SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                                   (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, $.01 par value
                    Series E Preferred Stock, $.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 $.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 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.

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 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 operate 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.

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 and
Redeemable Series E Stock Purchase  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  (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  $440,000  was used to reduce  trade
accounts  payable or to  opportunistically  purchase  inventory  from vendors on
advantageous terms.
<PAGE>
Series F Preferred Offering

         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 $.01
per share (the  "Series F Stock"),  and one Series F  Preferred  Stock  Purchase
Warrant (the "Warrants"),  at a purchase price of $3.00 per Unit, through Morgan
Grant Capital Group,  Inc., as placement  agent. The Company is seeking to raise
an aggregate of $4,500,000 which requires the sale of a minimum of 250,000 Units
to close the offering.  Each Warrant is exercisable  for a period of five years,
commencing  one year from issuance,  at $4.00 per share.  Each share of Series F
Stock shall carry a $0.36 annual dividend, payable quarterly, and the holder has
the right,  commencing six months after issuance, to convert each share into two
fully paid and  non-assessable  shares of Common  Stock.  As of the date of this
report, the offering has not been consummated.

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.

         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 (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

<PAGE>
$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,
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

         Until  recently,  the Company's  stores were serviced from two adjacent
distribution  facilities (one 43,000 square feet in size, the other 5,200 square
feet in size)  encompassing  an aggregate of  approximately  48,200 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 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. Though 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 generally  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.


<PAGE>
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 is 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").
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 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.

     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  Arrangement.
$1.5 million of the $3 million in additional  borrowing support from the standby
letters of credit was  provided  by an  institutional  investor in the form of a
subordinated  loan; $1.0 million was provided in the form of a standby letter of
credit issued by Multimedia  Concepts  International,  Inc., an affiliate of the
Company; 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 payable 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 $84,000.  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.


<PAGE>
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 faces  competition from hobby vendors that market
through  direct sales forces and from  distributors  that rely on mail order and
telemarketing.  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 continual  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  compete  have  more
extensive research and development,  marketing and customer support capabilities
and  greater  financial,  technological  and  other  resources  than that of the
Company.  There can be no assurance  that the Company will be successful or that
it can  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.

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
Director of Operations and Director of Merchandising who in turn report directly
to the Company's Executive Officers.

ITEM 2.           DESCRIPTION OF PROPERTY

         The Company  maintains  approximately  3,500  square feet of  executive
office space and until  recently,  the  Company's  stores were serviced from two
adjacent  distribution  facilities  (one 43,000  square feet in size,  the other
18,000 square feet in size),  encompassing an aggregate of approximately  61,000
square feet, at 550 Rancheros  Drive,  San Marcos,  California.  As of April 15,
1997,  however,  the  Company  returned  12,800  feet of the 18,000  square foot
warehouse  space to the  landlord.  The combined  51,700  square foot office and
warehouse space are leased at an approximate annual cost of $281,000,  the lease
expiring on April 30, 2000.  The office and  warehouse are leased from a company
owned in part by 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. 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 in Costa Mesa, California)

<PAGE>
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 lease  negotiations with the landlords of
same.

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. This action is in the discovery phase.

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

ITEM 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.
<PAGE>
         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, par value $.01 (the "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 Preferred Stock as previously  authorized;  and (iii) the authorization
of 5,500,000 shares of a new class of preferred stock, par value $.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. The action was taken by amendment to the Company's Certificate
of Incorporation filed on May 29, 1998. See "-- Series F Preferred Offering."

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. 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>             <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 Preferred Stock and
Series E Preferred Stock Purchase  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 September
24, 1998. It began trading on the OTC Bulletin Board
<PAGE>
     As of June 24,  1998,  there were 344  holders  of record of the  Company's
Common Stock,  although the Company  believes that there are  approximately  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-reverse  split shares  which have not been  exchanged as yet are offered for
such exchange by the Company's shareholders.)

         On September  24, 1997,  the  Company's  Common Stock was delisted from
trading on the Nasdaq  Stock  Market.  The Company  appealed  an earlier  Nasdaq
determination  and presented  its argument at an oral hearing  before the Nasdaq
Listings  Qualifications  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's management believes that
Nasdaq has erred in its determination and has sought all administrative remedies
available  from the Nasdaq Stock  Market.  The Company has decided not to appeal
Nasdaq's decision to the Securities and Exchange Commission.



<PAGE>
                                     PART II

     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             $46,589        $(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                                   ---                 ---                 ---                 ---


</TABLE>

                              Year Ended March 31,
<TABLE>
<CAPTION>


                                                  1995                1996                1997                 1998
                                                  ----
Operating Data:

<S>                                               <C>                 <C>                 <C>                  <C>        
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

Operating expenses                                  9,292,632           9,105,515           8,789,570           10,119,430

Net loss                                              875,788           3,542,715           3,584,881            2,054,470

Loss per common share(1)                    (0.87)                         (2.77)              (1.29)               (0.50)

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.

<PAGE>
Results of Operations

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

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

For the 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.

     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 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.

     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.
<PAGE>
     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 totaled  $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.

     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.

     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.  In fiscal year
1997,  the net loss  applicable to common  shares  differed from the net loss by
$27,545,  as a result of preferred stock dividends accrued in that year. The net
loss per common share for the 1998 fiscal year was $0.50  compared to a net loss
per common  share in the 1997  fiscal year of $1.29.  The 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 Preferred 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.  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.

     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.  Proceeds  from
preferred  stock  sales was the  single  largest  contributor  to the  Company's
financing activities in fiscal 1997 as well.
<PAGE>
     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
Preferred  Stock and  Redeemable  Series E Purchase  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.

         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, 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 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
has been provided by Multimedia Concepts International, Inc., an affiliate.

     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. The Private  Placement carries a minimum amount of $750,000 and a maximum
of  $4,500,000.  Each  unit  consists  of one  share of the  Company's  Series F
Preferred  Stock,  par value $.01 per share,  and one Series F  Preferred  Stock
Purchase Warrant at a purchase price of $3.00 per Unit.

         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

<PAGE>
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, 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.

     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.


<PAGE>
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,  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,  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 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 the assets of Toys.

         In  December  1996,  Haskell  & White  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  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.

                                    PART III

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT

Officers and Directors

         The Directors of the Company are elected annually by the  shareholders,
and the Officers are appointed annually by the Board of Directors.  Vacancies on
the Board of Directors may be filled by the remaining  Directors.  Each Director
and Officer will hold office until the next annual  meeting of  shareholders  or
until his  successor  is elected  and  qualified.  The  Executive  Officers  and
Directors of the Company are as follows:
<TABLE>
<CAPTION>

NAME                                        AGE                       POSITION

<S>                                         <C>                        <C>                     
Harold Rashbaum                             70                         Chairman of the Board

Richard Brady                               46                         Chief Executive Officer, President,
                                                                       and Director

James Frakes                                41                         Chief Financial Officer, Secretary,
                                                                       and Director

John Hites                                  41                         Vice President of  Retail Operations

Moses Mika                                  78                         Director
</TABLE>
<PAGE>
     All Directors hold office until the next annual meeting of  stockholders or
until their  successors  are duly  elected and  qualified.  Officers are elected
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 Mr.  Mika's  son.  Each
Director  is elected  at an annual  meeting of the  Company's  shareholders  and
serves for a period of one year or until a successor is duly elected.

         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.

     Harold  Rashbaum  was  appointed  Chairman  of the  Board of  Directors  on
September  10, 1996.  Mr.  Rashbaum was a crisis  management  consultant  to the
Company from July 1995 to September 10, 1996. He has been the  President,  Chief
Executive Officer, and a Director of Hollywood  Productions,  Inc. ("Hollywood")
since  January  1997.  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.

         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.

         James Frakes was elected Chief  Financial  Officer and Secretary of the
Company in July 1997.  Since August 1997, he has been a Director of the Company.
In January 1998,  Mr. Frakes was elected  Director of Hollywood.  Prior thereto,
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.

     John Hites was appointed Vice President of Retail Operations of the Company
in April  1998.  From  1991  through  March  1998,  Mr.  Hites  operated  a sole
proprietorship  known as Vintage Sports Company which engaged in the retail sale
of sporting  goods.  From November 1995 to September  1997,  Mr. Hites  operated
Vintage Game and Hobby,  a related  business which engaged in the retail sale of
games, toys, and crafts. Since 1974, Mr. Hites has been actively involved in the
retail sale of specialty  toys and items.  From 1976 through 1982, Mr. Hites was
employed by Toys International,  Inc. Mr. Hites attended California  Polytechnic
University,  Pomona,  California,  from 1974  through 1976 where he focussed his
studies on business administration.
<PAGE>
     Moses Mika was  appointed  Director of the Company in March 1998.  Mr. Mika
has been retired since 1989.

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 Preferred  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.

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>   <C>
Richard Brady                               1998              120,000               -        25,000 (2)                    8,579 (3)
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 Preferred  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.

         Commencing January 1998, Harold Rashbaum, the Company's Chairman of the
Board has received a $2,500 monthly  consulting  fee. Mr. Rashbaum works closely
with management in developing the Company's ongoing business strategy.
<PAGE>
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  (reflects 1 for 3
reverse  split)  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 has 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).

         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.



<PAGE>
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 
               Of Beneficial Owner                       Beneficially Owned (1)           

---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                                   <C>
Harold Rashbaum (4)(5)
c/o Play Co. Toys & Entertainment Corp.                           --                                   --
550 Rancheros Drive
San Marcos, CA
---------------------------------------------------------------------------------------------------------------------------
Richard Brady(4)(5)
c/o Play Co. Toys & Entertainment Corp.                         25,587                                  *
550 Rancheros Drive
San Marcos, CA
---------------------------------------------------------------------------------------------------------------------------
Moses Mika
c/o Play Co. Toys & Entertainment Corp.                           --                                   --
550 Rancheros Drive
San Marcos, CA
---------------------------------------------------------------------------------------------------------------------------
United Textiles &
Toys Corporation                                           2,486,247(5)(6)                            59.1
448 West 16th Street
New York, NY 10011
---------------------------------------------------------------------------------------------------------------------------
Multimedia Concepts International, Inc.
448 West 16th Street                                           --(5)(7)                               --(7)
New York, NY 10011
---------------------------------------------------------------------------------------------------------------------------
Europe American
Capital Foundation                                             --(5)(8)                               --(8)
Box 47
Tortola, BVI
---------------------------------------------------------------------------------------------------------------------------
Vermongenstreuhand GMBH
Kiser Street, #14                                              --(5)(9)                               --(9)
Bregenz Austria
---------------------------------------------------------------------------------------------------------------------------
Volcano Trading
Limited                                                       --(5)(10)                              --(10)
Via Cantonale, #16
Lugano Switzerland
---------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a group
(5 persons)(3)(5)                                                  25,587                               *
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
*  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  and 50,000 shares of Series E Stock  issuable on exercise of
options granted to Richard Brady and Harold Rashbaum.  Does not include the sale
of any shares of Series F Preferred Stock or the conversion  thereof into shares
of Common Stock. See "Business - Series F Preferred Offering."

     (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.

     (5) 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 Preferred Stock offering.

     (6) Does not include  1,350,000  shares of Common Stock  issuable  upon the
conversion of 225,000 shares of the Series E Preferred  Stock.  Includes 578,742
shares issued in connection  with the  distribution  of the Company's  shares by
American Toys in August 1996.

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

     (9) Does not include  4,500,000  shares of Common Stock  issuable  upon the
conversion of 750,000 shares of the Series E Preferred 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  Preferred  Stock;  or (ii)
2,088,000  shares of Common Stock issuable upon conversion of the Series E Stock
underlying 348,000 Series E Stock Purchase Warrants.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         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 January 1998, in accordance with the FINOVA  financing,  the Company
received  $3.0 million in standby  letters of credit:  $2.0 Million of which was
established  by the Company and secured by a $2.0  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 $1.0 million of which was provided by  Multimedia  Concepts
International, Inc., an affiliate of the Company.
<PAGE>
         From  April  1996 to June  1997,  Europe  America  Capital  Corporation
("EACC"),  an  affiliate,  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 to acquire the assets of Toys (a three store chain);  to finance the
openings of the Santa Clarita,  Arizona Mills, Redondo Beach, Ontario Mills, and
Clairemont  stores;  to  redesign  five  store  locations;  and to  support  the
Company's operations during the Company's business turnaround.

         The  Company  leases  a  combined  51,700  square  feet of  office  and
warehouse space at an approximate annual cost of $247,000, the lease expiring 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.

         On January 30, 1996, pursuant to the requirements of the Company's Loan
Agreement with Congress,  American Toys,  Inc.  converted all $1,400,000 of debt
owed by the Company into equity.  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  1,157,028  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.

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>
                  Index to Financial Statements                                                                    F-1
                  Report of Independent Certified Public Accountants                                               F-2
                  Balance Sheets                                                                                   F-3
                  Statements of Operations                                                                         F-5
                  Statements of Stockholders' Equity                                                               F-6
                  Statements of Cash Flows                                                                         F-7
                  Notes to Financial Statements                                                                    F-9
</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 those  designated with an asterisk (*), which are
filed herewith,  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) to the Company's Registration
Statement on Form SB-2,  Registration No.  333-32051;  or (iii) 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.

<PAGE>
<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.
  3.3                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, 1995 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/A1 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 America 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 America 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. (incorporated by 
                     reference herein to exhibit 10.86 to the Company's Registration Statement on Form SB-2, Registration No. 
                     333-32051.
10.87                Lease Agreement for Store - Clairemont (incorporated by reference herein to exhibit (iv) of the Company's 10-
                     QSB for the period ended September 30, 1997).
10.88                Lease Agreement for Store - Redondo Beach (incorporated by reference herein to exhibit (iv) of the Company's 
                     10-QSB for the period ended September 30, 1997).
10.89                Lease Agreement for Store - Arizona Mills (incorporated by reference herein to exhibit (iv) of the Company's 
                     10-QSB for the period ended September 30, 1997).
10.90                FINOVA Loan and Security Agreement (incorporated by reference herein to exhibit (iv) 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 (iv) of the Company's 10-
                     QSB for the period ended Dec. 31, 1997).
10.92*               Lease Agreement for Store - City Mills
10.93*               Lease Agreement for Store - Las Vegas
16.01                Letter from BDO Seidman, LLP (incorporated by reference herein to Form 8-K dated February 20, 1997).
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 26th day of June, 1998.

                                    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                                      6/26/98
Harold Rashbaum                                      Board of Directors                                   Date


/s/ Richard Brady                                    Chief Executive Officer                              6/26/98
Richard Brady                                        President, and Director                              Date


/s/ James Frakes                                     Chief Financial Officer,                             6/26/98
JamesFrakes                                          Secretary, and Director                              Date


/s/ Moses Mika                                       Director                                             6/26/98
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.

     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
                                                    Certified Public Accountants

Newport Beach, California
May 15, 1998


                                       F-2


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

<TABLE>
<CAPTION>


                                 Balance Sheets


                                 ASSETS (Note 4)

                                                                   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


                      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 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                                               5,891,020           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                                                       6,675,398           6,512,107
     Accumulated deficit                                                            (10,104,946)         (8,050,476)
                                                                                ---------------    ----------------

                  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

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

Net loss applicable to common shares .......   $ (2,054,470)   $ (3,612,426)
                                               ============    ============

Basic and diluted loss per common share and
     share equivalents .....................   $       (.50)   $      (1.29)
                                               ============    ============

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



<TABLE>
<CAPTION>
                                                                   Additional   Redeemable Preferred Stock    
                                        Common Stock               Paid-in      Series B             Series D 
 ........................................Shares         Amount      Capital      Shares  Amount       Shares 
                                        -------------  ----------- ------------ ------- ------     -------  

<S>            <C>                        <C>        <C>          <C>                  <C>     <C>              
Balance, April 1, 1996                    1,287,843  $    12,878  $  4,779,520         81,579  $      87,680   

Redemption of preferred stock                   -             -              -        (81,579)       (81,579)  
Payment of accrued dividends                    -             -              -              -         (6,101)   
Conversion of due to affiliate and
   related accrued interest to Series
   E preferred stock                            -              -             -              -             -     
Issuance of Series E preferred
   stock for cash                               -              -             -              -             -     
Conversion of Series E preferred
   stock to common                        2,410,000       24,100       337,400              -             -     
Conversion of Series D preferred
   stock to common                          385,676        3,857     1,395,187              -             -     
Net loss for the year                             -            -             -              -             -     
                                        -----------  -----------  ------------  -------------  -------------  

Balance, March 31, 1997                  4,083,519        40,835     6,512,107              -             -   

Issuance of common stock for cash           20,000           200           300              -             -   
Issuance of Series E preferred stock
   for cash                                       -            -             -              -             -   
Issuance of Series E warrants for cash            -            -        50,000              -             -   
Issuance of Series E preferred
   stock and warrants for cash,
   net of offering expenses                       -            -       112,991              -             -   
Net loss for the year                             -            -             -              -             -   
                                        -----------  -----------  ------------  -------------  -------------  

Balance, March 31, 1998                   4,103,519    $  41,035  $  6,675,398             -   $  -           
                                        ===========    =========  ============            ===  ====          
</TABLE>


                  Statements of Stockholders' (Deficit) Equity
                       Years Ended March 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                     Preferred Stock                                                   
                                                     Series E Class I      Accumulated
 ........................................Shares       Amount                Deficit
                                        


<S>                                        <C>          <C>                <C>           
Balance, April 1, 1996                     -  $         -                  $  (4,465,595)

Redemption of preferred stock              -            -                        -     
Payment of accrued dividends               -            -                        -
Conversion of 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                      (361,500)    (361,500)                   -
Conversion of Series D preferred
   stock to common                         -            -                        -
Net loss for the year                      -            -                    (3,584,881)
                                        -----------  -----------            ------------

Balance, March 31, 1997                 2,500,570    2,500,570               (8,050,476)

Issuance of common stock for cash          -            -                        -
Issuance of Series E preferred stock
   for cash                               950,000    1,200,000                   -
Issuance of Series E warrants for cash     _            _                        -
Issuance of Series E preferred
   stock and warrants for cash,
   net of offering expenses               750,000    2,190,450                   -
Net loss for the year                      -            -                    (2,054,470)
                                        -----------  -----------             ------------

Balance, March 31, 1998                 4,200,570  $ 5,891,020            $ (10,104,946)
                                        ===========  =========              ============
</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  57% 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.

     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.


                                      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

     1. Summary of Accounting Policies (continued)

     Net Loss Per Share (continued)

     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.

     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.

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

     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.


                                      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





1.       Summary of Accounting Policies (continued)

         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.
         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.

         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
         provision   statement  in  the  fiscal  year  ending  March  31,  1999.
         Management does not expect this statement to  significantly  impact the
         Company's 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





     1. Summary of Accounting Policies (continued)

     Effect of New Accounting Pronouncements (continued)

     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.

     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.


                                      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


3.       Property and Equipment

     Property and equipment consisted of the following:

                                         March 31,
                                          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,  European  American  Capital  Corp.  ("EACC"),  an affiliate,
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.


                                      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

     4. Financing Agreement (continued)

         The exercise of options to acquire  shares of Series E preferred  stock
by EACC, before the options terminated in December 1997 upon consummation of the
Company's Series E preferred stock offering (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.

     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 July 21,  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.


                                      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

     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

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                                                     1998                1997

<S>                                                                                  <C>                 <C> 
         Note payable to ABC Fund Ltd., an affiliate, 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 (Note 9).  
         Note is subordinate to the FINOVA Financing (Note 13).                      $1,500,000          -

         Note payable to Breaking Waves, Inc., an affiliate, 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

</TABLE>

                                      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





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:
          Year
         March 31                                                      Amount
         1999                                                    $      350,000
                                                                      1,500,000
                                                                 $    1,850,000

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.



<PAGE>
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)
                                                                                ---------------    ----------------

         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:
<TABLE>
<CAPTION>

                                                                                             March 31,
                                                                                     1998                1997

<S>                                                                                   <C>             <C>    
         Federal statutory income tax (benefit) rate                                  (34.0)%         (34.0)%
         State income taxes, net of federal benefit                                     0.1             0.1
         Change in valuation allowance                                                 33.9            33.9
                                                                                -----------        --------------

                  Effective income tax rate                                                -%              -%
</TABLE>


<PAGE>
     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. 

     A portion of the NOLs  described  above are  subject to  provisions  of the
Internal  Revenue Code 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).


                                      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

     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).

         At March 31, 1998 the aggregate future minimum lease payments due under
these noncancelable leases are as follows:
<TABLE>
<CAPTION>

                      Year Ending                                                   Amount
                       March 31,                                                    Leases

                         <S>                                                    <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>


                                                      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)

     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, 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 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.

     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.

     9. Commitments and Contingencies (continued)

     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.

     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 $1.15 per share was  authorized,
vesting  at the rate of  10,000  shares  per annum in each of the  twelve  month
periods  ending July 1998,  1999 and 2000.  As of March 31, 1998,  no options to
purchase common stock had been exercised.

     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.

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.

     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.


                                      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 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.

     Issuance of Series E Preferred Stock

     In April 1996,  EACC  exercised its option 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 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.

     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.

     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.


                                      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)

     Stock Option Grants

     In March 1998, the Company's Board of Directors  granted to its Chairman of
the Board and to its  President  rendered,  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
the closing  market  price as adjusted  for the  restrictive  nature and vesting
requirement of the securities.

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.


                                      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

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.

               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.


                                      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)

     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.

     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.


                                      F-24


<PAGE>