Even on the graffiti-scarred, concrete and barbed-wire fringe of a troubled city, a dream can survive.

It's a weedy corner, the one near downtown Los Angeles, where 1st and 2nd streets converge on Glendale Avenue and Beverly Boulevard. At rush hour, streams of traffic race by in hot pursuit of freeway on-ramps. Harried drivers may not notice the white, cinder-block building there--the one with the faded clown and the plaster rose bushes out in front.

That architectural anomaly is the Bob Baker Marionette Theater, for 28 years an unlikely fairy-tale haven for innocence, wide-eyed awe and laughter.

Even when puppeteer Bob Baker and his partner Alton Wood sold the theater in 1988--it seemed the right thing to do after a lifetime of performing--the magic seemed sure to go on.

But 12 days ago, financial problems threatened to end the shows forever.

The new owner wanted out. Baker and Wood were asked to take the theater back, but it needed a quick influx of more than $25,000. The doors were shut, and, for a few days at least, it looked as if Los Angeles would lose yet another cultural landmark.

But, this is a Hollywood story, a Capraesque fantasy with angels--two business savvy neighbors with what you might call deep pockets full of miracles.

"I have a brand-new grandson," said businessman Ernie Castillo, who arranged for the theater to get the insurance it needed to reopen. "I want something left for him in this world when he gets a little older to enjoy it."

Castillo was joined in his efforts by his friend, retired businessman Edward Maldonado, who also had a strong affinity with the Baker operation. "I used to bring kids from the East L.A. area down here many years ago," he said. "I always felt it was very important for them."

Now, a slow fade to when the theater's troubles began: Its owner, the New Bob Baker Puppets Inc., headed by Donald Battjes, decided to quit the theater business, citing its "marginal profitability."

Battjes, a one-time professional puppeteer and former director of corporate real estate for 20th Century Fox, said he wanted to concentrate solely on the more lucrative end of the operation he had purchased from Bob Baker--the commercial manufacture of marionettes. Clients include Disney and Warner Bros.

"It was not my intention to close the theater," Battjes said. "I'm proud of the refurbishing we've done and the quality of the staff and the productions."