COLORADO CITY, Colo. (AP) _ Phonetica One Inc., which makes talking stuffed animals, has run out of money but employees insisted on working without pay in the spirit of the Christmas season.

''I laid off 22 people yesterday and they didn't leave,'' company president William Gillard said.

Though the entire workforce of 55, including Gillard and other top executives, is working without pay, the company can't afford buy materials to produce their yakking animals for Christmas orders, Gillard said Wednesday.

Last month the state assembled a $580,000 bailout to prevent the failure of the company which claimed state and local economic development officials reneged on a promise of financial incentives when Phonetica moved here from Mexico.

The financial package includes a $200,000 state grant which Gillard said has not materialized, plus interest-free loans from Pueblo County.

Leonard Perlmutter, a state economic development official, said Phonetica One still can draw an additional $100,000 if it finds matching funds.

''The problem is that the conditions that are part of the agreement have not been met,'' Perlmutter said.