., to spin such shares off to
its stockholders and divest itself of its interest in the Company.

     From April 1996 to June 1997,  EACC  exercised its options and purchased an
aggregate of 3,562,070 shares of the Company's Series E Stock for $3,562,070. An
aggregate  of 361,500  shares were  converted  into  2,410,000  shares of Common
Stock.  Inclusive of the 250,000  shares of Series E Stock and 500,000  Series E
Warrants  issued in June 1997 (as a bridge  financing to the  completion  of the
Company's  December  1997  Series E  offering),  the  conversion  resulted in an
aggregate  of  3,450,570  shares  of  Series  E Stock  outstanding  prior to the
Company's  public  offering of December  1997. In July 1997,  the Company issued
20,000 shares of Common Stock to Klarman & Associates for legal fees of $500.

     After the Company's Series E offering,  which was consummated  December 29,
1997,  the  Company  had  outstanding  4,200,570  shares  of  Series E Stock and
2,000,000  Series E Warrants  outstanding  and 4,103,519  shares of Common Stock
outstanding.

     In March 1998, the Company issued 25,000 shares of Series E Stock,  subject
to a  vesting  schedule,  to  each  of  Messrs.  Richard  Brady  (the  Company's
President)  and Harold  Rashbaum (the Chairman of the Board).  These shares vest
100% on April 1, 1999.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

     The following  table  summarizes  certain  selected  financial  data and is
qualified in its entirety by the more detailed  financial  statements  contained
elsewhere in this document.
<TABLE>
<CAPTION>
                              Year Ended March 31,

                                                 1995                1996                1997                1998

Balance Sheet Data:

<S>                                               <C>                   <C>             <C>                   <C>       
Working capital (deficiency)                      $1,805,396            $192,401        $(1,570,486)          $4,452,481
Total assets                                      11,119,692           9,213,104           9,378,618          14,139,887
Total current liabilities                          7,298,136           6,673,570           8,148,657           4,581,831
Long term obligations                                140,218             726,007             226,925           7,055,549
Redeemable preferred stock                           242,275              87,680                 ---                 ---
Stockholders' equity                               3,439,063           1,725,847           1,003,036           2,502,507
Common stock dividends                                   ---                 ---                 ---                 ---

                              Year Ended March 31,

                                                  1995                1996                1997                 1998

Operating Data:

Net sales                                         $25,374,722         $21,230,853         $19,624,276          $22,568,527
Cost of sales                                      16,704,757          15,132,895          13,669,104           13,689,599
Total Operating expenses                            9,292,632           9,105,515           8,789,570           10,119,430
Net income (loss)                                   (875,788)         (3,542,715)         (3,584,881)          (2,054,470)
Net income (loss) applicable to common shares       (939,214)         (3,570,260)         (6,474,496)          (3,528,276)
Income (loss) per common share(1)                      (0.87)              (2.77)              (2.32)               (0.86)
Average shares outstanding(1)                       1,011,284           1,287,843           2,791,876            4,098,971
</TABLE>


     (1) Adjusted  for effects of 1 for 3 reverse  split of Common Stock in July
1997.

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
60.1% of the issued and outstanding shares of the Company's Common Stock.

For the year ended March 31, 1998 compared to the year ended March 31, 1997

     The Company  generated net sales of $22,568,527 in the year ended March 31,
1998 (also  referred to as fiscal year 1998).  This  represented  an increase of
$2,944,251,  or 15%, over net sales of  $19,624,276  in the year ended March 31,
1997 (also referred to as fiscal year 1997). Approximately $2.46 million of this
sales growth came from new stores (including the three Toys International, Inc.-
"Toys" - stores acquired in January 1997) and the remaining $480,000 came from a
3.7% increase in same store sales. Sales from the Company's wholesale operations
were insignificant in both fiscal years.
<PAGE>
     The Company ended fiscal year 1998 with 19 retail locations, compared to 21
retail  locations at the end of fiscal year 1997.  During fiscal year 1998,  the
Company opened four new stores and closed six stores (the lease for one of which
stores expired).

     The Company posted a gross profit of $8,878,928 in the year ended March 31,
1998.  This  represented  an increase of  $2,923,756,  or 49.1%,  over the gross
profit of $5,955,172 in the year ended March 31, 1997. The gross profit increase
was due to the above  noted  growth in net  sales and to an  improvement  in the
Company's  gross  margin  from 30.3% in fiscal year 1997 to 39.3% in fiscal year
1998.  This 9.0%  gross  margin  improvement  was the  result of a change in the
Company's  merchandising  mix to augment its  historical  product  base of lower
margin  traditional  toys with  educational  and specialty toys which  generally
produce better margins than traditional  toys. This change in merchandising  mix
has been the  centerpiece  of the Company's  business plan for fiscal years 1997
and 1998.

     Operating  expenses  (total  operating  expenses  less  litigation  related
expenses and  depreciation  and  amortization)  in the year ended March 31, 1998
were  $8,864,607.  This  represented  a  $482,052,  or 5.8%,  increase  over the
Company's operating expenses of $8,382,555 in the year ended March 31, 1997. The
primary reasons for the operating expense increase were a growth in rent expense
of approximately $411,000 and in payroll and related expense of $367,000.  Those
expense increases were partially offset by a reduction of advertising expense of
$574,000.

     The Company incurred $583,541 of litigation related expenses in fiscal year
1998. The expenses were  associated with the closure of five store locations and
related subsequent litigation. This expense includes settlement amounts relating
to four of the five closed  locations and the related legal fees and costs.  The
Company remains in litigation  regarding the fifth closed store which remains in
the discovery phase.  Management  intends to vigorously contest the action since
it believes the landlord failed to comply with its contractual obligations under
the lease.

     Depreciation and amortization  expense in the year ended March 31, 1998 was
$671,282.  This  represented a $264,267,  or 64.9%,  increase over the Company's
depreciation  and  amortization  expense of $407,015 in the year ended March 31,
1997. Depreciation and amortization are non-cash charges. The primary reason for
the depreciation  and amortization  expense increase was the depreciation on the
fixed assets purchased for the four new stores opened during fiscal year 1998.

     Total operating expenses (the sum of operating expenses, litigation related
expenses, and depreciation and amortization expense) in the year ended March 31,
1998 were $10,119,430.  This represented a $1,329,860,  or 15.1%,  increase over
the Company's total operating expenses of $8,789,570 in the year ended March 31,
1997. The reasons for this increase are noted in the three preceding paragraphs.

     The Company's  operating loss improved from  $2,834,398 in fiscal year 1997
to  $1,240,502  in  fiscal  year  1998.  This   represented  an  improvement  of
$1,593,896,  or 56.2%. This improvement was a result of the $2,923,756  increase
in gross  profit  being  partially  offset by the  $1,329,860  increase in total
operating expenses.

     Total  interest  expense  amounted  to $813,968 in the year ended March 31,
1998. This represented a $63,485,  or 8.5%,  increase in total interest expense.
The primary  reason for the  increased  level of  interest  expense was a higher
level of borrowings in fiscal year 1998 than in fiscal year 1997.


<PAGE>
     During  each of the years  ended  March  31,  1998 and  1997,  the  Company
recorded net income tax provisions consisting only of the current portion of the
minimum income taxes required by various  jurisdictions  including the States of
California  and  Delaware;  such  amounts  were  immaterial  and are included in
operating  expenses.  Changes in deferred taxes were offset dollar for dollar by
adjustments  to the  Company's  valuation  allowance  which has  reduced its net
deferred  tax assets to zero as of March 31, 1998 and 1997 and resulted in a net
zero dollar  provision  for  deferred  income  taxes for each of the years ended
March 31,  1998 and 1997.  In  evaluating  the need to provide a full  valuation
allowance on the Company's net deferred tax assets,  management  considered  its
historical  results of operations and its prospects for the future.  For several
years, the Company has generated net operation losses ("NOLs") for financial and
income tax reporting purposes.  These NOLs, which represent the most significant
portion of the Company's net deferred tax assets are realizable only from future
profitable operations. They, as well as other net deferred tax asset items, have
been fully reserved due to the Company's history of losses and lack of assurance
that future  profitable  operations will be achieved in the necessary  timeframe
and magnitude to realize the potential benefits of these NOLs.

     As a result of the above mentioned factors, the Company recorded a net loss
of  $2,054,470  for the  fiscal  year  ended  March  31,  1998 and a net loss of
$3,584,881  recorded in the fiscal year ended  March 31,  1997.  For fiscal year
1997, the net loss applicable to common shares,  as restated,  differed from the
net loss by  $2,889,615 as a result of $27,545 in dividends and accretion on the
former Series B preferred stock and $2,862,070 of non-cash dividends on Series E
Preferred  Stock  ("Series  E  Stock").  For  fiscal  year  1998,  the net  loss
applicable  to  common  shares,  as  restated,  differed  from  the net  loss by
$1,473,806 of on-cash dividends on Series E Stock.  Non-cash dividends on Series
E Stock  represent  amortization  of the discount  recorded upon issuance of the
Series E Stock which has a beneficial  conversion  feature.  No dividends in the
form of securities or other assets were actually paid out. As a result,  the net
loss per  common  share for the 1998  fiscal  year,  as  restated,  was $0.86 as
compared to the net loss per common share for the 1997 fiscal year, as restated,
of  $2.32.  The net loss per  common  share  decreased  both as a result  of the
decreased  net loss and due to the  increase in the weighted  average  number of
shares  outstanding  from  2,791,876  in fiscal year 1997 to 4,098,971 in fiscal
year 1998.

Liquidity and Capital Resources

     At March 31, 1998, the Company had a working capital position of $4,452,481
compared to a working  capital  deficit of  $1,570,486  at March 31, 1997.  This
change in the Company's working capital was largely due to the classification of
the  borrowings  under the  Company's  new  financing  agreement  as a long term
liability  at March 31,  1998  compared  to the  borrowings  under its  previous
financing  agreement that were classified as a short term liability 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  financing  transactions,  most recently  from a public  offering of the
Company's Series E Stock consummated in December 1997. 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.

     For the year ended March 31, 1998,  the Company used  $2,288,736 of cash in
its operations compared to $2,275,962 used in operations in the year ended March
31, 1996.  A  $1,779,874  increase in  merchandise  inventories  was the primary
reason that cash used in operations  actually grew by $12,774 while the net loss
decreased  by  $1,530,411.  The  Company  believes  that this  inventory  growth
occurred  due to  improved  support  from its trade  vendors in fiscal year 1998
compared to fiscal year 1997.

     The Company used $3,273,273 in its investing  activities during fiscal year
1998 compared to $1,024,127 in fiscal year 1997. In fiscal year 1998, $2,250,000
of the investing  activities related to the purchase of restricted  certificates
of  deposit.  $2 million of that  amount was used to  collateralize  a letter of
credit in the same  amount  in favor of FINOVA  Capital  Corp.  ("FINOVA"  - see
below), its working capital lender. (FINOVA is not affiliated with the Company).
The other  $250,000 is  collateral  for a facility  for  letters of credit.  The
remaining  $1,023,273 of investing  activities  related to purchases of property
and  equipment,  largely  at four  new  stores  that  the  Company  opened.  The
$1,024,127 in investing  activities in fiscal 1997 related to the acquisition of
Toys, a Southern  California-based,  three store chain of  specialty  toy stores
located in high traffic shopping malls.
<PAGE>
     The Company generated  $6,033,273 from its financing activities in the year
ended March 31, 1998 compared to the  generation of  $3,285,410  from  financing
activities in the year ended March 31, 1997.  The largest  contributions  to the
Company's  financing  activities  in the 1998  fiscal  year were the  receipt of
$3,390,450  of  net  proceeds  from  the  sale  of  preferred  stock  through  a
combination  of public and private  offerings  and  $1,750,000  in proceeds from
notes  payable.  Proceeds  from  preferred  stock  sales was the single  largest
contributor to the Company's financing activities in fiscal 1997 as well.

     As a result of the above factors, the Company had a net increase in cash of
$471,264  in fiscal year 1998  compared to a net  decrease in cash of $14,679 in
fiscal year 1997.

     During  fiscal  1998,  the Company  opened three new stores in high traffic
shopping malls and one new store in a large strip mall in San Diego, California.
In addition,  it reformatted one existing store in the San Diego area. The three
new high traffic  shopping  mall 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.

     On December 29, 1997, the Company  completed a public  offering of Series E
Stock and  Redeemable  Series E Purchase  Warrants  ("Series E  Warrants").  The
offering was managed by West America Securities Corp and generated $3,150,000 in
gross proceeds. The net proceeds of the offering were $2,303,441 after discounts
and  commissions,  legal  expenses,  Blue Sky fees,  accounting  fees,  printing
expenses,  other  investment  banking fees,  and other  miscellaneous  costs and
expenses.

     During the year ended March 31, 1998,  the Company  closed,  and ultimately
vacated,  five  retail  locations  prior to the ends of their  respective  lease
terms.  As a result,  four of the five  landlords  filed  lawsuits  against  the
Company to collect unpaid rent as well as rental obligations remaining under the
terms of the  respective  leases.  Subsequent  thereto,  through  May 1998,  the
Company, with assistance of outside counsel,  reached settlement agreements with
the various landlords. These settlements aggregated $469,600.

     The  statement  of  operations  for the year ended March 31, 1998  includes
$583,541 of "litigation related expenses" which comprise the settlement costs on
the  aforementioned  leases,  legal fees  associated with the  negotiations  and
monthly rentals for the locations since vacating the premises.

     The Company  currently has one remaining  landlord/tenant  matter which has
yet to be resolved.  The Company's management expects this matter to be resolved
without further material effects on the financial statements.

     At March 31, 1998,  the Company had an inventory  financing  line of credit
with  FINOVA  in  connection  with  a  Loan  and  Security   Agreement  ("FINOVA
Agreement").  On February 3, 1998,  the Company  borrowed  $4,866,324  under the
FINOVA  Agreement,  the proceeds of which were used  primarily to repay the then
outstanding  borrowings under the financing  arrangement with Congress Financial
Corporation  (Western),  its previous  working capital  lender,  and to pay fees
related to the FINOVA  Agreement.  The FINOVA  Agreement  provides  for  maximum
borrowings up to $7,100,000  based on a percentage of the cost value of eligible
inventory,  as defined.  Outstanding  borrowings bear interest at 1.5% above the
prime rate,  as defined (the prime rate at March 31, 1998 was 8.5%).  The FINOVA
Agreement matures on July 21, 2000 and can be renewed for one additional year at
the lender's option.

     The FINOVA  Agreement is guaranteed by UTTC and is secured by substantially
all of the assets of the Company  and  $3,000,000  in letters of credit.  Of the
$3,000,000 in letters of credit, $2,000,000 is collateralized by amounts held in
a restricted  certificate of deposit.  The remaining $1,000,000 letter of credit
was provided by MMCI, an affiliate.
<PAGE>
     In April 1998, the Company relocated its store in the Century City Shopping
Center in west Los  Angeles  to a new,  larger  location  within  that same high
traffic shopping center.  This store was one of the three stores acquired in the
purchase of Toys in January 1997. The relocation  involved the renovation of the
new store space at an overall aggregate cost of approximately $251,000.

     The Company  plans to open six new stores in high traffic  malls by the end
of calendar 1998.  The Company plans to open these new stores in Nevada,  Texas,
Illinois, Michigan, and Southern California. The Company has entered into leases
for six of these  locations.  The costs  involved  in opening the six new stores
will require a significant  capital  expenditure,  estimated to be approximately
$1.5 million to $2.4 million.

     In order to raise  additional  capital to help finance  this planned  store
expansion, in May 1998, the Company began a private placement sale of units (the
"Private  Placement")  through  Morgan Grant  Capital  Group,  Inc. as placement
agent. This offering was terminated by the Company,  and no funds were generated
thereby.

     In addition  to the equity  that the Company  plans to raise in the Private
Placement,  other  potential  sources  of  capital  to help  finance  the  store
expansion  include a combination of landlord tenant  improvement  contributions,
borrowings  on its  credit  line,  and  borrowings  under  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  complete  the  Private
Placement  or obtain  sufficient  landlord  or lease  financing  to support  the
projected new store opening costs.

Year 2000

     An  additional  area that  represents  a near term  commitment  of  capital
resources  is the  Company's  management  information  system.  The  Company has
investigated its existing management  information system and has determined that
it does not provide  sufficient  scope to support the planned  level of expanded
operations  and,  furthermore,  is not  year  2000  compliant.  The  Company  is
exploring the cost of upgrading its current system or purchasing a new system to
meet the  projected  demands of the business and to become year 2000  compliant.
Based on  information  learned to date,  the Company  estimates that the cost of
upgrading its current  system will be on the order of $190,000 to $300,000.  The
Company does not have any  estimates yet as to the cost of replacing its current
system.

     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. Should the Company become aware
of any such situation, contingency plans will be developed.

Trends Affecting Liquidity, Capital Resources and Operations

     As a result of its planned  merchandise  mix change to emphasize  specialty
and educational toys, the Company enjoyed significant sales and gross profits in
fiscal 1998. Same can be attributed to the expansion of its collectible die cast
cars,  specialty  yo-yo's,  Rokenbok and Learning  Curve toys, and the continued
strength of Beanie  Babies(R)and  other plush and  educational  toys.  While the
Company  believes  these  particular  toys will remain popular with its customer
base for the  remainder of calendar  year 1998,  there can be no assurance  that
these  particular  specialty  toys will continue to  contribute  strongly to the
Company's  sales and gross  profits.  However,  the history of the toy  industry
indicates that there is generally at least one highly popular toy every year.

     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.
<PAGE>
     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 and Kay Bee Toy Stores.
Competitors that emphasize specialty and educational toys include Disney Stores,
Warner Bros.  Stores,  Learning  Smith,  Lake Shore,  Zainy  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.

Seasonality

     The Company's  operations are highly seasonal with approximately  30-40% of
its net sales falling within the Company's  third quarter,  which coincides with
the Christmas selling season.  The Company intends to open new 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.

Impact of Inflation

     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.

ITEM 7.           FINANCIAL STATEMENTS

     See attached Financial Statements.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
        AND FINANCIAL DISCLOSURE

     On February 20, 1997, the Company  engaged  Haskell & White LLP,  Certified
Public  Accountants,  as its new independent  accountants to audit the Company's
financial  statements for the year ending March 31, 1997, replacing BDO Seidman,
LLP as auditors of the  Company.  Prior to  engaging  Haskell & White LLP,  such
accounting firm was not consulted on any matters  relative to the application of
accounting  principles on specified  transactions  or in any matter that was the
subject of a disagreement between the Company and its former accountants. During
the past year,  Haskell & White LLP has provided services of a general financial
consulting nature to the Company and has performed agreed upon procedures in the
due diligence  process related to the January 1997  acquisition of substantially
all of the assets of Toys.

     In  December  1996,  Haskell  & White  LLP  was  engaged  by U.S.  Wireless
Corporation,  (formerly  known as American  Toys,  Inc.),  the Company's  former
parent company,  to re-audit the financial  statement of American Toys, Inc. for
the year ended March 31, 1996. In so doing,  Haskell & White LLP  re-audited the
financial  statements  of the  Company  for the year ended  March 31,  1996 and,
therefore, provided an audit report for the comparative financial statements for
the years ended March 31, 1997 and 1996.

     The change in accountants was not due to any discrepancies or disagreements
between the Company and BDO Seidman, LLP on any matter of accounting  principles
or practices,  financial statement  disclosure,  or auditing scope or procedure.
The former accountants'  reports on the Company's  financial  statements for the
years ended  March 31,  1995 and 1996 did not  contain  any adverse  opinions or
disclaimers of opinion;  nor were they qualified or modified as to  uncertainty,
audit scope, or accounting principles.




<PAGE>
                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Officers and Directors

     The following table sets forth the names, ages, and titles of all directors
and officers of the Company:

<TABLE>
<CAPTION>
Name                            Age                  Position

<S>                             <C>                  <C>
Harold Rashbaum                 72                   Chairman of the Board

Richard Brady                   46                   Chief Executive Officer, President, and Director

James Frakes                    41                   Chief Financial Officer, Secretary, and Director

Moses Mika                      78                   Director
</TABLE>


     All  directors   are  elected  at  an  annual   meeting  of  the  Company's
shareholders  and hold  office for a period of one year or until the next annual
meeting  of  stockholders  or  until  their  successors  are  duly  elected  and
qualified.  Vacancies on the Board of Directors  may be filled by the  remaining
directors.  Officers are appointed  annually by, and serve at the discretion of,
the Board of Directors.  There are no family relationships  between or among any
officers or directors of the Company,  except Mr. Rashbaum is the  father-in-law
of Ilan Arbel, Mr. Mika's son.

     As permitted  under the Delaware  General  Corporation  Law, the  Company's
Certificate of Incorporation  eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision,  stockholders may be
unable to  recover  damages  against  directors  for  actions  which  constitute
negligence or gross  negligence or are in violation of their  fiduciary  duties.
This  provision in the Company's  Certificate  of  Incorporation  may reduce the
likelihood of derivative,  and other types of  shareholder,  litigation  against
directors.

     Richard Brady is a co-founder of the Company and has acted as the Company's
Chief  Executive  Officer and President  since  December 1995. Mr. Brady was the
Executive Vice President, Secretary, and a Director from the Company's inception
in 1974 until  December  1996.  He was  re-elected  Director  of the  Company in
January 1998.  Mr. Brady has been the President of Toys since January 1997 and a
Director thereof since May 1998.

     Harold Rashbaum has been Chairman of the Board of Directors since September
10, 1996. Mr. Rashbaum was a management consultant to the Company from July 1995
to September 10, 1996.  In May 1998,  he was elected as a Director of Toys.  Mr.
Rashbaum has been the  President,  Chief  Executive  Officer,  and a Director of
Hollywood  Productions,  Inc.  ("Hollywood") since January 1997. Since September
1996, he has also been the President,  Secretary,  and sole Director of Breaking
Waves, Inc. (a wholly-owned  subsidiary of Hollywood).  From May 1996 to January
1997, Mr. Rashbaum  served as Secretary and Treasurer of Hollywood.  He has been
the  President  of Breaking  Waves,  Inc.,  a  subsidiary  of  Hollywood,  since
September  1996.  Since February 1996, Mr.  Rashbaum has also been the President
and a Director of H.B.R.  Consultant Sales Corp.  ("HBR"),  of which his wife is
the sole  stockholder.  Prior  thereto  from  February  1992 to June  1995,  Mr.
Rashbaum was a consultant to 47th Street Photo,  Inc., an electronics  retailer.
Mr.  Rashbaum held this position at the request of the  bankruptcy  court during
the time 47th  Street  Photo,  Inc.  was in Chapter  11.  From  January  1991 to
February 1992, Mr. Rashbaum was a consultant for National Wholesale Liquidators,
Inc., a major retailer of household goods and housewares.
<PAGE>
     James Frakes was  appointed  Chief  Financial  Officer and Secretary of the
Company in July  1997.  In August  1997,  he was  elected  as a Director  of the
Company. In January 1998, Mr. Frakes was appointed Secretary and Chief Financial
Officer of Toys.  He was elected as a Director  thereof in May 1998.  In January
1998, Mr. Frakes was elected as a Director of Hollywood. From June 1990 to March
1997,  Mr. Frakes was Chief  Financial  Officer of Urethane  Technologies,  Inc.
("UTI") and two of its  subsidiaries,  Polymer  Development  Laboratories,  Inc.
("PDL") and BMC Acquisition, Inc. These were specialty chemical companies, which
focused on the  polyurethane  segment of the plastics  industry.  Mr. Frakes was
also Vice  President  and a Director of UTI during this  period.  In March 1997,
three unsecured creditors of PDL filed a petition for the involuntary bankruptcy
of PDL.  This  matter is  pending  before the United  States  Bankruptcy  Court,
Central District of California.  From 1985 to 1990, Mr. Frakes was a manager for
Berkeley   International   Capital  Corporation,   an  investment  banking  firm
specializing in later stage venture capital and leveraged  buyout  transactions.
In  1980,  Mr.  Frakes  obtained  a  Masters  in  Business  Administration  from
University  of Southern  California.  He obtained his Bachelor of Arts degree in
history from Stanford University, from which he graduated with honors in 1978.

     Moses Mika was  appointed as a Director of the Company in March 1998 and as
a Director of Toys in May 1998. Mr. Mika has been retired since 1989.

Significant Employees of the Company

     John Hites has been the Vice President of Retail  Operations of the Company
(a non-executive  officer  position) since April 1998. Since 1974, Mr. Hites has
been actively involved in the retail sale of specialty toys and items. From 1976
through 1982, prior to the Company's acquisition of Toys, Mr. Hites was employed
by Toys.

     Howard Labow has been the Vice  President of  Advertising of the Company (a
non-executive  officer  position)  since June 1998.  He has been employed by the
Company since 1977.

     Donna Hogan has been the Vice President of  Merchandising of the Company (a
non-executive  officer position) since June 1998. She was initially  employed by
the Company from 1976 to 1980 and returned to the Company in 1983.

Compliance with Section 16(a) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the Company's  officers,  directors,  and persons who beneficially own more than
ten percent of a registered  class of the  Company's  equity  securities to file
reports  of  securities  ownership  and  changes  in  such  ownership  with  the
Securities and Exchange Commission  ("SEC").  Officers,  directors,  and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish  the Company  with  copies of all Section  16(a) forms they file.
Based solely upon requests for information of the Company's officers, directors,
and greater than 10%  shareholders,  during  fiscal  1997,  the Company has been
informed that all officers,  directors,  or greater than 10%  shareholders  have
stated  that they have filed such  reports as are  required  pursuant to Section
16(a) during the 1996 fiscal year, except that Mr. Brady and Mr. Rashbaum failed
to file Form 4's timely upon receipt of shares of Series E Stock and Mr.  Frakes
failed to file a Form 3 upon  becoming  an  officer  of the  Company or upon his
receipt of stock options. All required filings have since been made. The Company
has no basis to believe that any required  filing by any of the above  indicated
individuals has not been made.


<PAGE>
ITEM 10.          EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

     The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-B) compensation  awarded or paid
by the Company during the years ended March 31, 1998,  1997, and 1996 to each of
the named executive officers of the Company.
<TABLE>
<CAPTION>

                           Summary Compensation Table
                               Annual Compensation

(a)                                (b)     (c)              (d)            (e)         (f)
Name and Principal                                                         Options/    Other Annual
Position                            Year   Salary($)        Bonus($)(1)    SARs(shs)   Compensation($)
--------------------                ----   ---------        -----------    
<S>                                 <C>    <C>              <C>            <C>         <C>  
Richard Brady ...................   1998   120,000          -              25,000      8,579
Chief Executive Officer, ........   1997   108,000          -              --          6,179(3)
President, and Director .........   1996   117,230          -              --          7,979(3)
</TABLE>

     (1) No bonuses were paid during the periods herein stated.

     (2) Mr. Brady  received  25,000  shares of the Series E Stock as a bonus in
March 1998, which shares vest equally over a 12 month period commencing in April
1998.

     (3) Includes an automobile  allowance of $7,200 for 1998,  $4,800 for 1997,
and $6,600 for 1996 and the  payment of life  insurance  premiums  of $1,379 for
each of 1998, 1997, and 1996.

     During fiscal 1998, Harold Rashbaum,  the Company's  Chairman of the Board,
received  an  aggregate  of  $25,000  in   compensation   from  the  Company  in
consideration  of the consulting  services he provided  therefor.  Mr.  Rashbaum
received  approximately $1,944 per month for the first nine months of the fiscal
year, and  commencing in January 1998, his monthly  consulting fee was increased
to $2,500.  In March 1998,  the Company  issued 25,000 shares of Series E Stock,
subject to a vesting schedule, to Mr. Rashbaum:  these shares vest 100% on March
10, 1999. Mr. Rashbaum devotes a significant portion of his time to the Company:
among other  things,  he reviews  potential  store  sites,  assists in strategic
planning, reviews all cash outflows, and otherwise works closely with management
in further developing and implementing the Company's ongoing business strategy.

1994 Stock Option Plan

     In 1994,  the Company  adopted the  Company's  1994 Stock  Option Plan (the
"Plan").  The Board  believes  that the Plan is  desirable to attract and retain
executives  and other key  employees  of  outstanding  ability.  Under the Plan,
options to purchase an aggregate of not more than 50,000  shares of Common Stock
may be  granted  from  time  to  time  to key  employees,  officers,  directors,
advisors, and independent  consultants to the Company and its subsidiaries.  The
Company granted to James Frakes, Chief Financial Officer and Secretary, pursuant
to his hire,  options to purchase  30,000  shares of Common Stock at an exercise
price of $3.25 per share, vesting at the rate of 10,000 shares per annum in each
of July 1998,  1999,  and 2000.  On June 17, 1998 the Board elected to reset the
exercise price of the option to $1.15,  representing  approximately  110% of the
closing price of the Common Stock on said date.

     The Board of Directors is charged  with  administration  of the Plan and is
generally  empowered  to interpret  the Plan,  prescribe  rules and  regulations
relating thereto, determine the terms of the option agreements,  amend them with
the consent of the  Optionee,  determine the employees to whom options are to be
granted,  and  determine  the number of shares  subject  to each  option and the
exercise price thereof. The per share exercise price for incentive stock options
("ISOs")  will not be less than 100% of the fair market  value of a share of the
Common Stock on the date the option is granted (110% of fair market value on the
date of grant of an ISO if the  Optionee  owns more than 10% of the Common Stock
of the Company).
<PAGE>
     Options will be exercisable for a term (not less than one year)  determined
by the Board.  Options may be exercised  only while the  original  grantee has a
relationship  with the Company or at the sole  discretion  of the Board,  within
ninety  days  after  the  original  grantee's  termination.   In  the  event  of
termination  due to  retirement,  the  Optionee,  with the consent of the Board,
shall have the right to exercise  his option at any time  during the  thirty-six
month  period  following  such  retirement.  Options  may  be  exercised  up  to
thirty-six  months  after  the  death or total and  permanent  disability  of an
Optionee.  In the event of certain  basic  changes in the  Company,  including a
change in control of the Company as defined in the Plan,  in the  discretion  of
the Board,  each option may become fully and immediately  exercisable.  ISOs are
not transferable  other than by will or by the laws of descent and distribution.
Options may be exercised during the holder's  lifetime only by the holder or his
guardian or legal  representative.  Options granted  pursuant to the Plan may be
designated as ISOs with the attendant tax benefits provided therefor pursuant to
Sections 421 and 422A of the Internal  Revenue  Code of 1986.  Accordingly,  the
Plan provides that the aggregate  fair market value  (determined  at the time an
ISO is granted) of the Common Stock  subject to ISOs  exercisable  for the first
time by an employee during any calendar year (under all plans of the Company and
its subsidiaries)  may not exceed $100,000.  The Board may modify,  suspend,  or
terminate  the Plan,  provided,  however,  that certain  material  modifications
affecting the Plan must be approved by the  shareholders,  and any change in the
Plan that may adversely affect an Optionee's  rights under an option  previously
granted under the Plan requires the consent of the Optionee.

1994 401(k) Employee Stock Option Plan ("ESOP")

     In May 1994, the Company adopted corporate  resolutions  approving a 401(k)
Employee Stock Ownership Plan (the "ESOP Plan") which covers  substantially  all
employees  of the  Company.  The ESOP Plan was  filed on July 14,  1995 with the
Internal  Revenue  Service  and  includes  provisions  for both  employee  stock
ownership  and a 401(k)  Plan.  The ESOP Plan allows  contributions  only by the
Company:  these can be made annually at the discretion of the Company's Board of
Directors.  The ESOP Plan has been designed to invest primarily in the Company's
stock. The employees of the Company will contribute to the 401(k) portion of the
ESOP Plan  through  payroll  deductions.  The  Company  does not intend to match
contributions  to the  401(k).  Contributions  to the ESOP Plan may result in an
expense,  resulting  in a reduction in  earnings,  and may dilute the  ownership
interests of persons who currently own securities of the Company. On January 26,
1995, Messrs. Brady and Tom Davidson (a founder of the Company and the Company's
former  President)  and American Toys,  Inc.  contributed an aggregate of 13,333
shares of the Company's Common Stock to the ESOP.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  regarding  beneficial
ownership of the Company's  outstanding Common Stock as of June 24, 1998, by (i)
each beneficial owner of 5% or more of the Company's Common Stock;  (ii) each of
the Company's  executive  officers,  directors and key employees;  and (iii) all
executive officers, directors, and key employees as a group:
<PAGE>
<TABLE>
<CAPTION>
       Name and Address                           Number of Shares             Percent of Common Stock Beneficially Owned (2)(3)
       of Beneficial Owner                       Beneficially Owned (1)
      -------------------                        ------------------
---------------------------------------------------------------------------------------------------------------------------
Harold Rashbaum
<S>                                                                <C>                                <C>   
c/o Play Co. Toys & Entertainment Corp.                         -- (4)                                 --
550 Rancheros Drive
San Marcos, CA 92069
---------------------------------------------------------------------------------------------------------------------------
Richard Brady
c/o Play Co. Toys & Entertainment Corp.                       25,587 (4)                                *
550 Rancheros Drive
San Marcos, CA 92069
---------------------------------------------------------------------------------------------------------------------------
James Frakes
c/o Play Co. Toys & Entertainment Corp.
550 Rancheros Drive                                          10,000 (4a)                                *
San Marcos, CA 92069
---------------------------------------------------------------------------------------------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp.                           --                                   --
550 Rancheros Drive
San Marcos, CA 92069
---------------------------------------------------------------------------------------------------------------------------
United Textiles & Toys Corporation
1410 Broadway, Suite 1602                                2,489,910 (5)(5a)(6)                         60.1
New York, NY 10018
---------------------------------------------------------------------------------------------------------------------------
(table continued from previous page)

<PAGE>
          Name and Address                            Number of Shares             Percent of Common Stock Beneficially Owned (2)(3)
         Of Beneficial Owner                       Beneficially Owned (1)
                                                   ------------------
---------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts International, Inc.
1410 Broadway, Suite 1602                                     -- (5)(7)                              -- (7)
New York, NY 10018
---------------------------------------------------------------------------------------------------------------------------
Europe American Capital Foundation
Box 47                                                        -- (5)(8)                              -- (8)
Tortola, BVI
---------------------------------------------------------------------------------------------------------------------------
Vermongenstreuhand GMBH
Kiser Street, #14                                             -- (5)(9)                              -- (9)
Bregenz Austria
---------------------------------------------------------------------------------------------------------------------------
Volcano Trading Limited
Via Cantonale, #16                                            -- (5)(10)                             -- (10)
Lugano Switzerland
---------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a group
(5 persons)                                                        35,587 (3)                           *
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

*  Less than 1%

     (1) Unless otherwise noted, all of the shares shown are held by individuals
or entities  possessing  sole voting and  investment  power with respect to such
shares.  Shares not outstanding but deemed  beneficially  owned by virtue of the
right of an individual or entity to acquire them within 60 days,  whether by the
exercise of options or  warrants,  are deemed  outstanding  in  determining  the
number of shares beneficially owned by such person or entity.

     (2) The  "Percent of Common  Stock  Beneficially  Owned" is  calculated  by
dividing the "Number of Shares  Beneficially  Owned" by the sum of (i) the total
outstanding shares of Common Stock of the Company, and (ii) the number of shares
of Common  Stock that such  person or entity has the right to acquire  within 60
days,  whether by exercise of options or warrants.  The "Percent of Common Stock
Beneficially  Owned" does not reflect shares beneficially owned by virtue of the
right of any person,  other than the person named and affiliates of said person,
to acquire them within 60 days, whether by exercise of options or warrants.

     (3) Does not include  25,503,420  shares of Common Stock  issuable upon the
conversion  (any time two years from  issuance) of 4,200,570  shares of Series E
Stock outstanding.

     (4) Does not  include  150,000  shares of Common  Stock  issuable  upon the
conversion (any time two years from issuance) of 25,000 shares of Series E Stock
issued as a bonus in April 1998.

     (4a) Represents those shares  underlying an option which shall vest on July
1, 1998. An additional  10,000 shares  underlying such option shall vest on July
1, 1999, and the final 10,000 shares  underlying  such option shall vest on July
1, 2000.

     (5) Shares of Series E Stock  owned  hereby  (as well as any  Common  Stock
specifically  indicated  hereon) are  subject to a two-year  lock up on transfer
commencing  December  1997,  in accordance  with lock up agreements  executed in
connection with the Company's Series E Stock offering.

     (5a)  The  president  of  UTTC,  a  publicly  traded  company  which is the
Company's  controlling  shareholder,  is Ilan  Arbel who is also the  president,
chief executive officer, and a director of MMCI, a publicly traded company which
is the parent  company of UTTC  (owning  78.5% of same).  MMCI is owned 62.2% by
U.S. Stores Corp., a company of which Mr. Arbel is the president and a director.
U.S. Stores Corp. is owned 100% by American Telecom PLC, a British  corporation.
By virtue of its  ownership of UTTC,  MMCI may be deemed a beneficial  holder of
the Company's common stock held by UTTC.
<PAGE>
     (6) Does not include  1,350,000  shares of Common Stock  issuable  upon the
conversion of 225,000 shares of the Series E Stock.

     (7) Does not include  4,818,420  shares of Common Stock  issuable  upon the
conversion of 803,070 shares of the Series E Stock.

     (8) Does not include  7,035,000  shares of Common Stock  issuable  upon the
conversion of 1,172,500 shares of the Series E Stock.

     (9) Does not include  4,500,000  shares of Common Stock  issuable  upon the
conversion of 750,000 shares of the Series E Stock.

     (10)Does not include (i) 1,500,000 shares of Common Stock issuable upon the
conversion of 250,000 shares of the Series E Stock; or (ii) 2,088,000  shares of
Common Stock issuable upon conversion of the Series E Stock  underlying  348,000
Series E Warrants.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Related Transactions

     The  president of UTTC,  in a letter dated May 15, 1998,  has  represented,
generally,  his intent and ability to provide  working  capital to the  Company,
should same be necessary, through September 30, 1999.

     In March 1998, the Company issued 25,000 shares of Series E Stock,  subject
to one year  vesting  schedules,  to each of  Richard  Brady,  President  of the
Company,  and Harold Rashbaum,  Chairman of the Board of the Company, as bonuses
in  recognition  of their  efforts to further the  Company's  turnaround  toward
profitability.

     In  addition,  during  fiscal  1998,  the Company  remitted an aggregate of
$25,000 to Mr. Rashbaum in consideration of the consulting  services he provided
therefor.  Mr. Rashbaum  received  approximately  $1,944 per month for the first
nine months of the fiscal year,  and  commencing  in January  1998,  his monthly
consulting  fee was  increased to $2,500.  Mr.  Rashbaum  devotes a  significant
portion of his time to the Company.  Among other  things,  he reviews  potential
store  sites,  assists in strategic  planning,  reviews all cash  outflows,  and
otherwise works closely with management in further  developing and  implementing
the Company's ongoing business strategy.

     In January  1998, in accordance  with the FINOVA  financing  (FINOVA is not
affiliated with the Company), the Company received $3 million in standby letters
of credit:  $2 million of which was  established by the Company and secured by a
$2  million  certificate  of deposit  which was  acquired  with $1.5  million in
proceeds from a subordinated  debt arrangement and $500,000 from the proceeds of
the Company's  December 1997 public offering of Series E Stock and $1 million of
which was  provided by MMCI,  an affiliate of the Company by virtue of its 78.5%
ownership of UTTC, the Company's parent.

     From April 1996 to June 1997,  EACC,  an entity of which Ilan Arbel  and/or
his relatives is/are  officer(s) and/or  director(s),  exercised its options and
purchased an aggregate of 3,562,070 shares of the Series E Stock for $3,562,070.
An aggregate of 361,500 shares were  converted to Common Stock which,  inclusive
of the  250,000  shares of Series E Stock  issued in June 1997,  constituted  an
aggregate of 3,450,570 shares of Series E Stock  outstanding prior to the Series
E Stock public  offering in December  1997.  The proceeds of the funds  received
from this  investment  enabled  the Company (i) to acquire the assets of Toys (a
three store  chain) in January  1997,  (ii) to finance the openings of the Santa
Clarita,  Arizona Mills,  Redondo  Beach,  Ontario  Mills,  and Clairemont  Mesa
stores,  (iii)  to  redesign  four  store  locations,  and (iv) to  support  the
Company's operations during the Company's business turnaround.

     The Company  leases  40,000 square feet of combined  office  (approximately
3,000 square feet) and warehouse  (approximately 37,000 square feet) space at an
approximate annual cost of $247,000. The lease expires in April 2000. The office
and  warehouse  are leased from a  partnership  of which one of the  partners is
Richard Brady, the President and a Director of the Company. The Company believes
that  the  lease  is on  terms  no more or less  favorable  than  terms it might
otherwise have negotiated with an unaffiliated party.
<PAGE>
     In January 1997, the Company entered into a consulting agreement with Gayle
Hoepner,  a selling  stockholder and former chief executive officer of Toys. Mr.
Hoepner was not an affiliate of the Company. The term of the agreement commenced
on January 16,  1997,  expired on April 16, 1997,  and called for three  monthly
payments of $10,000 each.  Pursuant to the consulting  agreement,  Mr.  Hoepner,
among other things,  (i) advised the Company on specialty toys purchasing,  (ii)
introduced  management  to  his  contacts  in the  specialty  toy  industry  and
accompanied  management  to the  Nurnberg,  Germany toy show,  and (iii) advised
management on potential  store sites.  The Company  believes that this agreement
was on terms no less  favorable than terms it might  otherwise  have  negotiated
with any other unrelated third party.

     On January 30, 1996,  pursuant to the  requirements  of the Company's  loan
agreement with  Congress,  American  Toys,  Inc. (the  Company's  former parent)
converted all $1.4 million of debt owed by the Company into equity.  Congress is
not affiliated with the Company.  In exchange for the debt,  American Toys, Inc.
agreed to receive  from the Company  one share of Series D Preferred  Stock with
the right to elect 2/3 of the  Company's  Board of  Directors  upon  stockholder
approval.  In  August  1996,  the one  share of  Series D  Preferred  Stock  was
converted into 385,676 shares of the Company's Common Stock based on the initial
amount of the debt  divided  by the  average  price of the  shares  for a 90 day
period prior to the  conversion.  This was performed in order for American Toys,
Inc. to spin such shares off to its  stockholders and divest its interest in the
Company.

     See   "Executive   Compensation"   for  a  description   of  the  Company's
compensation of its officers and directors.

The Company's Parents

     At fiscal year end March 31, 1998,  approximately  60.1% of the outstanding
shares of the Company's common stock, par value $0.01 (the "Common Stock"), were
held by UTTC, the Company's parent corporation.  UTTC is a Delaware  corporation
and public company owned 78.5% by MMCI,  also a Delaware  corporation and public
company.  MMCI  is  owned  62.2%  by  U.S.  Stores  Corp.,  a  private  Delaware
corporation,  which is owned 100% by  American  Telecom  PLC,  a British  public
corporation.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) The following financial  statements of the Company are included as Part
II, Item 8:
<TABLE>
<CAPTION>

<S>                                                                                                         <C>
                  Table of Contents                                                                       F-1
                  Report of Independent Certified Public Accountants                                      F-2
                  Balance Sheets                                                                          F-3 to F-4
                  Statements of Operations                                                                F-5
                  Statements of Stockholders' Equity                                                      F-6
                  Statements of Cash Flows                                                                F-7 to F-8
                  Notes to Financial Statements                                                           F-9 to F-33
</TABLE>


     (b) During the last quarter, the Company filed one Form 8-K. In March 1998,
the Company filed a Form 8-K apprising of Mr. Sheikhar Boodram's  resignation as
a director of the Company.

     (c) All exhibits,  except (i) those  designated  with an asterisk (*) which
are filed herewith or (ii) those  designated  with a double  asterisk (**) which
shall be  filed  by  amendment  hereto,  have  previously  been  filed  with the
Commission either (i) in connection with the Company's Registration Statement on
Form SB-2,  dated November 2, 1994,  under file No.  33-81940-NY;  (ii) with the
Company's  Registration Statement on Form SB-2,  Registration No. 333-32051;  or
(iii) as indicated by the reference herein and pursuant to 17 C.F.R.  ss.230.411
are incorporated by reference herein.  Exhibits previously filed but not as part
of the SB-2 Registration  Statement are incorporated  herein by reference to the
appropriate document.
<TABLE>
<CAPTION>

<S>                  <C>    
  1.1                Form of Underwriting Agreement. See (ii) above.
  3.1                Certificate of Incorporation of the Company dated June 15, 1995. See (i) above.
  3.2                Amendment to Certificate of Incorporation of the Company, filed July 2, 1997. See (ii) above.
  3.2(a)             Amendment to Certificate of Incorporation of the Company, filed August 11, 1997. See (ii) above.
  3.2(b)             Amendment to Certificate of Incorporation of the Company filed May 29, 1998 (incorporated by reference herein 
                     to Appendix A of the Company's Information Statement filed with the Commission on May 12, 1998).
  3.3                By-Laws of the Company. See (i) above.
  4.1                Specimen Common Stock Certificate See (i) above.
  4.2                Specimen Warrant Certificate. See (ii) above.
  4.3                Specimen Series E Preferred Stock Certificate. See (ii) above.
  4.4                ESOP Plan. See (i) above.
  4.5                Form of Warrant Agreement between the Company, the Underwriter and Continental Stock Transfer & Trust Company. 
                     See (ii) above.
10.22                Lease Agreement for Store - Escondido. See (i) above.
10.23                Lease Agreement for Store - Convoy.  See (i) above.
10.26                Lease Agreement for Store - Chula Vista. See (i) above.
10.27                Lease Agreement for Store - El Cajon. See (i) above.
10.29                Lease Agreement for Store - Simi Valley. See (i) above.
10.30                Lease Agreement for Store - Encinitas. See (i) above.
10.31                Lease Agreement for Store - San Dimas. See (i) above.
10.33                Lease Agreement for Store - Rialto. See (i) above.
10.34                Lease Agreement for Store - Redlands. See (i) above.
10.35                Lease Agreement for Store - Rancho Cucamonga. See (i) above.
10.36                Lease Agreement for Store - Woodland Hills. See (i) above.
10.37                Lease Agreement for Warehouse - Executive Offices. See (i) above.
10.38                Lease Agreement for Store - Pasadena. See (i) above.
10.38(a)             Lease Agreement for Store - Whittier. See (i) above.
10.41                The Company Incentive Stock Option. Plan See (i) above.
10.44                Lease Agreement for Store - Corona Plaza. See (i) above.
10.50                Extension of Warehouse Lease. See (i) above.
10.65                Direct delivery Purchase Agreement between the Company and Camp Pendleton See (i) above.
10.66                Direct delivery Purchase Agreement between the Company and MCRD, San Diego See (i) above.
10.75                Asset Purchase Agreement for the purchase of Toys International  (incorporated by reference herein to exhibit 
                     10.75 of  the Company's 10-QSB for the period ended  December 31, 1996 filed with the Commission).
10.76                Lease Agreement for Store - Riverside International (incorporated by reference herein to exhibit 10.76 of  the 
                     Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.77                Lease Agreement for Store - Santa Clarita International (incorporated by reference herein to exhibit 10.77 of 
                     the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.78                Lease Agreement for Store - South Coast Plaza International (incorporated  by reference herein to exhibit 
                     10.78 of the Company's 10-KSB for the year ended March 31,1997, filed with the Commission).
10.79                Lease Agreement for Store - Century City International (incorporated by reference herein to exhibit 10.79 of 
                     the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.80                Lease Agreement for Store - Crystal Court International (incorporated by reference herein to exhibit 10.80 of 
                     the Company's 10-KSB for the year ended March 31, 1997, filed with the Commission).
10.81                Lease Agreement for Store - Orange County (incorporated by reference herein to exhibit (i) of the Company's 
                     10-QSB/A-1 for the period ended September 30, 1995 filed with the Commission).
10.82                Loan and Security Agreement with by and between Congress Financial Corporation (Western) as Lender and Play 
                     Co. Toys as Borrower dated February 1, 1996 (incorporated by reference herein to exhibit (i) of the Company's 
                     10-QSB for the period ended December 31, 1995).
10.82(a)             Amendment No. 4 to Loan and Security Agreement with Congress. See (ii) above.
10.83                Stock Purchase Option Agreement with Europe American Capital Corporation for Series E Preferred Stock 
                     (incorporated by reference herein to exhibit (ii) of the Company's 10-QSB for the period ended December 31,  
                     1995).
10.84                Stock Purchase Option Agreement with Europe American Capital Corporation for Common Stock (incorporated by 
                     reference herein to exhibit (iii) of the Company's 10-QSB for the period ended December 31, 1995).
10.85                Lease Agreement for Store - Mission Viejo (incorporated by reference herein to exhibit (iv) of the Company's 
                     10-QSB for the period ended December 31, 1995).
10.86                Subscription Agreement between the Company and Volcano Trading Limited dated June 30, 1997. See (ii) above.
10.87                Lease Agreement for Store - Clairemont (incorporated by reference herein to exhibit 10.87 of the Company's 
                     10-QSB/A-1 for the period ended September 30, 1997).
10.88                Lease Agreement for Store - Redondo Beach (incorporated by reference herein to exhibit 10.88 of the Company's 
                     10-QSB/A-1 for the period ended September 30, 1997).
10.89                Lease Agreement for Store - Arizona Mills (incorporated by reference herein to exhibit 10.89 of the Company's 
                     10-QSB/A-1 for the period ended September 30, 1997).
10.90                FINOVA Loan and Security Agreement (incorporated by reference herein to exhibit 10.90 of the Company's 10-QSB 
                     for the period ended December 31, 1997)
10.91                Schedule to Loan and Security Agreement (incorporated by reference herein to exhibit 10.91 of the Company's 
                     10-QSB for the period ended Dec. 31, 1997).
10.92                Lease Agreement for Store - City Mills (incorporated by reference herein to exhibit 10.92 of the Company's 
                     10-KSB for the fiscal year ended March 31, 1998).
10.93                Lease Agreement for Store - Las Vegas (incorporated by reference herein to exhibit 10.93 of the Company's 
                     10-KSB for the fiscal year ended March 31, 1998).
10.93(a)**           Agreements with Pacifica Capital
10.93(b)*            Letter from Ilan Arbel, dated May 15, 1998, re: funding of Company's operations
27.01*               Financial Data Schedule

</TABLE>
<PAGE>
                                   SIGNATURES


     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
has duly  caused  this  report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized, this 31st day of March 1999.

                                    PLAY CO. TOYS & ENTERTAINMENT CORP.


                                    By:     /s/ Richard Brady___________ 
                                            Richard Brady, Chief Executive
                                            Officer and President


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>

<S>                                                  <C>                                                  <C>
/s/ Harold Rashbaum                                  Chairman of the                                      3/31/99
Harold Rashbaum                                      Board of Directors                                   Date


/s/ Richard Brady                                    Chief Executive Officer,                             3/31/99
Richard Brady                                        President, and Director                                       Date


/s/ James Frakes                                     Chief Financial Officer,                             3/31/99
James Frakes                                         Secretary, and Director                              Date


/s/ Moses Mika                                       Director                                             3/31/99
Moses Mika                                                                                                Date

</TABLE>



<PAGE>
                                TABLE OF CONTENTS

                             March 31, 1998 and 1997
<TABLE>
<CAPTION>

                                                                            Page

<S>                                                                            <C>
Report of Independent Certified Public Accountants .......................   F-2

     Financial Statements:

     Balance Sheets ......................................................   F-3

     Statements of Operations ............................................   F-5

     Statements of Stockholders' (Deficit) Equity ........................   F-6

     Statements of Cash Flows ............................................   F-7

Notes to Financial Statements ............................................   F-9


</TABLE>


<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors
Play Co. Toys & Entertainment Corp.

     We  have  audited  the  accompanying  balance  sheets  of Play  Co.  Toys &
Entertainment  Corp. (a subsidiary of United  Textiles & Toys Corp.) as of March
31,  1998 and 1997  and the  related  statements  of  operations,  stockholders'
equity,  and cash flows for each of the two years in the period  ended March 31,
1998  and  1997.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 14, the Company has  restated  its  previously  issued
1998 and 1997 financial statements.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the  financial  position  of  Play  Co.  Toys  &
Entertainment  Corp.  at  March  31,  1998  and  1997,  and the  results  of its
operations  and its cash  flows  for each of the two years in the  period  ended
March  31,  1998 and  1997 in  conformity  with  generally  accepted  accounting
principles.



                                                             HASKELL & WHITE LLP


     Newport Beach,  California May 15, 1998,  except for Note 14 which is as of
February 3, 1999


                                       F-2


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)



                                 Balance Sheets


                                 ASSETS (Note 4)
<TABLE>
<CAPTION>

                                                                   March 31,             
                                                             1998           1997      
Current
<S>                                                      <C>           <C>        
     Cash ............................................   $   648,986   $   177,722
     Restricted certificate of deposit (Notes 2 and 4)       250,000          --
     Accounts receivable .............................        78,594        60,206
     Merchandise inventories .........................     7,872,804     6,092,930
     Other current assets ............................       183,928       247,313
                                                         -----------   -----------

                  Total current assets ...............     9,034,312     6,578,171

Property and equipment, net of accumulated
     depreciation and amortization of $3,414,235
     and $2,828,913, respectively (Note 3) ...........     2,782,386     2,475,650

Restricted certificate of deposit (Notes 2 and 4) ....     2,000,000          --

Deposits and other assets (Note 4) ...................       323,189       324,797
                                                         -----------   -----------

                                                         $14,139,887   $ 9,378,618
                                                         ===========   ===========


</TABLE>
                 See accompanying notes to financial statements.

                                       F-3


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)



                                 Balance Sheets
                              (Restated - Note 14)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                                                             March 31,             
                                                                                     1998                1997      
Current
<S>                                                  <C>           <C>        
     Bank overdraft ..............................   $      --     $   135,325
     Borrowings under financing agreement (Note 4)          --       4,438,875
     Accounts payable ............................     3,505,230     3,123,851
     Accrued expenses and other liabilities ......       726,601       308,940
     Current portion of notes payable (Note 6) ...       350,000       141,666
                                                     -----------   -----------

                  Total current liabilities ......     4,581,831     8,148,657

Borrowings under financing agreement (Note 4) ....     5,445,198          --

Notes payable, net of current portion (Note 6) ...     1,500,000       100,000

Deferred rent liability (Note 9) .................       110,351       126,925
                                                     -----------   -----------

                  Total liabilities ..............    11,637,380     8,375,582
                                                     -----------   -----------

Commitments and contingencies 
 (Notes 2, 4, 7, 9, 10 and 13)

Stockholders' (deficit) equity (Notes 11 and 13)
     Series E  convertible  preferred  stock,  
     $1 par value,  10,000,000  shares authorized;  
     4,200,570 and 2,500,570  shares  outstanding,  
     respectively, full liquidation  value of 
     $4,200,570 and $2,500,570,  net of unamortized
     discount of $1,916,644 and $0 for beneficial 
     conversion feature (Note 14)                      3,974,376     2,500,570

     Common stock, $.01 par value, 40,000,000 shares 
     authorized; 4,103,519 and 4,083,519 shares 
     outstanding, respectively                            41,035        40,835
Additional paid-in capital ............               12,927,918     9,374,177
Accumulated deficit ...................              (14,440,822)  (10,912,546)
                                                     -----------    -----------

             Total stockholders' equity                2,502,507     1,003,036
                                                     -----------    -----------

                                                 $    14,139,887    $9,378,618
                                                 ===============    ===========
</TABLE>
                 See accompanying notes to financial statements.

                                       F-4


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)



                            Statements of Operations
                              (Restated - Note 14)

<TABLE>
<CAPTION>

                                                                   Years Ended March 31,      
                                                                1998                1997      

<S>                                                         <C>             <C>         
Net sales ...............................................   $ 22,568,527    $ 19,624,276

Cost of sales ...........................................     13,689,599      13,669,104
                                                            ------------    ------------

                  Gross profit ..........................      8,878,928       5,955,172
                                                            ------------    ------------

Operating expenses
     Operating expenses (Notes 9 and 10) ................      8,864,607       8,382,555
     Litigation related expenses (Note 7) ...............        583,541            --
     Depreciation and amortization ......................        671,282         407,015
                                                            ------------    ------------

                  Total operating expenses ..............     10,119,430       8,789,570
                                                            ------------    ------------

Operating income (loss) .................................     (1,240,502)     (2,834,398)
                                                            ------------    ------------

Interest expense (Note 4)
     Interest and finance charges .......................        525,323         443,872
     Amortization of debt issuance costs ................        288,645         306,611
                                                            ------------    ------------

                  Total interest expense ................        813,968         750,483
                                                            ------------    ------------

Net income (loss) .......................................   $ (2,054,470)   $ (3,584,881)
                                                            ============    ============

Calculation of Basic and Diluted Income (Loss) Per Share:

     Net income (loss) ..................................   $ (2,054,470)   $ (3,584,881)

     Effects of non-cash dividends on convertible
     preferred stock (Note 14) ..........................     (1,473,806)     (2,889,615)
                                                            ------------    ------------

     Net income (loss) applicable to common shares ......   $ (3,528,276)   $ (6,474,496)
                                                            ============    ============

     Basic and diluted income (loss) per common share and
     share equivalents ..................................   $       (.86)   $      (2.32)
                                                            ============    ============

     Weighted average number of common shares and
     share equivalents outstanding ......................      4,098,971       2,791,876
                                                            ============    ============
</TABLE>



                 See accompanying notes to financial statements.

                                       F-5


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                  Statements of Stockholders' (Deficit) Equity
                       Years Ended March 31, 1998 and 1997
                              (Restated - Note 14)
<TABLE>
<CAPTION>                
                                                                  Redeemable 
                                                   Additional   Preferred Stock         Preferred Stock   
                               Common Stock        Paid-in         Series B        Series D           Series E       Accumulated
                               Shares    Amount    Capital      Shares  Amount   Shares Amount      Shares   Amount    Deficit    
<S>                            <C>       <C>       <C>          <C>     <C>      <C> <C>          <C>        <C>     <C>
Balance, April 1, 1996 ........1,287,843 $12,878   $  4,779,520  81,579 $ 87,680  1  $1,399,044   --         $  --   $   (4,465,595)

Redemption of preferred stock .     --      --             --   (81,579) (81,579) --   --         --            --         --
Payment of accrued dividends ..     --      --             --      --     (6,101) --   --         --            --         --
Conversion of debt due to 
   affiliate and related 
   accrued interest to Series
   E preferred stock ..........     --      --          528,070    --       --    --   --         528,070       --         --
Issuance of Series E preferred
   stock for cash .............     --      --        2,334,000    --       --    --   --       2,334,000       --         --
Conversion of Series E preferred
   stock to common ............2,410,000  24,100        337,400    --       --    --   --        (361,500)     (361,500)   --
Conversion of Series D preferred
   stock to common ............  385,676   3,857      1,395,187    --       --    (1)(1,399,044)   --           --         --
Non-cash dividend to amortize
   discount on Series E .......     --      --             --      --       --    --   --          --         2,862,070  (2,862,070)
Net loss for the year .........     --      --             --      --       --    --   --          --           --       (3,584,881)
------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ -------------

Balance, March 31, 1997 .......4,083,519   40,835      9,374,177   --       --    --   --       2,500,570     2,500,570 (10,912,546)

Issuance of common stock 
   for cash ...................   20,000      200            300   --       --    --   --          --           --          --
Issuance of Series E 
 preferred stock for cash .....     --       --        1,200,000   --       --    --   --         950,000       --          --
Issuance of Series E warrants 
   for cash                         --       --           50,000   --       --    --   --          --           --          --
Issuance of Series E preferred
   stock and warrants for cash,
   net of offering expenses ...     --       --        2,303,441   --       --    --   --          750,000      --          --
Non-cash dividend to amortize
   discount on Series E .......     --       --             --     --       --    --   --          --         1,473,806  (1,473,806)
Net loss for the year .........     --       --             --     --       --    --   --          --           --       (2,054,470)
                               --------- ----------- ----------- ------   -----  ----  -----      --------- ----------  ------------
Balance, March 31, 1998 .......4,103,519  $41,035    $12,927,918   --     $ --    --   $--        4,200,570 $3,974,376 $(14,440,822)
                               ========= =========== =========== ======   =====  ====  =====      ========= ==========  ============

</TABLE>

                 See accompanying notes to financial statements.

                                       F-6


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)


                       Statements of Cash Flows (Note 12)

<TABLE>
<CAPTION>


                                                          Years Ended March 31,       
                                                         1998           1997      

Cash flows from operating activities:

<S>                                                    <C>            <C>         
     Net loss ......................................   $(2,054,470)   $(3,584,881)
     Adjustments to reconcile net loss to net cash
       used for operating activities:
         Depreciation and amortization .............       671,282        407,015
         Loss on abandonment of assets .............        45,255           --
         Amortization of debt issuance costs .......       196,849        214,743
         Deferred rent .............................       (16,574)       (71,012)
     Increase (decrease) from changes in:
         Accounts receivable .......................       (18,388)       (24,933)
         Merchandise inventories ...................    (1,779,874)       431,154
         Other current assets ......................        63,385        (13,912)
         Deposits and other assets .................      (195,241)        94,867
         Accounts payable ..........................       381,379        245,668
         Accrued expenses and other liabilities ....       417,661         25,329
                                                       -----------    -----------

                  Cash used for operating activities    (2,288,736)    (2,275,962)
                                                       -----------    -----------

Cash flows from investing activities:

     Purchase of restricted certificates of deposit     (2,250,000)          --
     Purchases of property and equipment ...........    (1,023,273)    (1,024,127)
                                                       -----------    -----------

                  Cash used for investing activities    (3,273,273)    (1,024,127)
                                                       -----------    -----------

</TABLE>


                 See accompanying notes to financial statements.

                                       F-7


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)



                       Statements of Cash Flows (Note 12)


<TABLE>
<CAPTION>
                                                             Years Ended March 31,       
                                                            1998                1997      

Cash flows from financing activities:

<S>                                                       <C>             <C>         
     Change in bank overdraft .........................   $   (135,325)   $     26,574
     Borrowings under financing agreements ............     33,560,443      22,404,385
     Repayments under financing agreements ............    (32,554,120)    (21,368,535)
     Proceeds from notes payable ......................      1,750,000            --
     Repayment of notes payable .......................       (141,666)        (23,334)
     Proceeds from issuance of common stock ...........            500            --
     Proceeds from issuance of preferred stock ........      3,390,450       2,334,000
     Proceeds from issuance of preferred stock warrants        162,991            --
     Redemption of preferred stock ....................           --           (81,579)
     Payment of dividends on preferred stock ..........           --            (6,101)
                                                          ------------    ------------

                  Cash provided by financing activities      6,033,273       3,285,410
                                                          ------------    ------------

Net increase (decrease) in cash .......................        471,264         (14,679)

Cash, beginning of year ...............................        177,722         192,401
                                                          ------------    ------------

Cash, end of year .....................................   $    648,986    $    177,722
                                                          ============    ============


</TABLE>

                 See accompanying notes to financial statements.

                                       F-8



<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




1.       Summary of Accounting Policies

         Business Organization and Revenue Recognition

     Play  Co.  Toys  &  Entertainment  Corp.  (the  "Company")  is  a  Delaware
corporation  that  owns and  operates  retail  stores  which  sell  educational,
specialty,  collectible,  and  traditional  toys.  The Company had nineteen (19)
retail stores located within southern  California and Arizona at March 31, 1998.
The Company's retail stores,  which are located in high-traffic  malls and strip
centers, operate under the names "Play Co. Toys," "Toys International," and "Toy
Co."

     In August 1996, the Company  became a subsidiary of United  Textiles & Toys
Corp. ("United Textiles"),  formerly known as Mister Jay Fashions  International
(Note 11). As of March 31, 1998 United Textiles owns approximately  60.1% of the
outstanding shares of the Company's common stock.

     Revenues are  recognized  at the point of sale for retail  locations and at
the shipping date for wholesale  operations.  Wholesale  operations  represent a
minor portion of the Company's operations.

     Nature of Relationships with Affiliates

     As described in the footnotes  following,  the Company obtains a portion of
the financing from and engages in transactions with affiliated  entities.  These
entities and the nature of the affiliations are as follows:

<TABLE>
<CAPTION>
         <S>                                         <C>
         Name of Entity                              Nature of Affiliation

         United Textiles                             A majority stockholder of the Company and 
                                                     the company which effectively controls the 
                                                     Company. The president and a director of 
                                                     United Textiles is Ilan Arbel.

         Multimedia Concepts                         Majority stockholder of United Textiles.
         International, Inc. ("MMCI")                The president and a director of MMCI is 
                                                     Ilan Arbel.

         Europe American Capital Corp.               Entity of which Ilan Arbel and/or his relatives 
                                                     is/are officer(s) and/or director(s).
</TABLE>
     1. Summary of Accounting Policies (continued)

     Nature of Relationships with Affiliates (continued)
<TABLE>
<CAPTION>

         <S>                                         <C>
         Name of Entity                              Nature of Affiliation

         ABC Fund, Ltd.                              Entity of which Ilan Arbel and/or his relatives 
                                                     is/are officer(s) and/or director(s).

         Breaking Waves, Inc.                        Entity of which Ilan Arbel's relative is an officer 
                                                     and director and chairman of the board of the Company.
</TABLE>

         Merchandise Inventories

     Merchandise  inventories  are  stated  at  the  lower  of  cost  (first-in,
first-out method - "FIFO") or market.

     Concentration of Credit Risk

     The Company maintains cash balances at two banks. Accounts at each bank are
insured  by  the  Federal  Deposit  Insurance  Corporation  up  to  $100,000  in
aggregate. Uninsured balances are approximately $2,698,986 and zero at March 31,
1998 and 1997, respectively.

     Property and Equipment

     Property and equipment is recorded at cost.  Depreciation  and amortization
are provided using the straight-line method over the estimated useful lives (3 -
15 years) of the related assets.  Leasehold  improvements are amortized over the
lesser  of  the  related  lease  terms  or the  estimated  useful  lives  of the
improvements. Maintenance and repairs are charged to operations as incurred.


                                       F-9


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




     1. Summary of Accounting Policies (continued)

     Store Opening and Closing Costs

     Costs incurred to open a new retail location such as advertising,  training
expenses  and  salaries  of newly  hired  employees  are  generally  expensed as
incurred and improvements to leased facilities are capitalized. Upon permanently
closing a retail location,  the costs to relocate fixtures,  terminate employees
and other related costs are expensed as incurred.  In addition,  the unamortized
balance of any abandoned leasehold improvements are expensed.

     Income Taxes

     The Company uses the  liability  method of  accounting  for income taxes in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 109,
Accounting for Income Taxes.  Deferred income taxes are recognized  based on the
differences  between  financial  statement  and  income  tax bases of assets and
liabilities  using enacted rates in effect for the year in which the differences
are expected to reverse.  Valuation allowances are established,  when necessary,
to reduce the  deferred tax assets to the amount  expected to be  realized.  The
provision  for income  taxes  represents  the tax payable for the period and the
change during the period in deferred tax assets and  liabilities,  including the
effect of change in the valuation allowance, if any.

     Net Loss Per Share

     During the three-month  period ended December 31, 1997, the Company adopted
the  provisions  of SFAS  No.  128,  Earnings  Per  Share,  which  requires  the
disclosure of "basic" and "diluted"  earnings  (loss) per share.  Basic earnings
(loss) per share is computed by dividing net income (loss),  after reduction for
preferred stock dividends and the accretion of any redeemable  preferred  stock,
by the weighted average number of common shares  outstanding during each period.
Diluted  earnings (loss) per share is similar to basic earnings (loss) per share
except  that the  weighted  average  number  of  common  shares  outstanding  is
increased to reflect the dilutive  effect of potential  common  shares,  such as
those  issuable  upon the  exercise of stock or warrants and the  conversion  of
preferred stock, as if they had been issued.

     Dividends  accrued and accretion  recorded on the former Series B preferred
stock aggregated $27,545 for the year ended March 31, 1997. No such transactions
occurred during the year ended March 31, 1998. 1. Summary of Accounting Policies
(continued)

     Net Loss Per Share (continued)

     Non-cash  dividends recorded to amortize the discount on Series E Preferred
Stock totaled  $1,473,806  and $2,862,070 for the years ended March 31, 1998 and
1997 (Note 14).

     The  financial  statements  for the year  ended  March  31,  1997 have been
restated to reflect the effects of adopting SFAS No. 128.  However,  for both of
the years ended March 31, 1998 and 1997,  there is no  difference  between basic
and  diluted  loss per  common  share as the  effects of the  exercise  of stock
options or warrants and conversion of preferred  stock are  anti-dilutive  given
the net loss recorded for both years.

     As of March 31, 1998 and 1997,  potentially dilutive securities outstanding
which were not  included  in the  calculation  of basic and diluted net loss per
common share consist of the following: Potential Common Shares March 31
<TABLE>
<CAPTION>

                                                          1998                  1997
                                                          ----                  ----
Common shares issuable upon:
<S>                                                     <C>                   <C>       
Conversion  of  Series  E  Preferred  Stock;   
4,200,570  and  2,500,570  shares outstanding,  
respectively,  each  convertible  into six 
shares of common stock, subject to holding periods      25,203,420            15,003,420

Exercise of  2,000,000  outstanding  warrants to 
purchase  2,000,000  shares of convertible  
Series E Preferred  Stock,  each share of 
Series E then convertible into six shares of 
common stock                                            12,000,000                 --

Exercise of employee stock options                          30,000                 3,334

Exercise of options  available to EACC to acquire  
2,862,070  shares of Series E Preferred  Stock,  
each  share of Series E then  convertible  into 
six shares of common stock. The option terminated 
in December 1997.                                              --             102,827,580
                                                        37,233,420            117,834,334
                                                        ===========           ===========
</TABLE>


     Common share and per share amounts have been retroactively adjusted for the
one-for-three reverse stock split which was effective in July 1997.

     1. Summary of Accounting Policies (continued)

     Statements of Cash Flows

     For purpose of the  statements  of cash flows,  the Company  considers  all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.

     Fair Value of Financial Instruments

     The carrying amount of the Company's financial  instruments,  consisting of
accounts receivable,  accounts payable, and borrowings,  approximates their fair
value.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual amounts could differ from those estimates.

     Impairment of Long-Lived Assets

     SFAS No.  121,  Accounting  for the  Impairment  of  Long-Lived  Assets and
Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain
identifiable  intangibles  to be held  and used by an  entity  be  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be  recoverable.  For purposes of evaluating
potential  impairment,  the Company's  assets are grouped by physical  location,
namely the corporate  office/warehouse  and  individual  retail  locations.  The
Company  adopted SFAS 121 effective  April 1, 1997.  There was no impact of such
adoption on the Company's financial  condition and results of operations.  Since
adopting SFAS 121 in April 1997,  the Company gives  consideration  to events or
changes  in  circumstances  for  each of its  locations  and has not  identified
circumstances  other  than the  closure of retail  locations  (see Note 7) which
results in the write-off of unamortized  balances of tenant improvements for the
year ended March 31, 1998.  The expense  related to the write-off of such assets
was immaterial.



     1. Summary of Accounting Policies (continued)

     Stock-Based Compensation

     SFAS  No.  123,  Accounting  for  Stock-Based   Compensation,   established
financial   accounting  and  reporting   standards  for   stock-based   employee
compensation  plans and certain  other  transactions  involving  the issuance of
stock.  The  Company  adopted  the  disclosure  requirements  of  SFAS  123  for
stock-based employee compensation  effective April 1, 1996. However, the Company
continues to use the intrinsic value method for recording  compensation expenses
as prescribed by APB Opinion No. 25,  Accounting  for Stock Issued to Employees.
The fair value method  prescribed by SFAS No. 123 is used to record  stock-based
compensation to non-employees.

     Effect of New Accounting Pronouncements

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement  establishes standards for reporting and display of comprehensive
income and its components (revenues,  expenses, gains and losses) in an entity's
financial  statements.  This  statement  requires an entity to classify items of
other comprehensive  income by their nature in a financial statement and display
the accumulated balance of other  comprehensive  income separately from retained
earnings and  additional  pai in-capital in the equity section of a statement of
financial  position.  This pronouncement is effective for fiscal years beginning
after December 15, 1997 and the Company  expects to adopt the provisions of this
statement in the fiscal year ending March 31, 1999.  Management  does not expect
this statement to significantly impact the Company's financial statements.

     In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related  Information.  This statement requires public enterprises
to report financial and descriptive  information about its reportable  operating
segments and  establishes  standards for related  disclosures  about product and
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years  beginning  after December 15, 1997 and the Company  expects to
adopt the provisions of this statement in the fiscal year 1999.  Management does
not expect  this  statement  to  significantly  impact the  Company's  financial
statements.


     1. Summary of Accounting Policies (continued)

     In April 1998, the AICPA's Accounting  Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP, which is effective for fiscal years  beginning  after December 15, 1998
with earlier application  encouraged,  requires entities to expense start-up and
organization  costs for establishing new operations.  Management does not expect
this statement to significantly impact the Company's financial statements.

     Reclassification of Prior Year Amounts

     To enhance comparability,  certain  reclassifications have been made to the
1997  financial  statements,  where  appropriate,  to conform with the financial
statement presentation used in 1998.

     2. Restricted Certificates of Deposit

     At March 31, 1998,  the Company has two  certificates  of deposit which are
restricted as to their nature. The first, in the amount of $2,000,000 represents
collateral  against a letter of credit  securing the FINOVA  Financing (Note 4),
and is classified as a non-current  asset since the funds in the  certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA  Capital  Corporation.  The  second,  in the  amount of  $250,000,  is
collateral for a facility for letters of credit.

     3. Property and Equipment

     Property and equipment consisted of the following:


                                        1998                1997

Furniture, fixtures and equipment       $4,222,586     $3,699,371           
                    
         Leasehold improvements          1,551,760      1,220,246          
         Signs                             317,363        280,034
         Vehicles                          104,912        104,912  
                                         ---------      ---------   
                                         6,196,621      5,304,563              
         Accumulated depreciation 
          and amortization              (3,414,235)    (2,828,913)
      
                                        $2,782,386     $2,475,650
4.       Financing Agreements 
       
     On February 7, 1996, the Company borrowed, under an agreement with Congress
Financial  Corporation  (Western)  (the  "Congress  Financing"),   approximately
$2,243,000,  the  proceeds  of which  were  used to repay  the then  outstanding
borrowings  under a bank  line  of  credit  agreement.  The  Congress  Financing
provided for maximum  borrowings up to $7,000,000 based upon a percentage of the
cost value of  eligible  inventory,  as  defined.  Outstanding  borrowings  bore
interest at 1.5% above the prime rate, as defined.

     In connection  with the Congress  Financing,  and the previous bank line of
credit agreement, Europe American Capital Corp. ("EACC"), an affiliate (Note 1),
provided a $2,000,000 letter of credit for collateral.  As compensation to EACC,
the Company granted EACC options to acquire shares of common stock, the value of
such  options  estimated  at  $224,000  by the  Company;  and options to acquire
additional  shares of common stock and shares of Series E Preferred  Stock,  the
value of these  options  estimated  at $234,000 by the  Company.  The  aggregate
$458,000 was initially  included in other assets,  as debt issuance  costs,  and
additional  paid-in  capital.  The option  values were  amortized  into interest
expense  through  the  February  1, 1998  maturity  of the  Congress  Financing,
resulting in aggregate  interest  charges of $196,849 and $214,743 for the years
ended March 31,  1998 and 1997,  respectively.  No options to acquire  shares of
common stock were exercised before the termination of the exercise period.

     EACC  exercised  a portion of its  options  to  acquire  shares of Series E
Preferred Stock in various increments as described in Note 11. EACC's option was
terminated in December 1997, upon  consummation of the Company's public offering
of Series E Preferred Stock (Note 11).

     In March 1997,  the Congress  Financing  was amended to provide for,  among
other things,  increased borrowing ratios and an additional $1,000,000 letter of
credit  as  collateral  from  EACC.  Thereafter,   the  Congress  Financing  was
collateralized  by an  aggregate  $3,000,000  in letters of credit  through  its
maturity on February 1, 1998.


                                      F-10


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




4.       Financing Agreements (continued)

     On February 3, 1998, the Company  borrowed,  under an agreement with FINOVA
Capital Corporation (the "FINOVA Financing"),  $4,866,324, the proceeds of which
were used primarily to repay the then outstanding  borrowings under the Congress
Financing, and to pay fees related to the FINOVA Financing. The FINOVA Financing
provides for maximum  borrowings up to  $7,100,000  based on a percentage of the
cost value of  eligible  inventory,  as  defined.  Outstanding  borrowings  bear
interest at 1.5% above prime rate,  as defined (the prime rate at March 31, 1998
was 8.5%).  The  agreement  matures on August 3, 2000 and can be renewed for one
additional year at the lender's option.

     Total  fees  related  to  the  FINOVA  Financing  aggregated  approximately
$272,000 and are being  amortized over the 30-month term of the  agreement.  The
unamortized  portion of these debt  issuance  costs,  $253,858,  is  included in
"deposits and other assets" at March 31, 1998.

     The FINOVA Financing includes a financial covenant requiring the Company to
maintain,  at all times, net worth, as defined, of $750,000.  At March 31, 1998,
the Company was in compliance with this financial covenant.

     The FINOVA  Financing is  guaranteed  by United  Textiles and is secured by
substantially  all of the assets of the  Company  and  $3,000,000  in letters of
credit. Of the $3,000,000 in letters of credit,  $2,000,000 is collateralized by
amounts  held in a restricted  certificate  of deposit  (Note 2). The  remaining
$1,000,000  letter  of  credit,   has  been  provided  by  Multimedia   Concepts
International, Inc., an affiliate of the Company.

     5. Asset Purchase Agreement

     On January 16, 1997 the board of  directors  of the  Company  approved  the
purchase of the assets and  assumption of certain  existing  liabilities of Toys
International.  Toys International is a high-end retailer of toys which operated
three mall locations in Southern California.  As part of the purchase agreement,
the Company  obtained  the rights to the Toys  International  and Tutti  Animali
operating  name  trademarks  and also assumed the  existing  leases at the three
locations.  The total purchase price was $1,024,184  which  consisted  mainly of
inventory and certain prepaid expenses and deposits. The purchase price was paid
in the form of a cash payment of $759,184 in January  1997 and the  execution of
two promissory notes aggregating $265,000 (Note 6). 6. Notes Payable

     March 31, 1998 1997 Note payable to ABC Fund Ltd.,  an affiliate  (Note 1),
bearing  interest at 5% per annum,  principal  due on August 15,  2000,  accrued
interest due on May 10, 1998, and quarterly until debt paid in full or converted
into common stock of a subsidiary  (Note 9). Note is  subordinate  to the FINOVA
Financing (Note 4). $ 1,500,000 -

     Note  payable to Breaking  Waves,  Inc.,  an  affiliate  (Note 1),  bearing
interest at 15% per annum,  payable in ten monthly  installments of $25,000 plus
accrued  interest  through maturity on December 31, 1998. Note is subordinate to
the FINOVA Financing (Note 4). 250,000 -

     Note payable to stockholder  of Toys  International  non-interest  bearing,
guaranteed  by United  Textiles,  payable in quarterly  installments  of $25,000
through  maturity,  on  January  16,  1999.  Note is  subordinate  to the FINOVA
Financing (Note 4). 100,000 200,000

                                      F-11


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




6.       Notes Payable (continued)
<TABLE>
<CAPTION>

                                                                                             March 31,             
                                                                                     1998                1997      
<S>                                                                             <C>                 <C>                         
     Note payable to stockholder of Toys  International,  non-interest  bearing,
guaranteed by United Textiles, payable in five installments ranging from $11,667
to $15,000 through maturity, on June 16, 1997.                                            -              41,666
     
                                                                                     ---------         --------

         Total notes payable                                                          1,850,000         241,666

         Less current portion                                                          (350,000)       (141,666)
                                                                                ---------------    ----------------

         Long-term portion                                                      $     1,500,000    $     100,000
                                                                                ===============    ================
</TABLE>

         Future  obligations  under these notes payable as of March 31, 1998 are
as follows:
<TABLE>
<CAPTION>

                         Year
                       March 31                                                      Amount    
                         <S>                                                     <C>           
                         1999                                                    $      350,000
                                                                                        -
                                                                                      1,500,000
                                                                                 $    1,850,000
</TABLE>

     The above notes carry interest rates that differ from  prevailing  interest
rates.  The Company has not provided for imputed  interest on rate  discounts or
premiums as the effects are immaterial to the financial statements.

=========


                                      F-12


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




7.       Closure of Retail Stores - Litigation

     During the year ended March 31, 1998,  the Company  closed,  and ultimately
vacated,  five  retail  locations  prior to the end of their lease  terms.  As a
result, four of the five landlords filed lawsuits against the Company to collect
unpaid  rent as well as  rental  obligations  remaining  under  the terms of the
respective leases.

     Subsequent  to the filing of actions by the landlords and through May 1998,
the Company,  with assistance of outside counsel,  reached settlement agreements
with the various landlords. These settlements aggregated $469,600.

     The  statement  of  operations  for the year ended March 31, 1998  includes
$583,541 of "litigation related expenses" which comprise the settlement costs on
the  aforementioned  leases,  legal fees  associated with the  negotiations  and
monthly rentals for the locations since vacating the premises.

     The Company  currently has one remaining  landlord/tenant  matter which has
yet to be resolved.  The Company's management expects this matter to be resolved
without further material effects on the financial statements.

                                      F-13


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




8.       Income Taxes

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  amounts  used for income  tax  purposes.  The tax  effects of
significant  items  comprising the Company's net deferred  income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>

                                                                                             March 31,             
                                                                                     1998                1997      

<S>                                                                             <C>                <C>              
         Inventories                                                            $      (227,696)   $       (183,192)
         AMT tax credits                                                                (23,260)            (23,260)
         Accrued expenses                                                               (19,779)            (15,119)
                                                                                ---------------    ----------------

                  Current portion of net deferred income
                      tax (assets) liabilities                                         (270,735)           (221,571)
                                                                                ---------------    ----------------

         Depreciation and amortization                                                  (28,388)            150,857
         Loss on disposal of assets                                                      25,926                   -
         Net operating loss carryforwards                                            (3,652,294)         (3,142,710)
         Deferred rent liability                                                        (43,891)            (50,945)
         Income taxes                                                                       508                   -
         Amortization of stock options                                                 (202,049)                  -
                                                                                ---------------    ----------------

                  Long-term portion of net deferred
                      income tax (assets) liabilities                                (3,900,188)         (3,042,798)
                                                                                ---------------    ----------------

</TABLE>

                                      F-14


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




8.   Income Taxes (continued)
<TABLE>
<CAPTION>

<S>                                                            <C>            <C>        
         Total net deferred income tax (assets) liabilities    (4,170,923)    (3,264,369)
                                                              -----------    -----------
         Valuation allowance ..............................     4,170,923      3,264,369


                  Net deferred income taxes ...............   $      --      $      --
                                                              ===========    ===========
</TABLE>

     At March 31, 1998 and 1997, a 100% valuation allowance has been provided on
the net deferred  income tax assets since the Company can not determine  that it
is "more likely than not" to be realized.

     The  reconciliation  of income taxes computed at the federal  statutory tax
rate to income  taxes at the  effective  income  tax rate in the  statements  of
operations is as follows:

                                                  March 31,
                                               1998    1997

         Federal statutory income tax (benefit (34.0)%  (34.0)%
                                                       
         State income taxes, net of federal be   0.1      0.1
         Change in valuation allowance ....     33.9     33.9
                                                ----     ----

                  Effective income tax rate       -%       -%

     At March 31, 1998, the Company has net operating  loss (NOL)  carryforwards
of approximately  $9,800,000 for federal purposes and  approximately  $5,300,000
for state  purposes.  The federal NOLs are  available to offset  future  taxable
income and expire at various  dates  through March 31, 2013 while the state NOLs
are available and expire at various dates through March 31, 2003.


                                      F-15


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




8.       Income Taxes (continued)

     A portion of the NOLs  described  above are  subject to  provisions  of the
Internal   Revenue  Code  ss.382  which  limits  use  of  net   operating   loss
carryforwards  when  changes of  ownership of more than 50% occur during a three
year  testing  period.  During  the years  ended  March 31,  1994 and 1995,  the
Company's  ownership  changed  by more than 50% as a result of the May 1993 of a
majority  interest in the Company by American  Toys and the  Company's  November
1994  completion  of an initial  public  offering of its common  stock.  Further
changes in common and preferred stock  ownership  during each of the years ended
March 31, 1998 and 1997, as described in Note 11, have also potentially  limited
the use of NOLs. The effect of such  limitations has yet to be determined.  NOLs
could be further  limited upon the  exercise of  outstanding  stock  options and
stock  purchase  warrants  or as a  result  of a  planned  private  offering  of
preferred stock (Note 13).

9.       Commitments and Contingencies

     Operating Leases

     The  Company  leases  its  retail  store  properties  under   noncancelable
operating lease agreements which expire through October 2007 and require various
minimum annual  rentals.  Several of the leases  provide for renewal  options to
extend the leases for additional five or ten-year periods.  Certain store leases
also require the payment of property taxes,  normal maintenance and insurance on
the properties  and additional  rents based on percentages of sales in excess of
various specified retail sales levels.

     During the years ended March 31, 1998 and 1997, the Company incurred rental
expense under all operating  leases of $3,112,822 and $2,681,728,  respectively.
Contingent rent expense was insignificant  during the years ended March 31, 1998
and 1997.

     During the year ended March 31, 1997,  the Company  sub-leased  portions of
its  warehouse  building  and a portion  of one of its  retail  locations  under
noncancelable operating leases. Sub-lease income during the year ended March 31,
1997 was $93,822 (Note 10).


                                      F-16


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




9.       Commitments and Contingencies (continued)

     Operating Leases (continued)

     At March 31, 1998 the aggregate  future  minimum  lease  payments due under
these noncancelable leases,  including  approximately $448,000 for the remaining
term of the lease for the closed  Rialto,  California  retail  location (Note 7)
through November 2003, are as follows:
<TABLE>
<CAPTION>

                      Year Ending                                                   Amount
                       March 31,                                                    Leases     

<S>                      <C>                                                    <C>            
                         1999                                                   $     2,541,123
                         2000                                                         2,583,314
                         2001                                                         2,103,669
                         2002                                                         1,788,302
                         2003                                                         1,665,152
                      Thereafter                                                      3,919,531

                  Total minimum lease payments                                  $    14,601,091
                                                                                 ===============
</TABLE>

         Termination of Warehouse Lease

     In April 1997, the Company  negotiated a settlement  with a landlord for an
excess  warehouse  facility,  whereby the Company  was  released  from the lease
obligation for a settlement of $60,000. This early lease termination will result
in annual  savings of  approximately  $235,000  based on the original  scheduled
lease term through April 2000.

     Convertible Debt Agreement

     As  discussed in Note 6, the Company has a $1.5 million note payable to ABC
Fund,  Ltd., an affiliate.  Prior to the August 15, 2000 maturity date, the note
is convertible  into the common stock of a subsidiary of the Company.  ABC Fund,
Ltd. may, at its option, convert all or a portion of the note and accrued unpaid
interest  thereon  into up to 25% of the common  stock of the  subsidiary  at an
exercise price equal to the net book value of the subsidiary's shares. 

                                      F-17


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




9.       Commitments and Contingencies (continued)

           Delisting of Securities

     On September 24, 1997, the Company's common stock was delisted from trading
on the  NASDAQ  Stock  Market  ("NASDAQ")  as  the  Company  did  not  meet  the
stockholders' equity maintenance requirement of $1,000,000 at the time and based
on  certain  transactions  undertaken  in  February  1996  which  NASDAQ  deemed
"detrimental  to the  investing  public and  public  interest"  with  respect to
options  issued to an investor which provided a letter of credit as security for
the Congress Financing.

     Since September 24, 1997, the Company's common stock, as well as its Series
E preferred stock and Series E stock purchase warrants sold in a public offering
completed in December 1997, have been quoted on the  over-the-counter on the OTC
bulletin board.

     Dependence on Suppliers

     Approximately thirty-one percent (31%) of the Company's inventory purchases
are made directly from five (5) manufacturers.  The Company typically  purchases
products   from  its   suppliers   on  credit   arrangements   provided  by  the
manufacturers.  The termination of a credit line or the loss of a major supplier
or the  deterioration of the Company's  relationship with a major supplier could
have a material adverse effect on the Company's business.

     401(k) Employee Stock Ownership Plan

     In August 1994, the Company  adopted a 401(k) Employee Stock Ownership Plan
(the "Plan") which covers  substantially all employees of the Company.  The Plan
includes  provisions  for both an Employee  Stock  Ownership Plan ("ESOP") and a
401(k) Plan.

     The  ESOP  allows  only  contributions  by the  Company  which  can be made
annually at the  discretion  of the Company's  Board of  Directors.  The ESOP is
designed to invest primarily in the Company's stock. As of March 31, 1998, there
had been no transactions with regards to the ESOP.



                                      F-18


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




9.       Commitments and Contingencies (continued)

     401(k) Employee Stock Ownership Plan (continued)

     The 401(k)  portion of the Plan is  contributed  to by the employees of the
Company through payroll deductions.  The Company makes no matching contributions
to the 401(k).

         1994 Stock Option Plan

     In June 1994,  the Company  adopted the 1994 Stock Option Plan (the "Plan")
which  provides  for options to purchase  an  aggregate  of not more than 50,000
post-reverse split shares of common stock as may be granted from time to time by
the  Company's  Board of  Directors.  Pursuant  to the  hiring of the  Company's
current Chief  Financial  Officer and  Secretary,  an option to purchase  30,000
shares of Common Stock at an exercise  price of $3.25 per share was  authorized,
vesting at the rate of 10,000  shares  per annum in each of July 1998,  1999 and
2000.  As of March 31,  1998,  no  options  to  purchase  common  stock had been
exercised. Subsequent to March 31, 1998, the exercise price of these options was
reset to $1.15 per share by the Board of Directors.

         Seasonality

     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,  in order for the  Company to operate,  it must obtain  substantial
short-term  borrowings from lenders and the Company's suppliers during the first
three-quarters  of each  fiscal  year to purchase  inventory  and for  operating
expenditures.  Historically,  the  Company  has been able to obtain  such credit
arrangements  and  substantially  repay the amounts  borrowed from suppliers and
reduce  outstanding  borrowings from its lender during the fourth quarter of its
fiscal year.


                                      F-19


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




9.       Commitments and Contingencies (continued)

          Year 2000

     An area that represents a near-term  commitment of capital resources is the
Company's  management  information  system.  The  Company has  investigated  its
existing  management  information  system  and has  determined  that it does not
provide  sufficient  scope to support the planned  level of expanded  operations
and, furthermore, is not Year 2000 compliant. The Company is currently exploring
the cost of upgrading its current  system or purchasing a new system to meet the
projected  demands of the business and to become Year 2000  compliant.  Based on
information  learned to date,  the Company  estimates that the cost of upgrading
its current system would be on the order of $190,000 to $300,000. Management has
not been able to estimate a replacement cost at March 31, 1998.

     Should management elect to modify existing computer systems to correct Year
2000  deficiencies,  the cost of such  upgrades  will be expensed  as  incurred.
Alternatively,  should management  identify a suitable  replacement  system, the
cost of the new system will be capitalized,  and the remaining net book value of
systems disposed will be expensed upon retirement.

10.      Related Party Transactions

         Office and Warehouse Lease

     The Company  leases an office and warehouse  building from a partnership of
which one of the partners is a Company officer,  stockholder, and director. Rent
expense  under this lease for the years ended  March 31,  1998 and 1997  totaled
$247,289 and $227,546, respectively. The lease expires in April 2000.

         Sub-lease

     During the year ended March 31,  1997,  sub-lease  rental  income  included
$54,422 from an entity in which  stockholders  and employees of the Company have
an ownership  interest.  Sub-lease income was  insignificant  for the year ended
March 31, 1998.


                                      F-20


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




10.      Related Party Transactions (continued)

         Consulting Agreement

     In January 1997, the Company  entered into a consulting  agreement with the
stockholder of Toys  International  as part of the purchase  agreement with Toys
International.  The term of the agreement commenced on January 16, 1997, expired
on April 16, 1997 and called for three  monthly  payments of $10,000  each. As a
result, the expenses related to the agreement totaled $23,334 and $6,666 for the
years ended March 31, 1998 and 1997, respectively.

         Consulting Fees

     The Company made payments aggregating $25,000 and $7,000 to the Chairman of
the Board of Directors for various  consulting  services  during the years ended
March 31, 1998 and 1997, respectively.

         Commitment of Financing

     The individual,  beneficial majority  stockholder of United Textiles,  in a
letter dated May 15,  1998,  has  represented  his intent and ability to provide
additional  working  capital to the Company,  should such be necessary,  through
September 1999.

11.      Equity Transactions

         Capital Structure

     At March 31, 1998, the Company's capital structure  consisted of 40,000,000
authorized  shares of $.01 par value  common  stock  and  10,000,000  authorized
shares of $1.00 par Series E Preferred  Stock.  Each share of Series E Preferred
Stock is convertible into six shares of common stock at the option of the holder
after holding the shares of Series E Preferred Stock for two years from the date
of issuance.  This capital  structure  became effective August 11, 1997 upon the
amendment of the Company's  certificate of  incorporation in anticipation of the
public offering of Series E Preferred Stock discussed below.



                                      F-21


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




11.      Equity Transactions (continued)

         Issuance of Series E Preferred Stock

     In April 1996, EACC exercised its option,  the grant and terms of which are
described in Note 4, and acquired 528,070 shares of Series E Preferred Stock. In
connection therewith,  the amount due to EACC, aggregating $528,070 at March 31,
1996 was extinguished.

     In June 1996, October 1996 and January 1997, EACC exercised its option, the
grant and terms of which are described in Note 4, and acquired 334,000,  800,000
and 1,200,000 shares of Series E Preferred Stock, respectively. All options were
exercised at $1.00 per share  resulting in an aggregate  cash  consideration  of
$334,000, $800,000 and $1,200,000,  respectively. The 334,000 shares of Series E
Preferred  Stock issued to EACC in June 1996 were  subsequently  transferred  to
United Textiles.

     In an agreement  dated June 30, 1997,  the Company  agreed to issue 250,000
shares of Series E Preferred Stock for $500,000 and 500,000 warrants to purchase
Series E  Preferred  Stock for an  additional  $50,000  in a private  sale.  The
$550,000  was  collected  on August 12,  1997 and the shares and  warrants  were
issued.

     In June 1997, the Company issued 700,000 shares of Series E Preferred Stock
to EACC which had advanced funds subsequent to March 31, 1997 against its option
to acquire share of Series E Preferred  Stock,  the grant and terms of which are
described in Note 4.

     On December 29, 1997,  the Company  completed a public  offering of 750,000
shares  of Series E  Preferred  Stock and  1,500,000  redeemable  Series E stock
purchase warrants.  The gross proceeds from the offering were $3,150,000 and the
net  proceeds to the Company  totaled  $2,303,441  after  deduction  of offering
expenses including such items as underwriter  discounts and commissions,  legal,
accounting, printing and filing fees.

         Other Preferred Stock Transactions

     In April 1996,  the Company  redeemed all remaining  outstanding  shares of
Series B preferred stock, aggregating 81,579, at the redemption price of $81,579
and paid dividends on the Series B preferred stock aggregating $6,101.


11.      Equity Transactions (continued)

         Other Preferred Stock Transactions (continued)

     On August 8, 1996 the Company amended its certificate of incorporation upon
approval by the board of directors  to allow the Series D preferred  stock to be
convertible  into 385,676  shares of the Company's  common stock.  On August 11,
1996,  American Toys  converted  its one share of Series D preferred  stock into
385,676 shares of the Company's common stock. At this time,  American Toys owned
1,235,319  shares of the common stock of the Company  which were spun-off to the
stockholders of American Toys,  including United Textiles.  As a result,  United
Textiles became the majority stockholder of the Company.

     In August  1996,  the 334,000  shares of Series E  Preferred  Stock held by
United  Textiles were converted into  2,226,667  shares of the Company's  common
stock. In addition, in February 1997, EACC converted 27,500 shares of the Series
E Preferred Stock into 183,333 shares of the Company's common stock.

         Series E Preferred Stock Bonus

     In March 1998, the Company's Board of Directors  granted to its Chairman of
the Board and to its  President,  25,000  shares  each of its Series E Preferred
Stock,  par value $.01 per share in  recognition of their efforts to further the
Company's turnaround towards  profitability.  The shares shall vest on a monthly
basis over a one-year period  commencing April 1, 1998, being fully vested April
1999. On the date of grant management  determined the compensation value of this
stock grant to be  approximately  $47,000 in the  aggregate,  based on a closing
market  price of $1.86 per  share  which was  subjected  to a 50%  marketability
discount given the restrictive nature and vesting  requirement of the securities
as well as the relatively low trading volume.


                                      F-22


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




12.      Supplemental Cash Flow Information

         Cash paid for income taxes and interest was as follows:

                         Years Ended March 31,
                           1998       1997
         Interest paid   $511,924   $443,875
                         ========   ========

         Income taxes    $    800   $    800
                         ========   ========

     For the year ended March 31, 1997,  non-cash  financing  activities include
the extinguishment of balance due to affiliate  aggregating $528,070 in exchange
for 528,070  shares of Series E Preferred  Stock,  the  conversion on 1 share of
Series D preferred stock for 385,676  post-reverse  split shares of common stock
and the conversion of 361,500  shares of Series E Preferred  Stock for 2,410,000
post-reverse  split shares of common stock.  In addition,  the Company  incurred
$265,000 in notes payable to the stockholder of Toys  International  as a result
of the asset purchase which consisted mainly of inventory.

13.      Subsequent Events

         Change in Capital Structure

     In anticipation of a private  placement of securities,  as discussed below,
the Company's Board of Directors,  in April 1998, authorized an amendment to the
Company's capital structure which would (i) increase the total authorized common
shares from 40,000,000 to 51,000,000;  (ii) increase the total authorized shares
of preferred  stock from  10,000,000  to  15,500,000;  and (iii)  designate  the
5,500,000  increase  in  shares  of  authorized  preferred  stock as  "Series  F
Preferred  Stock,"  par value $.01 per share.  Such  amendment  was  approved by
written consent of a majority of the shareholders.

     The holders of the shares of the Series F Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends,  cumulative dividends at $0.09 per share
per  quarter  or $.036 per  annum.  The  dividend  is to be  payable  quarterly.
Dividends shall be fully  cumulative and shall accrue (whether or not declared),
without interest,  from the date such dividends are payable.  The Series F Stock
shall have liquidation preference of $3.00 per share, subject only to the Series
E Stock preference.

13.      Subsequent Events (continued)

         Change in Capital Structure (continued)

     The Series F Preferred  Stock  shall  possess no voting  rights,  except as
provided by law with respect to altering the rights and preferences thereof. The
Series F Stock shall have the right, at the option of each individual holder, at
any time,  commencing  six months after  issuance,  to convert each share to two
fully paid and  non-assessable  shares of Common Stock.  Upon  conversion of the
Series F Stock into Common  Stock,  the  ownership  interests of persons who own
Common Stock at the time of conversion shall be diluted.

     The Company may, at any time commencing one year from issuance,  redeem all
of the issued and outstanding shares of the Series F Stock for a per share price
of $3.00,  plus  accrued  but unpaid  dividends,  upon  notice to each holder of
record of the Series F Stock.

     Each warrant is exercisable into one share of Series F Stock commencing one
year from  issuance  at $4.00 for a period of five years.  Unexercised  warrants
will  automatically  expire at the end of such  five-year  period.  Although the
Company has no current intention of reducing the exercise price or extending the
exercise  period of the  warrants,  it is  possible  that either or both of such
changes may be effected by resolution of the Board of Directors in the future.

     The Series F warrants are redeemable by the Company at any time, commencing
one year from  issuance,  upon 30 days' prior notice,  at a redemption  price of
$.05 each.

         Private Placement of Series F Preferred Stock

     In April 1998,  the Company's  Board of Directors  approved a resolution to
seek  additional  equity  capital  of a minimum  of  $750,000  to a  maximum  of
$4,500,000  from a private  placement sale of units.  Each unit is to consist of
one share of Series F preferred  stock par value $.01 per share and one Series E
Preferred  Stock  purchase  warrant at a purchase  price of $3.00 per unit.  The
private placement was subsequently terminated, and no funds were raised thereby.


                                      F-23


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




13.      Subsequent Events (continued)

         Expansion Plans

     The  Company's  Board of  Directors  has  authorized  management  to locate
suitable  expansion sites and enter into leases for new retail  locations in the
states of: Nevada, Texas, Illinois, Michigan and additional sites in California.

         Capital Lease Facility

     The  Company  borrowed  approximately  $85,000  to  finance  equipment  and
fixtures  for the  remodel  of one of its  retail  locations  through  a finance
company.  Borrowings  under  the  agreement  are to be paid  monthly,  including
interest, over sixty months.

14.      Restatement of Financial Statements

     The Company has restated its financial statements for the years ended March
31, 1998 and 1997 from those originally presented to conform with Topic No. D-60
of the  Emerging  Issues Task Force.  Topic D-60  communicated  the views of the
staff of the Securities and Exchange Commission that the portion of the proceeds
upon  issuance  of  convertible  preferred  stock  allocable  to the  beneficial
conversion  feature  should  be  recorded  as  additional  paid-in  capital  and
recognized  as a  dividend  over  the  minimum  period  in which  the  preferred
shareholders can realize the conversion.

                                      F-24


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997




14.      Restatement of Financial Statements (continued)

     The  Company's  Series E Preferred  Stock,  of which  shares were issued in
varying  amounts on various dates as described in Note 11, includes a beneficial
conversion feature in that each share of Series E Preferred Stock is convertible
into six shares of the Company's common stock at the option of the holder, at no
additional conversion price.

     The  beneficial  conversion  feature is measured at the date of issuance of
the Company's Series E Preferred Stock as the difference  between the conversion
price and the market value of the common stock into which the Series E Preferred
Stock is convertible,  limited to the proceeds received from the issuance of the
Series E Preferred  Stock.  Based on the  calculations  prescribed  by Topic No.
D-60,  all  proceeds  initially  received by the Company  from the  issuances of
preferred  stock should  initially be recorded as additional  paid-in capital as
100% of the proceeds is allocable to the beneficial conversion feature. Over the
required holding period, a non-cash  dividend is recorded  reducing the retained
earnings (or  increasing  the  accumulated  deficit) and  increasing the balance
recorded as Series E Preferred Stock in the balance sheet. Thus, there is no net
effect on the total shareholders' equity of the Company.

     However,  the Company has also  restated  its net loss per common  share as
presented in the statement of  operations  for each of the years ended March 31,
1998 and 1997 as the dividend  attributable to the beneficial conversion feature
of the Series E Preferred  Stock  reduces the amount of net income (or increases
the amount of net loss) applicable to the common shares.

     In applying  the  provisions  of Topic No.  D-60,  the Company has recorded
dividends  of  $1,473,806  for the  year  ended  March  31,  1998.  This  amount
represents $0, $1,200,000,  $0 and $273,806 for each of the three-month  periods
ended June 30, 1997, September 30, 1997, December 31, 1997 and March 31, 1998.

     In applying  the  provisions  of Topic No.  D-60,  the Company has recorded
dividends  of  $2,862,070  for the  year  ended  March  31,  1997.  This  amount
represents  $528,070,   $334,000,  $800,000  and  $1,200,000  for  each  of  the
three-month  periods ended June 30, 1996,  September 30, 1996, December 31, 1996
and March 31, 1997.

                                      F-25


<PAGE>
                       PLAY CO. TOYS & ENTERTAINMENT CORP.
                 (A Subsidiary of United Textiles & Toys Corp.)

                          Notes to Financial Statements

                       Years Ended March 31, 1998 and 1997



14.      Restatement of Financial Statements (continued)

     As a  result  of the  application  of  Topic  No.  D-60,  the  Company  has
reclassified  the initial  proceeds  of issuance of Series E Preferred  Stock to
additional  paid-in  capital  and  the  resulting  dividends  which  affect  the
accumulated  deficit and the amount  recorded as Series E Preferred  Stock.  The
impact on the financial  statements  for the years ended March 31, 1998 and 1997
is summarized as follows:
<TABLE>
<CAPTION>

                                    March 31, 1998                                      March 31, 1997             
                           ----------------------------------------------------------------------------------------

                                    As Reported          As Restated         As Reported           As Restated

Series E convertible preferred stock
<S>                                      <C>                  <C>                 <C>                     <C>       
                                         $5,891,020           $3,974,376          $2,500,570              $2,500,570
Additional paid-in capital               $6,675,398          $12,927,918          $6,512,107              $9,374,177
Accumulated deficit                   $(10,104,946)        $(14,440,822)        $(8,050,476)           $(10,912,546)

Total stockholders' equity               $2,502,507           $2,502,507          $1,003,036              $1,003,036


Net loss for the year ended            $(2,054,470)         $(2,054,470)        $(3,584,881)            $(3,584,881)
Effects of non-cash dividends                    $0         $(1,473,806)           $(27,545)            $(2,889,615)
Net loss applicable to common shares
                                       $(2,054,470)         $(3,528,276)        $(3,612,426)            $(6,474,496)
Basic and diluted loss per common 
share and share equivalent                  $ (.50)              $ (.86)            $ (1.29)                $ (2.32)
</TABLE>

                                      F-26