<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   ----------

                                  FORM 10-KSB

[x]                  ANNUAL REPORT UNDER SECTION 13 OR
                            15(d) OF THE SECURITIES

                              EXCHANGE ACT OF 1934
                   For the fiscal year ended DECEMBER 31, 1996

[ ]                TRANSITION REPORT UNDER SECTION 13 OR
                            15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                         Commission file number: 0-23000

                        THE HARVEY ENTERTAINMENT COMPANY
                 (Name of Small Business Issuer in its charter)

          CALIFORNIA                                    95-4217605
 (State or Other Jurisdiction of                     (I.R.S. Employer
 Incorporation or Organization)                     Identification No.)

1999 AVENUE OF THE STARS, SUITE 2050, LOS ANGELES, CALIFORNIA    90067
(Address of Principal Executive Offices)                       (Zip Code)

        Registrant's Telephone Number, Including Area Code: 310/789-1990

      Securities registered under Section 12(b) of the Exchange Act: NONE

         Securities registered under Section 12(g) of the Exchange Act:

                           COMMON STOCK, NO PAR VALUE
                                (Title of class)

         Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for past 90 days:
Yes [x]  No [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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 the Form 10-KSB: [ ]

         State issuer's revenue for its most recent fiscal year:  $9,168,000

         State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of March 12, 1997, a date
within the past 60 days, is: $16,533,825.

         State the number of shares outstanding of each of issuer's classes of
common equity, as of March 13, 1997: 3,598,900.

         Transitional Small Business Disclosure Format: Yes: [ ] No: [x]



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<PAGE>   2
                                     PART I

ITEM 1.  BUSINESS

                                  INTRODUCTION

         The Harvey Entertainment Company (the "Company") owns and exploits a
substantial library of classic animated characters and other intellectual
property assets.

         The Company was formed in 1989 by Jeffrey A. Montgomery to acquire
Harvey Comics, Inc. ("Harvey").  Harvey, now a wholly owned subsidiary of the
Company, was founded in 1939 and acquired or developed a number of widely
recognized characters associated with the golden age of comic books.  Harvey's
assets include:

         -       The Harvey Classic Characters, a roster of many recognizable
and well-known trademarked characters in the entertainment industry, including
Casper, the Friendly Ghost, Fatso, Stinkie and Stretch (the Ghostly Trio),
Richie Rich, Baby Huey, Wendy, the Good Little Witch and Hot Stuff, as well as
Little Audrey, Little Lotta, Little Dot, Herman and Katnip, Stumbo the Giant,
and Buzzy the Funny Crow.  (All characters referred to in this 10-K and annual
report are the copyrighted and trademarked property of Harvey Comics, Inc., a
wholly owned subsidiary of The Harvey Entertainment Company.)

         -       The Harvey Classic Film Library, a film library (exclusive of
the original musical score) consisting of 274 six- to eight- minute fully
animated color cartoon shorts, including 248 which were originally produced and
theatrically released by Paramount Pictures during the 1950s, 13 Baby Huey and
13 Richie Rich shorts which were produced in 1994 and 1996 respectively.  (In
1990 and 1991, the Company made a substantial investment in the conversion of
its 248 older cartoon shorts from analog to digital format, including color
restoration, re-dubbing and re-scoring.)

         -       The Harvey Classic Comic Book Library, a comic book film
library which features the Harvey Classic Characters from which approximately
1,875 32-page comic books can be produced (of which approximately 1,100 feature
the most popular Harvey Classic Characters).  The rights to publish these comic
books have been licensed to The Marvel Entertainment Group, Inc. ("Marvel")
until June 2000.

         The Company's principal executive offices are located at 1999 Avenue
of the Stars, Suite 2050, Los Angeles, California 90067; its phone number is
(310) 789-1990.

                      RECENT DEVELOPMENTS FOR THE COMPANY

DIRECT-TO-VIDEO:

         "CASPER, A SPIRITED BEGINNING":   The Company and Saban Entertainment
announced in May 1996 that they had agreed to co-produce a feature length live
action direct-to-video based on the Company's Casper character.  Twentieth
Century Fox Home Entertainment will serve as the exclusive worldwide home video
distributor and Saban Entertainment will handle worldwide ancillary sales such
as television, cable, and pay- per-view for the new feature.  Principal
photography on the "Casper, A Spirited Beginning" home video feature was
completed in January 1997 and the film is scheduled for home video release in
Fall 1997.

         "RICHIE RICH DIRECT-TO-VIDEO":  In May 1996, the Company and Saban
Entertainment agreed to co-produce a feature length live action direct-to-video
based on Richie Rich.  Warner Home Video will serve as the exclusive worldwide
home video distributor and Saban Entertainment will be responsible for
worldwide ancillary sales such as television, cable, and pay-per-view.  The
"Richie Rich Direct-to-Video" video is tentatively scheduled for release in
1998.  See "Business" for more details on the Company's direct-to-video
agreements.




                                      -2-
<PAGE>   3

         The Company will not bear the production or marketing costs of either
of these video productions.

TELEVISION PRODUCTION:

         "CASPER":  In February 1997 The Fox Kids Network ordered 26 additional
episodes of the all new "Casper" animated series, bringing the total of new
episodes to 52.  The 26 new episodes will be co-produced by Universal Studios
Inc. (formerly known as MCA Inc.) and the Company, and 100% financed by
Universal Television.  The Company receives a license fee for each episode
produced and shares in a percentage of the profits, if any, from the
exploitation of the animated series.

         "RICHIE RICH":  In 1996, the Company produced and self financed 13
Richie Rich 7 minute animated shorts that were packaged with 26 existing
animated shorts from the Harvey Classic film library to create a total of 13
half hour episodes for weekly television syndication for the 1996-1997 season.
The "Richie Rich" series is currently available to over 80% of the nation's
households and is distributed by Claster Television.  The Company has not
chosen a foreign distributor for the "Richie Rich" animated series, but plans
to do so in 1997.

MERCHANDISING:

         In April 1996, Universal Studios' right to act as the Company's
exclusive merchandising agent for its characters lapsed.  Since that time, the
Company and Universal Studios have been negotiating the terms of a continuing
merchandising relationship.  In January 1997, the Company and Universal Studios
tentatively agreed upon a new short-term merchandising agreement wherein the
Company, with certain exceptions, will serve as the exclusive merchandising
agent for the Company's characters, including Casper.  The new merchandising
agreement between the Company and Universal Studios calls for, among other
things, the Company to (i) hire a minimum of four additional staff members to
support Casper merchandising and (ii) use its best efforts to maximize revenues
from Casper merchandising.  (The Company and Universal Studios are continuing
to negotiate a long-term merchandising relationship in the context of a more
global agreement between them.)

         MASTER TOY LICENSEE:  In February 1997, the Company entered into a
master toy license with Trendmasters for Casper and has an agreement in
principle covering Richie Rich and Baby Huey toys.  The agreements call for,
among other things, Trendmasters to produce and release a minimum number of
toys based on Casper over the next 18 months.

OTHER MATTERS:

         NEW STAFF.  The Company has recently hired a Vice President of
Consumer Products and a Vice President of Creative Affairs to oversee the
Company's merchandising division and the development of the Company's
characters.  The Company has also hired a Director of Sales, Director of
Creative Affairs, Director of Finance Administration and two additional
assistants.  The new personnel have been engaged to allow the Company to step
up its active involvement in the development and merchandising of the Company's
Classic Characters.

         STOCK REPURCHASE PROGRAM.  In January 1997, the Company announced that
its Board of Directors had authorized a stock repurchase program under Rule
10b-18 of the Securities Exchange Act of 1934.  The Company may, from time to
time, in market transactions, purchase up to 10% of its outstanding Common
Stock (approximately 380,000 shares).  Through March 13, 1997, the Company has
repurchased 42,700 shares at an average price of $7.46 per share.  There is no
assurance that a material number of shares will be purchased pursuant to the
repurchase program.

         LITIGATION SETTLEMENT.  On November 13, 1995, the Company filed an
action against Fleischer Studios, Inc. and Stanley Handman for breach of
contract, fraud, accounting and copyright infringement in connection with the
copyright to Betty Boop.  In the action, the Company sought, among other
things, to obtain a 10% participation in the exploitation of Betty Boop from
1980 to the present pursuant to an alleged earlier agreement, and sought
rescission of the agreement by which the Company allegedly transferred its
rights in Betty Boop to Fleischer.  In December





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<PAGE>   4
1996, the Company and Fleischer settled the action with the payment by
Fleischer to the Company of $375,000.  In exchange, the Company gave up any
rights it may have had to the character.

                                    BUSINESS

         The Company derives its revenues primarily from filmed entertainment
and merchandising.  The Company formerly was engaged in comic book publishing,
but phased out its unprofitable publishing operations in 1994 after entering
into a five-year agreement with Marvel pursuant to which Marvel publishes,
distributes and licenses comic books based upon the Harvey Classic Characters.
In 1996 and 1995, operating revenues were divided among these sources as
follows:

<TABLE>
<CAPTION>
                                                            1996             1995
                                                            ----             ----
<S>                                                          <C>             <C>
Filmed Entertainment                                         64%             39%
Merchandising                                                36%             61%

Total                                                       100%            100%
                                                            ===             ===
</TABLE>

BUSINESS STRATEGY.

         The Company is attempting to capitalize on the success of its recently
reintroduced classic characters, Casper and Richie Rich, through exploitation
of new products utilizing the characters, enhancements and additions, in home
video, live action or animated television productions and in emerging
markets such as pay-per-view, interactive media and location-based
entertainment centers.  Also, the Company has started an in-house creative
affairs and merchandising department to creatively redevelop and commercially
relaunch other select Harvey Calssic Characters.  There can be no assurance
that the Company and its characters will be able to penetrate any of these
markets successfully or that, in the event that the Company does enter one or
more of these markets, it will be able to compete successfully or generate
profits.

FILMED ENTERTAINMENT.

DIRECT-TO-VIDEO (HOME VIDEO):

         Based on the success of the Walt Disney Company and Universal Studios
with family fare direct-to-videos based on theatrical motion pictures, the
Company believes the direct-to-video business is an attractive and emerging
market in which to capitalize on the theatrical and home video success of the
Company's recent filmed entertainment projects featuring Casper and Richie
Rich.  The Company also hopes to use direct-to-videos as a tool to reintroduce
its other Classic Characters to children of all ages.

         "CASPER, A SPIRITED BEGINNING":  In May 1996, the Company and Saban
Entertainment entered into an agreement to co-produce one feature length live
action direct-to-video feature based on the Company's Casper character.
Twentieth Century Fox Home Entertainment will serve as the exclusive worldwide
home video distributor and Saban Entertainment will handle worldwide ancillary
sales such as television, cable and pay-per- view.  "Casper, A Spirited
Beginning" video feature completed principal photography in January 1997 and is
scheduled for home video release in Fall 1997.  The Company will not bear any
of the production costs of this feature.

         The agreement for "Casper, A Spirited Beginning" provides for a
nonrefundable $3.3 million advance payable to the Company (which amount was
received in June 1996) recoverable only from the Company's share of 50% of the
profits.  The Company's 50% profit participation, if any, is payable after
Saban Entertainment recovers the $3.3 million advance, and all production,
marketing, and third-party out-of-pocket distribution costs have been recouped.
There is no distribution fee on the "Casper, A Spirited Beginning" home video
release.  The agreement provides for a seven (7) year distribution term for
Saban Entertainment and Twentieth Century Fox Home Entertainment, which may be
extended to 10 years under certain circumstances, after which all distribution
and





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<PAGE>   5

ownership rights will revert to the Company without any further obligation to
Saban Entertainment or Twentieth Century Fox Home Entertainment.

         The Company has also begun development on a second live action Casper
feature length direct-to-video film that will introduce Casper's girlfriend,
Wendy, the Good Little Witch, targeted for a fall 1998 release, and a live
action direct-to-video film spin-off starring Wendy, the Good Little Witch
targeted for release in 1999.  (There is no assurance that these films will
be produced or released and, if released, that they will be successful.)

         "RICHIE RICH DIRECT-TO-VIDEO":  In May 1996, the Company and Saban
Entertainment agreed to co-produce one feature- length live action "Richie Rich
Direct-to-Video."  Warner Home Video will serve as the exclusive worldwide home
video distributor and Saban Entertainment will handle worldwide ancillary sales
such as television, cable, and pay-per-view.  The "Richie Rich Direct-to-Video"
film is tentatively scheduled for video release in 1998.  The agreement for
"Richie Rich Direct-to-Video" does not require that the Company bear production
expenses, and allows the Company to share in 50% of the profits, if any, after
Saban Entertainment recovers its marketing, production and out-of-pocket
distribution costs plus a twenty-five percent (25%) distribution fee.  (The
Company did not receive an advance for the "Richie Rich Direct-to- Video"
feature.)   Saban Entertainment will retain distribution rights in perpetuity
for the first "Richie Rich Direct-to-Video."

         The Company is currently developing a second Richie Rich
direct-to-video feature targeted for release in 1999.  There can be no
assurance that this feature will be produced or completed, or if completed,
that it will be successful.

         The Company believes that additional Harvey Classic Characters may be
exploited in the direct-to-video market in the future, but there can be no
assurance that any direct-to-video features will be completed and released or
that, if released, such features will be successful.

TELEVISION:

         Harvey Classic Film Library.  The Company owns the Harvey Classic Film
Library, which consists of approximately 274 six- to eight- minute color
cartoon shorts, of which 248 were originally created in the 1950's for
theatrical exhibition.  The Harvey Classic Film Library was restored,
digitized, re-dubbed and re-scored by the Company in 1990 and 1991.  As part of
the restoration process, the Company created 65 30- minute episodes from the
original 248 shorts and entitled them "Casper and Friends."  The Company has
the right to use the original musical score to the original 248 shorts in the
Harvey Classic Film Library, but ownership to that music was retained by
Paramount Pictures.  Paramount receives music performance royalties when the
cartoons are shown publicly utilizing the original score.  The writers and
publisher of the music receive performance royalties from BMI, which collects
such royalties from broadcasters.  In 1994 and 1996, the Company added to its
animated film library 13 animated shorts for both Baby Huey and Richie Rich.

         HIT Entertainment ("HIT") distributes the Harvey Classic Film Library
internationally, including "Casper and Friends," "Casper Classics" and "The
Baby Huey Show."  The library is currently being broadcast in approximately 55
countries worldwide.  Exhibitors generally remit film licensing receipts to the
distributor who remits such receipts to the Company, net of distribution fees
included in cost of sales.  The Company's distribution agreement with HIT
expires in December 1997 and HIT and the Company are discussing extending the
distribution term.  In the event the Company and HIT do not renew the
distribution agreement, the Company believes that it can replace HIT with a new
distributor.

         New Television Production.  In 1995 and 1996, Universal Studios and
the Company produced 26 thirty-minute all new animated episodes of "Casper,"
which began airing on the Fox Kid's Network in February 1996.  In February
1997, Universal Studios and the Company received an order from Fox Kids Network
for an additional 26 thirty-minute episodes of Casper for a total of 52
animated episodes.  All 52 animated "Casper" episodes have or will be financed
by Universal Studios.  For each episode produced, the Company receives a fixed
license fee and is entitled to share in a percentage of the profits, if any.





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<PAGE>   6

          Additionally, in 1996 the Company produced an animated television
series featuring Richie Rich.  The new series, distributed by Claster
Television, is available to over 80% of the nation's households in Fall 1996 in
first run syndication. The series was not renewed for first-run syndication
television for the 1997-1998 broadcast season in the United States.

         "The Baby Huey Show," a weekly syndicated cartoon series which debuted
in September 1994, is currently broadcast in over 30 foreign countries.  It
will not be aired in the United States for the 1996-1997 television season.
The Company is currently developing a live action series concept for Baby Huey.
However, there can be no assurance that any new episodes will be produced.

THEATRICAL LICENSING:

         Motion pictures featuring Casper, the Friendly Ghost and Richie Rich
were released in May 1995 and December 1994, respectively.  To date, Universal
Studios' "Casper" and Warner Bros.' "Richie Rich" have generated reported
worldwide box office receipts in excess of $280 million and $80 million,
respectively.  The Company received certain character movie licensing fees and
merchandising participations for both features, but did not participate in box
office receipts, nor has it received revenues from its defined profit
participations, and there is no assurance it will receive any profit shares in
the future.

         In January 1996, Warner Bros., which produced the film "Richie Rich,"
exercised its rights to produce a theatrical motion picture sequel to "Richie
Rich."  Warner's exclusive rights with respect to the sequel extend to the
earlier of two years after the date of release of the sequel, or January 29,
2000.

         The Company and Universal Studios are in discussions concerning a live
action theatrical sequel to the 1995 "Casper" feature film.  However, there can
be no assurance that this feature will be produced or completed, or if
completed, that it will be successful.

MERCHANDISING.

         In April 1996, Universal Studios' exclusive merchandising agency with
the Company terminated.  Since April 1996, the Company and Universal Studios
have been negotiating new terms for a continuing merchandising relationship.
In January 1997, the Company and Universal Studios tentatively agreed to a new
short-term merchandising relationship wherein the Company will serve as the
exclusive merchandising agent for all of its characters, including Casper
(except with respect to certain future theatrical releases). The new
merchandising relationship between the Company and Universal Studios
calls for, among other things, the Company to hire a minimum of four additional
staff members to support the Casper merchandising program.  In November 1996,
the Company hired a Vice President of Consumer Products to oversee the
division.  He has hired a Director of Sales, Director of Business
Administration, Director of Creative Affairs and two assistants.  The new
merchandising division will be available to exploit all of the Company's other
Classic Characters as well as Casper.  The Company anticipates investing a
material portion of its available capital in this merchandising division,
although no assurances can be given the Company will be successful or
profitable in merchandising its Characters.

         The Company and Universal Studios are currently negotiating a
permanent merchandising relationship in the context of a more global agreement
between them.

         If Universal Studios and the Company do not enter into a permanent
merchandising relationship, the Company believes Universal Studios' rights to
Casper will be limited to the right to merchandise "Casper" the animated series
for two and one-half years after the last animated "Casper" episode is produced
by Universal Studios, and that Universal Studios will also be entitled to
certain other merchandising rights if a sequel to Universal Studios' "Casper"
feature is ever produced.





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<PAGE>   7

COMIC BOOK PUBLISHING.

         In 1994, the Company and Marvel entered into an agreement (the "Marvel
Agreement") pursuant to which Marvel publishes, distributes and licenses, on an
exclusive basis, comic books and magazines based upon the Harvey Classic
Characters.  The Marvel Agreement remains in effect until June 30, 2000 and, if
not terminated by either party, is to be automatically renewed for successive
one-year periods.  In addition, Marvel may extend the Marvel Agreement for an
additional three years in the event it has not paid the Company at least $2
million during the initial term.  The Marvel Agreement provides for a minimum
royalty of $1,000,000 during the initial term and $600,000 over the extended
term, if any.  Under the Marvel Agreement, the Company receives varying
royalties based on Marvel's revenues, which royalties are offset against the
minimum payments. The Company has retained reasonable approval rights over the
plots and pencil sketches of comic books Marvel proposes to publish based on
the Company's Harvey Classic Characters.  The Company accounts for revenues
received under the Marvel Agreement as merchandising revenues.  Marvel filed
for bankruptcy reorganization in December, 1996.  The Company is uncertain as
to the effect of Marvel's bankruptcy on the Company's business, but does not
believe the Marvel bankruptcy will have a material impact.  Receivables from
Marvel (which have been discounted to net present value, using a discount rate
of 10% per annum) totaled $479,000 at December 31, 1996.

INTELLECTUAL PROPERTY ASSETS.

         The Company's principal assets are its copyright and trademark rights
in its proprietary Harvey Classic Characters, including Casper, the Friendly
Ghost, Fatso, Stinkie and Stretch (the Ghostly Trio), Richie Rich, Baby Huey,
Wendy, the Good Little Witch, Little Audrey, Herman and Katnip, Little Lotta,
Little Dot, Buzzy the Funny Crow, Stumbo the Giant and Hot Stuff.  In addition,
the Company possesses copyrights to approximately 1,875 32-page comic books
published between approximately 1955 and 1993 and the copyrights to the film
shorts in its Harvey Classic Film Library.  The Company has applied for and
received copyright and trademark protection in the United States and copyright
protection in certain foreign countries which are parties to the Berne
Convention on many, but not all, of its publications, the film shorts in the
Harvey Classic Film Library and the Harvey Classic Characters.  The Company
attempts to vigorously protect against infringements on the rights it holds to
its proprietary characters and publications.

         Substantially all of the United States copyrights on the Company's
cartoon shorts and comic books were acquired under the Copyright Act of 1909
(the "1909 Act").  Under the 1909 Act, copyrights were granted for an initial
term of 28 years and a renewal term of 28 years.  Under the Copyright Act of
1976 (the "1976 Act"), copyright protection for existing and new copyrights was
extended for a total term of 75 years from the date of initial publication.
Therefore, for Company works published prior to the effective date of the 1976
Act, the terms of the Company's copyrights have been extended to 75 years from
the dates of initial publication of the underlying works.  Substantially all of
the most important Harvey Classic Characters are protected in the United States
by United States trademarks which run for a period of 10 years, and which may
be renewed for an indefinite number of additional 10 year periods upon a
showing of continued use.  While many countries have intellectual property laws
that protect United States holders of such property, others do not, and there
can be no assurance that the Company's rights will not be violated or its
characters "pirated" in foreign jurisdictions.

         The Copyright registrations for seven cartoon shorts and a limited
number of comic books were not renewed by prior management and such
registrations have expired.  By virtue of the expiration of the copyrights in a
limited number of original cartoon shorts and comic books, the Company's rights
to the sole and exclusive use of those cartoons and comic books is unclear.

         From time to time, claims have been asserted against the Company
alleging that the Casper character may have fallen into the public domain and
thus can be freely used and exploited by anyone.  However, the Company believes
that any such claims are meritless and that the Company's exclusive rights to
Casper are adequately protected by law.





                                      -7-
<PAGE>   8
COMPETITION.

         Management believes its principal competitors are The Walt Disney
Company, Fox Kids Worldwide, Warner Bros., and Nickelodeon.  These competing
companies are all much larger and better financed than the Company.

EMPLOYEES.

         The Company employs 17 persons on its full-time staff.  For the
Company's filmed entertainment productions, in those instances where the
Company oversees and bears the costs of production, the Company hires
independent contractors or production facilities for creative work on an
as-needed basis.  None of the Company's employees are represented by a union
and the Company believes relations with its employees are good.

                     FACTORS WHICH MAY AFFECT FUTURE RESULTS

         In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution readers
that the following important factors, among others, in some cases have affected
and in the future could affect the Company's actual results and could cause
such results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Company.

         SUCCESS OF EXPANSION STRATEGY.  The exploitation of the Company's
Harvey Classic Characters and related ancillary rights through the development
of new products and entry into emerging markets is a principal element of the
Company's growth strategy.  Certain of these products, such as direct-to-video
and merchandising, are new to the Company and there can be no assurance that
the Company will be able to develop new products successfully or compete
effectively in new markets.  In addition, there is no assurance that the Harvey
Classic Characters will enjoy sustained popularity such that the Company can
recover any of its upfront production and other development costs.  As a
result, there is substantial risk that the Company will be unable to implement
successfully its expansion strategy.

         NEW MERCHANDISING ACTIVITIES.  In the past, the Company has relied
upon Universal Studios for substantially all merchandising of the Harvey
Classic Characters.  Universal Studios' right to act as the Company's exclusive
merchandising agent terminated in April 1996 and the Company is now handling
merchandising for its Classic Characters itself.  There is no assurance that
the Company, despite its additions to staff and related overhead, will be able
to promote and compete in the merchandising marketplace effectively.  To the
extent the Company performs merchandising functions internally, there is no
assurance that its merchandising revenues will increase or be sustained at
current levels or be sufficient to defray its additional new costs associated
with its merchandising efforts.

         NATURE OF THE ENTERTAINMENT INDUSTRY.  The television, merchandising,
motion picture and direct-to-video industries are highly speculative and
historically have involved a substantial degree of risk.  The success of a
trademarked or copyrighted character, television show, video production or
motion picture depends upon unpredictable and changing factors such as audience
acceptance, which may bear little or no correlation to the Company's production
and other costs.  Although many of the Company's characters have been in
existence for more than 40 years, all are not currently popular and there is no
assurance that they will, despite the Company's increased efforts and
expenditures, become popular, or that those that are will continue to be
popular.  Audience acceptance of the Company's products represents a response
not only to the artistic components of the products, but also to promotion by
the distributor, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and public taste
generally, and other intangible factors, all of which change rapidly and cannot
be predicted with certainty.  Therefore, there is a substantial risk that some
or all of the Company's projects will not be commercially successful, resulting
in costs not being recouped or anticipated profits not being realized.  In
addition, there can be no assurance that the Company's projects, if
commercially successful initially, will remain commercially successful or be
promoted effectively and/or renewed by third-party agents or distributors.

         RELIANCE ON MAJOR DISTRIBUTORS.  The commercial success of a
television show, motion picture or video production may depend upon, among
other things, promotion by a distributor.  Historically, the Company has relied





                                      -8-
<PAGE>   9
on two distributors for domestic and foreign syndication of its television
programming.  Although Management believes these distributors could be replaced
if necessary, a termination of the Company's relationship with these
distributors could materially adversely affect the Company's results.

         COMPETITION IN MERCHANDISING AND ANIMATION.  Competition is intense in
merchandising and the animation industry in which the Company is engaged.
Management believes that the Company is in competition with major entertainment
companies, as well as with numerous smaller entertainment companies and other
leisure time activities, for the consumer entertainment dollar.  Management
believes that the Company's principal competitor is The Walt Disney Company,
which has far greater resources and distribution capabilities than the Company.
There can be no assurance that the Company will produce and market its products
successfully or that its merchandising and filmed entertainment projects will
generate any profits.

         FLUCTUATIONS IN QUARTERLY AND YEARLY OPERATING RESULTS.  The Company's
quarterly and yearly operating results may fluctuate in part due to the manner
in which the Company is required to record revenue from film licensing and
merchandising agreements.  Although film licensing and merchandising agreements
typically grant rights for a period of one to five years, all revenues are
recognized when the license period begins, provided certain conditions are met.
Additionally, possible fluctuations in quarterly and yearly operating results
may arise due to the Company's timing in entering into merchandising and film
licensing agreements.  For example, merchandising revenues with respect to a
particular character tend to be concentrated around the period of initial
release of a filmed entertainment project featuring such character.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily an accurate indication of future
performance.

         DEPENDENCE ON KEY PERSONNEL.  The Company is dependent on the efforts
and abilities of its senior management, particularly Jeffrey A.  Montgomery,
the Company's Chief Executive Officer and Gregory M. Yulish, its Executive Vice
President and Chief Financial Officer.  The Company maintains a $2,000,000
"keyman" life insurance policy on Mr. Montgomery.  The loss of any of the
Company's key executives could have an adverse effect on the business and
prospects of the Company.

         UNISSUED PREFERRED STOCK; SHARES ELIGIBLE FOR FUTURE SALE.  The Board
of Directors without further action by the holders of Common Stock may issue up
to 3,000,000 shares of preferred stock, no par value (the "Preferred Stock") in
one or more series and may fix or alter the rights, preferences, privileges and
restrictions, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
preferences and conversion rights, and the description of and number of shares
constituting any wholly unissued series of Preferred Stock.  No shares of
Preferred Stock presently are outstanding.  The issuance of Preferred Stock
shares under certain circumstances could have the effect of delaying or
preventing a change of control or other corporate action and may dilute the
interests of the holders of Common Stock.  In addition, sales of Common Stock
in the public market could adversely affect the market price of the Company's
shares.  Options granted under the Company's stock option plans, registration
rights granted to certain individuals and shares of previously restricted
Common Stock are all eligible for sale in the public market, subject, in some
cases, to certain restrictions.


ITEM 2.  PROPERTIES

         The Company leases approximately 7,237 square feet (gross) of office
space in Century City (Los Angeles) pursuant to a five (5) year lease entered
into in August 1996.  The Company also leases approximately 9,000 square feet
(gross) of office space in Santa Monica pursuant to a ten-year lease entered
into in December 1993.  The Company has subleased approximately 6,000 square
feet of this space to an unaffiliated person through January 31, 2001, and
subleases approximately 3,000 square feet to a Universal Studios' subsidiary
for $7,000 per month.  The Company is presently in discussions with Universal
Studios about converting the month-to-month sublease into a longer term
arrangement.  The Company's principal business address is 1999 Avenue of the
Stars, Suite 2050, Los Angeles, California 90067.





                                       -9-
<PAGE>   10

ITEM 3.  LEGAL PROCEEDINGS

THE HARVEY ENTERTAINMENT COMPANY V. JEFFREY FRANKLIN ET AL. AND STEVE WATERMAN

         On September 30, 1994, the Company filed suit in the Superior Court of
the State of California for the County of Los Angeles against Jeffrey Franklin,
Jeffrey Franklin d/b/a ATI Enterprises, and Franklin/Waterman Entertainment,
Inc. alleging breach of fiduciary duty, intentional interference with
prospective economic advantage, breach of contract, breach of the implied
covenant of good faith and fair dealing, tortious breach of the implied
covenant of good faith and fair dealing, fraud, intentional misrepresentation,
unfair competition and constructive trust. The Company filed a related claim
against Franklin's business partner Stephen Waterman in May, 1996.  Jeffrey
Franklin is a former member of the Company's Board of Directors who, along with
his company ATI Equities and his partner Steve Waterman, entered into an
agreement (the "Contract") requiring Franklin et al. to act as the Company's
exclusive agent with regard to the presentation of motion picture, television,
video and music projects by the Company to potential buyers, distributors,
financiers, investors and other parties.  Pursuant to the Contract, Franklin
was to consult with the Company regarding the negotiation of any agreements in
the above-mentioned areas.  Franklin/Waterman Entertainment, Inc. is a
corporation closely related to Franklin and Waterman.

         In this action, the Company has alleged among other things that
Franklin (while acting as a director and agent of the Company), ATI and
Waterman conspired to wrongfully usurp corporate business opportunities for
themselves and for Franklin/Waterman which rightfully belonged to the Company,
and misrepresented to the Company the facts surrounding the transactions.  The
Company has sued for constructive trust to recover the profits the defendants
made from those wrongful acts, and for compensatory and punitive damages in an
amount exceeding $1,000,000.

         On December 13, 1994, several months after a $50 million fraud
judgment (including punitive damages) was awarded against Franklin and Waterman
in Los Angeles Superior Court, Franklin and Waterman filed for bankruptcy
pursuant to Chapter 11 of the United States Bankruptcy Code in the United
States District Court for the Central District of California, Northern
Division, Case No. 94-15283.  The automatic stay has been lifted against
Jeffrey Franklin and Steve Waterman.

         Discovery has recently been completed.  The Company believes that the
eventual outcome of the Franklin and Waterman actions will not have a material
effect on the financial position of the Company.  However, given the
uncertainties of litigation, no assurances can be given as to the final outcome
of this action or its effect.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.





                                      -10-
<PAGE>   11
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET PRICES

         The Company's Common Stock trades on The Nasdaq Stock Market's
National Market under the symbol HRVY.  Prior to December 5, 1994, the
Company's Common Stock traded on The Nasdaq Stock Market's SmallCap Market.
The following table sets forth, for the fiscal quarters indicated, the high and
low sale price for the Company's Common Stock.

<TABLE>
<CAPTION>
                                                                                   High             Low
                                                                                   ----             ---
      <S>                                                                         <C>              <C>
      Fiscal year ended December 31, 1994:
             First Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       $14.00            $9.50
             Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .        11.00             8.25
             Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . .        14.00            10.00
             Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .        19.50            11.75
      Fiscal year ended December 31, 1995:
             First Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       $18.25           $13.75
             Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .        17.75             6.50
             Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . .        15.00             7.50
             Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .        12.50             6.25
      Fiscal year ended December 31, 1996
             First Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       $10.00            $6.25
             Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .        12.00             6.75
             Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . .         9.63             6.50
             Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .         9.13             5.25
      Fiscal year ended December 31, 1997:
             First Quarter through March 21, 1997 . . . . . . . . . . . . .        $8.50            $5.63
</TABLE>

HOLDERS

         As of February 28, 1997, there were approximately 183 holders of
record of the Company's Common Stock.

DIVIDENDS

         To date, the Company has never paid cash dividends on its Common
Stock, and provisions in the Company's Revolving Credit Facility prohibit the
payment of dividends.  The Board of Directors expects that the Company will
continue to retain any future earnings for use in its business.

RECENT SALES OF UNREGISTERED SECURITIES.

         In January 1997, the Company issued two warrants to purchase Common
Stock.  The first, for a total of 50,000 shares of the Company's Common Stock,
was issued to Arnhold and S. Bleichroeder, Inc. as compensation for investor
relations and other related services.  Of the 50,000 shares, options for 25,000
shares vested immediately for services to the Company in 1997 and may be
exercised at any time through January 16, 2002.  The second option, for 25,000
shares, will only vest if the Company requests that Arnhold and S. Bleichroeder
perform similar services for calendar year 1998 and, in such case, the option
will be available for exercise through January 16, 2003.  The second option for
a total of 50,000 shares was issued to Michael Doherty,  an advisor to the
Company and former employee of Arnhold and S. Bleichroeder, on similar terms.
Both warrants were issued in reliance on the private placement exemption of
Section 4(2) of the Securities Act of 1933, as amended.





                                      -11-
<PAGE>   12
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

INTRODUCTION

         The Company conducts its operations through its wholly-owned
subsidiary, Harvey Comics, Inc.  The Company was formed by Jeffrey A.
Montgomery in 1989 and acquired Harvey that year from the families of its
founders.

         The Company's revenues are derived from two principal sources:  (i)
Merchandising and (ii) Filmed Entertainment.  The Company no longer publishes
comic books.

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                           -----------------------
                                                                        1996                   1995
                                                                        ----                   ----
<S>                                                                    <C>                   <C>
Filmed Entertainment Revenues . . . . . . . . . . . . . . . . . .      $5,824,000            $3,544,000
Merchandising Revenues  . . . . . . . . . . . . . . . . . . . . .       3,344,000             5,554,000
                                                                        ---------             ---------
Operating Revenues  . . . . . . . . . . . . . . . . . . . . . . .       9,168,000             9,098,000
                                                                        ---------             ---------
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . .       2,492,000             3,244,000
Selling, General & Administrative Expenses  . . . . . . . . . . .       4,008,000             3,722,000
Interest, Depreciation and Amortization . . . . . . . . . . . . .         806,000               828,000
                                                                        ---------             ---------
Income from Operations  . . . . . . . . . . . . . . . . . . . . .       1,862,000             1,304,000
Other Income  . . . . . . . . . . . . . . . . . . . . . . . . . .         377,000               234,000
                                                                        ---------             ---------
Income before Provision for Income Taxes  . . . . . . . . . . . .       2,239,000            1,538,0000
Provision for Income Taxes  . . . . . . . . . . . . . . . . . . .         972,000               685,000
                                                                        ---------             ---------
Net Income  . . . . . . . . . . . . . . . . . . . . . . . . . . .      $1,267,000              $853,000
                                                                        =========             =========
Net Income Per Share  . . . . . . . . . . . . . . . . . . . . . .           $0.33                 $0.21
                                                                        =========             =========
</TABLE>

RESULTS OF OPERATIONS

         Fiscal Year 1996 Compared to Fiscal Year 1995

         The Company's net operating revenues in the 1996 and 1995 were
$9,168,000 and $9,098,000, respectively, an increase of $70,000.  The increase
in revenues from 1995 to 1996 includes an increase of $2,280,000 in filmed
entertainment revenues and a decrease of $2,210,000 in merchandising revenues.

REVENUES

         Net filmed entertainment revenues were $5,824,000 and $3,544,000 in
1996 and 1995, respectively, an increase of $2,280,000.  The increase in filmed
entertainment revenues was primarily due to the Company entering into an
agreement with Saban Entertainment to co-produce two feature length, live
action direct-to-video films based on the Company's Casper and Richie Rich
characters.  For "Casper," the Company received a $3,300,000 nonrefundable
advance from Saban Entertainment against 50% of net receipts after production,
marketing and third-party out-of-pocket distribution expenses are recouped.
There were no such revenues in 1995.  Also contributing to the increase in
revenues was the distribution agreement entered into with MCA Television Ltd.
wherein MCA obtained the exclusive license to distribute for television
broadcast through June 1998, 56 episodes of "Casper and Friends" in the United
States.  The Company was paid a minimum nonrefundable guarantee of $840,000 for
the license.  There were no such revenues in the 1995 comparable period.
Foreign broadcast license revenues from the Harvey Classic Film Library and
"The Baby Huey Show" accounted for $819,000 in 1996 and $2,029,000 in 1995, a
decrease of $1,210,000 or 60%.  The decrease is due to fewer licenses being
sold to third parties in 1996 versus 1995.  Although foreign broadcasting
licenses are generally granted for a period of one to five years, all revenues
are recognized when the license period begins, provided certain conditions have
been met.  Due to this accounting





                                      -12-
<PAGE>   13
treatment, revenue fluctuations will likely recur in the future on a quarterly
and annual basis.  Revenues associated with the domestic barter sales of "The
Baby Huey Show" accounted for $101,000 in 1996 and $696,000 in 1995. The
decrease in revenues is due to the Company receiving 100% of the revenues from
"The Baby Huey Show" in 1995 versus 25% in 1996.  A portion of the 1996 "Baby
Huey Show," 13 7-minute "Baby Huey Shorts," was 100% financed by Universal
Studios and therefore the Company, which had no capital at risk, received a
lower participation.  "The Baby Huey Show's" United States season ended in the
third quarter of 1996.  The animated series "Richie Rich" premiered in
September 1996 and airs weekly in syndication.  It is potentially available to
over 80% of the nation's households.  Revenues associated with the domestic
barter sales of the "Richie Rich" animated series accounted for $430,000 in
1996.  There were no such revenues in 1995.  In January 1996, Warner Bros.,
which produced the "Richie Rich" motion picture, exercised its right for the
theatrical motion picture sequel to "Richie Rich" and paid the Company
$200,000.  There were no comparable revenues for 1995.  Animation license fees
for the "Casper" series, which is being financed by Universal Studios and airs
on the Fox Kids Network, were $130,000 and $780,000 in 1996 and 1995,
respectively.  The decrease in revenues is due to fewer shows being produced in
the later period.  The balance of 1996 revenues consist of residuals from the
"Casper and Friends" animated series. The balance of 1995 revenues consist of
residuals from the "Casper and Friends" animated series and "Richie Rich"
cartoon royalties from Hanna-Barbera.

         Net merchandising revenues were $3,344,000 and $5,554,000 in 1996 and
1995, respectively, a decrease of $2,210,000.  The decrease in merchandising
revenue was due to a decline in licensees for the worldwide merchandising
program for Casper.  The reason for the decline in licensees is primarily due
to the transition of merchandising for Casper from Universal Studios to the
Company and to the drop off in licensing fees after the release of the "Casper"
theatrical feature.  Although merchandising licenses are generally granted for
a period of one to three years, all minimum guaranteed license revenues are
recognized when the license period begins, provided certain conditions have
been met.  Due to this accounting treatment, revenue fluctuations from the
Company's merchandising activities will likely recur in the future on a
quarterly and annual basis.  A number of the licensees participating in the
Company's worldwide Casper merchandising program have generated revenues which
exceed minimum guaranteed amounts, which has and will result in additional
revenue to the Company.  The Company cannot accurately project future revenues
derived from Casper or any other merchandising revenues because the ongoing
success of the merchandising program is in part dependent upon anticipated
enhancements to the attractiveness and marketability of the Harvey Classic
Characters.  In addition, there can be no assurance that merchandising revenues
will increase or continue at the same level in the future because many of the
Casper licenses entered into in connection with the initial release of the
"Casper" motion picture have expired, and it is not known whether or how many
of such licenses will be renewed.

COST OF SALES

         Costs of sales relating to filmed entertainment revenues were
$1,660,000 and $1,520,000 in 1996 and 1995, respectively.  The increase in cost
of sales is due to an increase in filmed entertainment activity for the year.
As a percentage of net filmed entertainment revenues, cost of sales were 29%
and 43% in 1996 and 1995, respectively.  The decrease in costs of sales as a
percentage of revenues is due to there being no cost of sales associated with
the MCA domestic television license of "Casper and Friends" or "Richie Rich"
theatrical license fee.  Costs associated with the Saban Entertainment
direct-to-video agreement were $550,000, of which amount $350,000 was paid to
officers of the Company as a producer's fee.

         Merchandising costs of sales were $832,000 and $1,724,000 in 1996 and
1995, respectively.  As a percentage of net merchandising revenues, cost of
sales were 25% and 31% in 1996 and 1995, respectively.  The decrease in cost of
sales is due to a decrease in merchandising activity for the year.  The
decrease in costs of sales as a percentage of revenues is due to lower fees
associated with revenues derived from non-theatrical Casper licenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses (SG&A) were $4,008,000
and $3,722,000 for 1996 and 1995, respectively, an increase of $286,000.  The
increase in SG&A is due to an increase in legal expenses related to the





                                      -13-
<PAGE>   14
Company's litigation and the hiring of additional employees in fall 1996.  As a
percentage of net operating revenues, SG&A was 44% and 41% for 1996 and 1995,
respectively.

DEPRECIATION AND AMORTIZATION

         Depreciation expense was $53,000 and $61,000 in 1996 and 1995,
respectively.  Amortization of the film library was $558,000 and $580,000 in
1996 and 1995, respectively. The decrease in amortization is due to the
decrease in revenue derived from the film library, which is being amortized in
accordance with the individual film forecast method.  Amortization of
trademarks, copyrights and other was $51,000 in 1996 and $44,000 in 1995.
Amortization of goodwill was $130,000 in both 1996 and 1995.

INTEREST EXPENSE

         Interest expense was $14,000 and $13,000 in 1996 and 1995,
respectively.  Interest expense in 1996 and 1995 was due to annual loan fees on
the Company's line of credit.  See "Liquidity and Capital Resources."

OTHER INCOME

         Other income, primarily interest income, was $377,000 and $234,000 in
1996 and 1995, respectively.  The increase in other income was due to higher
cash balances for the period, which generated increased interest income on the
Company's short-term investments.

INCOME TAXES

         Provision for income taxes was $972,000 and $685,000 in 1996 and 1995,
respectively.  The increase in the provision for income taxes is due to the
Company's increased profitability in 1996 versus 1995.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operating activities was $3,899,000 and
$1,594,000 in 1996 and 1995, respectively.  Cash generated from operations was
primarily due to the increase in net income for the year and proceeds from the
collection of receivables.

         The Company believes that obligors liable on all receivables are of
good quality and that the allowance for doubtful accounts at December 31, 1996
in the amount of $573,000 is adequate.  The Company continually reevaluates its
receivables to reassess its allowance for bad debts.  The Company does not
believe the bankruptcy of Marvel will have an adverse effect on its ability to
collect funds due under its comic book publishing arrangement.

         Net cash (used in) provided by investing activities was $(2,265,000)
and $1,337,000 in 1996 and 1995, respectively.  The decrease in cash flows from
investing activities is primarily attributed to the Company's investment of
$1,872,000 in the production of 13 "Richie Rich" animated shorts in 1996.
There were no such charges in 1995.

         Net cash provided by financing activities was $56,000 and $831,000 in
1996 and 1995, respectively.  The 1995 and 1996 cash flows were the result of
proceeds from the exercise of stock options.  The Company did not draw on its
bank credit facility in 1996 or in 1995.

         The Company has a $2,500,000 revolving credit facility (the "Revolving
Facility") with City National Bank, which expires on June 1, 1997.  Interest on
advances made under the Revolving Facility accrues at 1% above the prime rate
as reported by the lender.  The Company has not drawn on this facility.  The
Revolving Facility is secured by substantially all of the assets of the
Company.

         The Revolving Facility prohibits the payment of dividends or other
distributions by Harvey to the Company, the guaranty by Harvey of Company
obligations, the grant of additional liens or security interests by Harvey, the
sale





                                      -14-
<PAGE>   15
of assets or the making of loans or other advances by Harvey (including loans
to the Company), or the incurrence of new indebtedness for borrowed money by
Harvey.  In addition, as amended, the Revolving Facility prohibits Harvey from
(i) permitting its net worth to fall below $12,000,000 as of the end of any
fiscal quarter, (ii) permitting its current ratio to be less than 1.5 to 1.0,
or (iii) permitting its ratio of indebtedness to net worth to be greater than
 .65 to 1.0.

INFLATION AND SEASONALITY

         Inflation has not been material to the Company during the past four
years.

ITEM 7.  FINANCIAL STATEMENTS

         [Pages F-1 through F-16 follow.]

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

         None.

[PART III FOLLOWS PAGE F-16, AT PAGE 16.]





                                      -15-
<PAGE>   16

ITEM 7.  FINANCIAL STATEMENTS
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

TABLE OF CONTENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               PAGE
<S>                                                                               <C>
INDEPENDENT AUDITORS' REPORT                                                    F-2


CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31,
   1996 AND 1995:

   Consolidated Balance Sheets                                                F-3 to F-4

   Consolidated Statements of  Income                                           F-5

   Consolidated Statements of Stockholders' Equity                              F-6

   Consolidated Statements of Cash Flows                                      F-7 to F-8

   Notes to Consolidated Financial Statements                                 F-9 to F-16
</TABLE>






                                       F-1


<PAGE>   17

INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
  The Harvey Entertainment Company
Los Angeles, California:

We have audited the accompanying consolidated balance sheets of The Harvey
Entertainment Company and subsidiary (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of The Harvey Entertainment Company
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.


/s/  DELOITTE & TOUCHE LLP

Los Angeles, California
February 14, 1997






                                       F-2



<PAGE>   18

THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                           1996          1995
<S>                                                              <C>           <C>
CURRENT ASSETS:
  Cash and cash equivalents                                  $ 6,057,000  $ 4,367,000
  Accounts receivable, net (Note 2)                            2,342,000    3,465,000
  Prepaid expenses and other current assets                      226,000      171,000
  Prepaid income taxes                                           620,000
  Note receivable - officer/stockholder (Note 8)                              128,000
                                                             -----------  -----------
          Total current assets                                 9,245,000    8,131,000


LONG-TERM ACCOUNTS RECEIVABLE (Note 2)                           410,000      642,000

FILM LIBRARY, Net of accumulated amortization of $2,853,000
   and $2,295,000 in 1996 and 1995, respectively              10,106,000    8,656,000

FURNITURE AND EQUIPMENT, Net of accumulated depreciation
  of $260,000 and $207,000 in 1996 and 1995, respectively        277,000      170,000

GOODWILL, Net of accumulated amortization of $963,000 and
  $833,000 in 1996 and 1995, respectively                      1,633,000    1,762,000

TRADEMARKS AND COPYRIGHTS, Net of accumulated
  amortization of $160,000 and $181,000 in 1996 and
  1995, respectively                                             503,000      374,000

OTHER ASSETS                                                     130,000       87,000
                                                             -----------  -----------
TOTAL (Note 4)                                               $22,304,000  $19,822,000
                                                             ===========  ===========
</TABLE>




See notes to consolidated financial statements.                      (Continued)












                                       F-3



<PAGE>   19

THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                                     1996           1995
                                                                                     ------------   ------------
<S>                                                                                  <C>            <C>
CURRENT LIABILITIES:
  Accounts payable and accrued expenses (Notes 8 and 9)                              $  1,075,000   $    789,000
  Income taxes payable (Note 3)                                                                           87,000
                                                                                     ------------   ------------
          Total current liabilities                                                     1,075,000        876,000

DEFERRED INCOME TAXES (Note 3)                                                          2,610,000      1,724,000

ACCRUED RENT (Note 5)                                                                     137,000         63,000
                                                                                     ------------   ------------
          Total liabilities                                                             3,822,000      2,663,000
                                                                                     ------------   ------------

COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 9)

STOCKHOLDERS' EQUITY:
  Preferred stock, $1 par value; authorized, 3,000,000 shares; none issued (Note 6)
  Common stock, no par value; 10,000,000 common shares authorized; 3,642,000
    shares issued and outstanding in 1996 and 3,630,000 in 1995 (Notes 6 and 7)        18,900,000     18,844,000
  Accumulated deficit                                                                    (418,000)    (1,685,000)
                                                                                     ------------   ------------

          Total stockholders' equity                                                   18,482,000     17,159,000
                                                                                     ------------   ------------

TOTAL                                                                                $ 22,304,000   $ 19,822,000
                                                                                     ============   ============
</TABLE>



See notes to consolidated financial statements.                      (Concluded)





                                       F-4



<PAGE>   20

THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                          1996       1995
<S>                                                                   <C>         <C>
OPERATING REVENUES (Note 2):
  Filmed entertainment                                                $5,824,000  $3,544,000
  Merchandising                                                        3,344,000   5,554,000
                                                                      ----------  ----------

           Total operating revenues                                    9,168,000   9,098,000
                                                                      ----------  ----------
OPERATING EXPENSES:
  Cost of sales (Note 2)                                               2,492,000   3,244,000

  Selling, general and administrative expenses (Notes 5, 8 and 9)      4,008,000   3,722,000
  Amortization of film library, goodwill, trademarks and copyrights,
    and other                                                            739,000     754,000
  Depreciation                                                            53,000      61,000
  Interest expense (Note 4)                                               14,000      13,000
                                                                      ----------  ----------

           Total operating expenses                                    7,306,000   7,794,000
                                                                      ----------  ----------

INCOME FROM OPERATIONS                                                 1,862,000   1,304,000

OTHER INCOME (Note 8)                                                    377,000     234,000
                                                                      ----------  ----------

INCOME BEFORE PROVISION FOR INCOME TAXES                               2,239,000   1,538,000


PROVISION FOR INCOME TAXES (Note 3)                                      972,000     685,000
                                                                      ----------  ----------

NET INCOME                                                            $1,267,000  $  853,000
                                                                      ==========  ==========

WEIGHTED AVERAGE COMMON SHARES AND COMMON
  SHARE EQUIVALENTS OUTSTANDING                                        3,882,000   4,005,000
                                                                      ==========  ==========

NET INCOME PER SHARE                                                  $     0.33  $     0.21
                                                                      ==========  ==========
</TABLE>




See notes to consolidated financial statements.






                                       F-5


<PAGE>   21


THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY YEARS
ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                               COMMON STOCK
                                         ------------------------  ACCUMULATED
                                          SHARES       AMOUNT        DEFICIT          TOTAL
<S>                                      <C>          <C>           <C>            <C>
BALANCE, JANUARY 1, 1995                 3,536,000  $ 17,895,000   $(2,538,000)   $15,357,000

  Exercise of stock options and
    warrants, including tax benefit
    (Notes 3 and 7)                         94,000       949,000                      949,000

  Net income                                                           853,000        853,000
                                         ---------    ----------    -----------    ----------
BALANCE, DECEMBER 31, 1995               3,630,000    18,844,000    (1,685,000)    17,159,000

  Exercise of stock options (Note 7)        12,000        56,000                       56,000

  Net income                                                         1,267,000      1,267,000
                                         ---------    ----------    -----------    ----------
BALANCE, DECEMBER 31, 1996               3,642,000  $ 18,900,000  $   (418,000)  $ 18,482,000
                                         =========    ==========    ===========    ==========
</TABLE>





See notes to consolidated financial statements.


















                                       F-6




<PAGE>   22




THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                    1996        1995
<S>                                                                 <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                   $ 1,267,000   $   853,000
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation                                                    53,000        61,000
    Amortization of film library, goodwill, trademarks and
      copyrights, and other                                        739,000       754,000
    Write-off of deferred offering costs                                         315,000
    Loss on sublease                                                             112,000
    Deferred income taxes                                          886,000       561,000
    Changes in operating assets and liabilities:
      Accounts receivable                                        1,355,000    (1,063,000)
      Prepaid expenses and other current assets                    (55,000)      (77,000)
      Prepaid income taxes                                        (620,000)
      Deferred offering costs                                                   (242,000)
      Accounts payable and accrued expenses                        287,000       277,000
      Accrued rent                                                  74,000       (44,000)
      Income taxes payable                                         (87,000)       87,000
                                                               -----------   -----------

          Net cash provided by operating activities              3,899,000     1,594,000
                                                               -----------   -----------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Net sale of marketable securities                                            1,435,000
  Purchase of furniture and equipment                             (160,000)      (90,000)
  Investments in trademarks and copyrights and film library     (2,175,000)      (87,000)
  (Increase) decrease in other assets                              (58,000)       79,000
  Proceeds from notes receivable - officer/stockholder             128,000
                                                               -----------   -----------

          Net cash (used in) provided by investing activities   (2,265,000)    1,337,000
                                                               -----------   -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES
 Proceeds from exercise of stock options                            56,000       831,000
                                                               -----------   -----------
</TABLE>


See notes to consolidated financial statements.                     (Continued)




                                      F-7

<PAGE>   23
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                            1996        1995
<S>                                                      <C>          <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS               $1,690,000    $3,762,000

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR             4,367,000       605,000
                                                        ----------    ----------

CASH AND CASH EQUIVALENTS, END OF YEAR                  $6,057,000    $4,367,000
                                                        ==========    ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year
  for:
    Interest                                            $   14,000    $   13,000
    Income taxes                                        $  797,000        42,000
</TABLE>



See notes to consolidated financial statements.                      (Concluded)




























                                       F-8



<PAGE>   24

THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      GENERAL - The Harvey Entertainment Company is incorporated in the state of
      California and is primarily engaged in filmed entertainment production and
      merchandise licensing of its classic characters.

      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 and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
      include the accounts of The Harvey Entertainment Company and its wholly
      owned subsidiary, Harvey Comics, Inc. (collectively, the "Company"). All
      significant intercompany accounts and transactions have been eliminated in
      consolidation.

      FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
      consist primarily of cash, cash equivalents, accounts receivable, accounts
      payable and accrued liabilities. The carrying values of all financial
      instruments, other than long-term receivables, are representative of their
      fair values due to their short-term maturities. The carrying values of
      long-term accounts receivable are considered to approximate their fair
      values because the interest rates used to discount these instruments are
      comparable to current rates offered to the Company.

      CASH AND CASH EQUIVALENTS - The Company considers investments with
      original maturities of 90 days or less to be cash equivalents.

      FILM LIBRARY - The film library (which is recorded at the lower of cost or
      estimated net realizable value) is amortized using the individual film
      forecast method in accordance with SFAS No. 53, "Financial Reporting by
      Producers and Distributors of Motion Picture Films." The individual film
      forecast method amortizes costs in the ratio that the current year's
      revenues bear to management's estimate of total remaining ultimate gross
      film revenues from all sources. Such estimates are revised periodically,
      and losses, if any, are provided for in full.

      Based upon the Company's estimates of future gross revenues at December
      31, 1996, approximately 18% of the unamortized film library will be
      amortized during the three-year period ending December 31, 1999. In
      addition, the Company estimates that approximately 60% of the unamortized
      film library will be amortized over the next 15 years. Because of the
      inherent uncertainties in estimating the remaining ultimate gross film
      revenues, it is at least reasonably possible that the Company's estimates
      of amortization will change in the near term.

      FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost and
      are depreciated using the straight-line method over three- to five-year
      estimated lives.




                                       F-9



<PAGE>   25



      GOODWILL - Goodwill is amortized on a straight-line basis over 20 years.
      The Company periodically reviews the recoverability of goodwill to
      determine if there has been any permanent impairment. This assessment is
      performed based on the estimated undiscounted future cash flows from
      operating activities compared with the carrying value of goodwill. If the
      undiscounted future cash flows are less than the carrying value, a
      write-down would be recorded measured by the amount of the difference.

      REVENUE RECOGNITION - The majority of the Company's licensing agreements
      for merchandising and filmed entertainment call for nonrefundable
      guaranteed fees, which are recognized when the license period begins,
      provided certain conditions have been met. Additional merchandising and
      film licensing revenues are recognized when earned based on royalty
      statements.

      CONCENTRATION OF CREDIT RISK - The Company's trade receivables result
      primarily from licensing agreements for merchandising and the animation
      film library, throughout the world. The Company performs ongoing credit
      evaluations of its customers and generally does not require collateral.
      Although the Company has a diversified customer base, a substantial
      portion of its debtors' ability to honor their contracts is dependent upon
      the merchandising and filmed entertainment industries.

      NET INCOME PER SHARE - Net income per share is computed based on the
      weighted average shares and common share equivalents outstanding during
      the period.

2.    SIGNIFICANT DISTRIBUTORS AND EXPORT SALES

      Accounts receivable consist of the following:


<TABLE>
<CAPTION>
                                                      1996               1995
<S>                                                   <C>                <C>
Accounts receivable:
  Domestic                                        $ 1,302,000       $ 2,573,000
  Foreign                                           2,023,000         2,156,000
                                                  -----------       -----------
                                                    3,325,000         4,729,000
Allowance for doubtful accounts                      (573,000)         (622,000)
                                                  -----------       -----------
                                                    2,752,000         4,107,000
Long-term portion                                    (410,000)         (642,000)
                                                  -----------       -----------
                                                  $ 2,342,000       $ 3,465,000
                                                  ===========       ===========
</TABLE>


      In April 1996, Universal Studios, Inc.'s ("Universal," formerly MCA, Inc.)
      right to act as the Company's exclusive merchandising agent lapsed. In
      January 1997, the Company and Universal tentatively agreed upon a new
      merchandising agreement whereby the Company will serve as the exclusive
      merchandising agent for the Company's characters. Universal currently owns
      approximately 9% of the Company's common stock.

      Through April 1996, Universal acted as the Company's worldwide agent for
      all merchandise licensing other than comic books. In such capacity,
      Universal was entitled to recoup a certain amount of documented expenses
      and retain a distribution fee based upon the amount of revenues derived
      from the merchandising agreements. Merchandising revenues earned under
      this agreement totaled $2,858,000 and $5,105,000 in 1996 and 1995,
      respectively. In connection with this agreement, the Company has
      receivables under merchandising licenses of $1,177,000 and $2,406,000 at
      December 31, 1996 and 1995, respectively. Long-term receivables have been
      discounted to their net present value, using discount rates of between 9%
      and 10% per annum.






                                      F-10



<PAGE>   26



      In 1995, the Company entered into an agreement with Universal whereby
      Universal produced 13 animated shorts featuring the Company's "Baby Huey"
      character. In connection with this agreement, the Company recognized
      $87,000 in revenue in 1995. In addition, the Company recognized $970,000
      and $780,000 of revenue in connection with separate agreements with
      Universal for license fees related to the production and distribution of
      the "Casper" animated series and from its classic film library in 1996 and
      1995, respectively. Receivables under these agreements totaled $128,000 at
      December 31, 1995.

      In 1996, the Company sold to an unrelated party the rights for direct to
      video productions for two films featuring its characters. Minimum
      nonrefundable guarantees received in 1996 totaled $3,300,000, which have
      been recognized as income. In January 1996, Warner Bros., Inc., which
      produced the "Richie Rich" motion picture, exercised its right for the
      theatrical motion picture sequel to "Richie Rich" and paid the Company
      $200,000.

      The Company has entered into a contract with a foreign distributor, which
      expires in November 1997, to license its film product. Sales through this
      distributor were $819,000 and $2,029,000 for the years ended December 31,
      1996 and 1995, respectively. Cash receipts from film licensing are
      remitted by the exhibitors to the distributor, who, in turn, remits these
      receipts to the Company, net of distribution fees, which are included in
      cost of sales. At December 31, 1996 and 1995, accounts receivable under
      this distribution contract totaled $643,000 and $987,000, respectively.

      The Company entered into agreements with a barter sales agent whereby the
      agent sold domestically the commercial time the Company was entitled to
      receive on two syndicated animated television series featuring the
      Company's characters. Under the terms of the agreements, the agent
      received commissions on all proceeds from advertising sales (net of
      advertising agency commissions). The agent and advertising agency
      commissions are included in cost of sales. Sales through this agent were
      $531,000 and $608,000 for the years ended December 31, 1996 and 1995,
      respectively. Accounts receivable from the sale of this commercial time
      totaled $321,000 and $126,000 at December 31, 1996 and 1995, respectively.

      The Company entered into an agreement with Marvel Entertainment Group,
      Inc. ("Marvel"), effective July 25, 1994, whereby Marvel would exclusively
      publish and distribute comic books in the United States based upon the
      Company's characters. The agreement remains in effect until June 30, 2000
      and will automatically renew for successive one-year periods until either
      party gives written notice of termination. Marvel guarantees that the
      Company will receive a minimum of $200,000 each year of the agreement (up
      to a maximum guarantee of $1,000,000) against a royalty based upon the net
      sales of comic books by Marvel. All revenues related to the agreement were
      recognized in 1994. Receivables from Marvel (which have been discounted to
      their net present value using a discount rate of 10% per annum) totaled
      $479,000 and $642,000 at December 31, 1996 and 1995, respectively. Marvel
      filed for bankruptcy reorganization in December 1996. The Company is
      uncertain as to the effect of Marvel's bankruptcy on the Company's
      business but does not believe that the Marvel bankruptcy will have a
      material impact on the Company's financial statements.





                                      F-11



<PAGE>   27



      Export sales by geographic area for the years ended December 31, 1996 and
1995 are as follows:



<TABLE>
<CAPTION>
                                                     1996                 1995
<S>                                             <C>                   <C>
Asia                                            $  144,000            $  883,000
Canada                                             179,000               117,000
Europe                                           1,309,000             3,141,000
Other                                              360,000               591,000
                                                ----------            ----------
                                                $1,992,000            $4,732,000
                                                ==========            ==========
</TABLE>


3.    INCOME TAXES

      Deferred income tax assets and liabilities are computed annually for
      differences between the financial statement and income tax bases of assets
      and liabilities that will result in taxable or deductible amounts in the
      future. Such deferred income tax asset and liability computations are
      based on enacted tax laws and rates applicable to periods in which the
      differences are expected to reverse. A valuation allowance is established,
      when necessary, to reduce deferred income tax assets to the amount
      expected to be realized. Income tax expense is the tax payable or
      refundable for the period plus or minus the change during the period in
      deferred income tax assets and liabilities. In connection with the
      acquisition of Harvey Comics, Inc. during 1989, the income tax basis of
      the assets acquired remained at the pre-acquisition value. As a result,
      all amortization of the acquired film library and trademarks and
      copyrights is not deductible for income tax purposes, resulting in the
      deferred income tax liability. The liability has been reduced by
      approximately $228,000 to give effect to the benefit resulting from net
      operating loss carryforwards.

      For income tax purposes, the Company has available approximately $650,000
      in federal net operating loss carryforwards that expire in 2004 through
      2009.

      The provision for income taxes for the years ended December 31, 1996 and
      1995 consists of the following:



<TABLE>
<CAPTION>
                                                             1996         1995
<S>                                                        <C>          <C>
Current                                                    $ 86,000     $124,000
                                                           --------     --------
Deferred                                                    886,000      443,000
Amounts related to exercise of stock options                             118,000
                                                           --------     --------

Total deferred                                              886,000      561,000
                                                           --------     --------

Provision for income taxes                                 $972,000     $685,000
                                                           ========     ========
</TABLE>


      The income tax benefits resulting from the exercise of stock options have
      been reflected as an addition to stockholders' equity.








                                      F-12



<PAGE>   28



      Income tax computed at the statutory federal income tax rate (35%) and the
      provision for income taxes in the financial statements for the years ended
      December 31, 1996 and 1995 differ as follows:



<TABLE>
<CAPTION>
                                                              1996       1995
<S>                                                          <C>        <C>
Provision computed at the statutory rate                     $784,000   $539,000
State income taxes, net of federal income tax benefit         143,000    101,000
Amortization of goodwill                                       45,000     45,000
                                                             --------   --------

Provision for income taxes                                   $972,000   $685,000
                                                             ========   ========
</TABLE>




4.    DEBT

      The Company has a revolving loan and security agreement that allows
      maximum borrowings of up to $2,500,000 and expires on June 1, 1997.
      Borrowings under the line of credit are collateralized by substantially
      all of the assets of the Company and bear interest at the lenders' prime
      rate plus 1% per annum (9.25% at December 31, 1996). The agreement is
      subject to certain requirements, including, but not limited to, the
      maintenance of minimum net worth, current ratio and indebtedness to net
      worth, and also disallows the payment of dividends. At December 31, 1996,
      the Company was in compliance with these covenants. No amounts were
      outstanding under this line of credit at December 31, 1996 and 1995.

5.    COMMITMENTS AND CONTINGENCIES

      LEASES - The Company is committed under operating leases to minimum rental
      payments (exclusive of real estate taxes and maintenance, net of sublease
      income) through 2004 as follows:


<TABLE>
<CAPTION>
YEAR ENDING                         GROSS            SUBLEASE
DECEMBER 31,                       RENTALS            INCOME               NET
<C>                             <C>                <C>                <C>
1997                            $  581,000         $  257,000         $  324,000
1998                               593,000            261,000            332,000
1999                               605,000            246,000            359,000
2000                               618,000            171,000            447,000
2001                               513,000             14,000            499,000
Thereafter                         742,000                               742,000
                                ----------         ----------         ----------
                                $3,652,000         $  949,000         $2,703,000
                                ----------         ----------         ----------
</TABLE>


      The effective annual rent expense for the Company is the total rent to be
      paid over the term of the lease, amortized on a straight-line basis. The
      difference between the actual rent amount paid and the effective rent
      recognized for financial statement purposes is reported as accrued rent.

      Rent expense charged to operations was $216,000 and $233,000 for the years
      ended December 31, 1996 and 1995, respectively. Rent expense is net of
      sublease income of $162,000 and $50,000 in 1996 and 1995, respectively.











                                      F-13


<PAGE>   29


      EMPLOYMENT AGREEMENTS - In 1995, the Company entered into employment
      contracts with its Chairman/Chief Executive Officer and Chief Financial
      Officer that require periodic payments aggregating $450,000 per year
      through April 1998. In addition, as part of the employment agreements, the
      officers were issued options to purchase 150,000 shares of the Company's
      common stock under the 1993 Stock Option Plan (see Note 7) and will be
      issued additional options in April 1997 for 75,000 shares.

      In 1996, the Company entered into employment contracts with two other
      employees. The Company is committed to salaries under these contracts of
      $254,000 in 1997 and $201,000 in 1998.

      LITIGATION - The Company v. Franklin et. al. On September 30, 1994, the
      Company filed a claim against a former member of the Board of Directors
      and his affiliates (see Note 8) for damages arising from breach of
      fiduciary duty, fraud and breach of contract, and seeks to recover the
      former board member's profits from the wrongful acts, plus compensatory
      and punitive damages. On November 15, 1994, an answer and cross-complaint
      was filed against the Company for breach of contract and other breaches.
      The former board member seeks $1.5 million in compensatory damage, an
      accounting from the Company based on claims of breach of contract and
      breach of implied covenant of good faith and fair dealing, and punitive
      damages. On December 13, 1994, the former board member filed for
      bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code.
      The automatic stay has been lifted pursuant to a stipulated order of the
      Bankruptcy Court. Discovery has been ongoing in these actions but is not
      yet completed. Management of the Company believes that the former board
      member's claims are without merit.

      Management of the Company believes that the eventual outcome of this case
      will not have a material effect on the financial position of the Company;
      however, it is at least reasonably possible that the final outcome of this
      action will have a material effect on the Company, although the amount
      cannot be estimated.

      The Company v. Fleischer Studios, Inc. et. al. In November 1995, the
      Company filed an action against Fleischer Studios, Inc. and an individual
      for breach of contract, fraud, and accounting and copyright infringement
      in connection with the copyright to the character "Betty Boop." In an
      agreement reached in 1996, the Company will receive $375,000 in settlement
      of such claims, and the Company gave up all future rights to the
      character.

6.    PREFERRED STOCK

      The Company is authorized to issue 3,000,000 shares of $1 par value
      preferred stock. The Board of Directors, without further action by the
      holders of the common stock, may fix or alter the rights, preferences,
      privileges and restrictions of the preferred stock.

7.    STOCK OPTIONS AND WARRANTS

      1993 AND 1994 STOCK OPTION PLANS - Under the Company's 1993 Stock Option
      Plan, the Company granted options to purchase 400,000 shares of common
      stock to officers and employees. In 1994, the Company adopted the 1994
      Stock Option Plan, under which the Company can grant options to purchase
      200,000 shares of common stock. The Company has discretion, subject to the
      terms of the Plans, to select the persons entitled to receive options, the
      terms and conditions on which options are granted, the exercise price, the
      time period for vesting such shares, and the number of shares subject
      thereto.



                                      F-14

<PAGE>   30



      Options granted to any person who owns stock possessing more than 10% of
      the combined voting power of all classes of the Company's stock shall be
      at an exercise price no less than 110% of fair market value on the date of
      grant. The exercise price in the case of options granted to all other
      persons must be at least equal to the fair market value of the common
      stock as of the date of grant.

      SPECIAL STOCK OPTION PLAN OF 1993 - The Special Stock Option Plan of 1993
      (the "Plan") compensated three executives for their agreement to reduce
      previously agreed-upon compensation. The Plan provided for the grant of
      options to these executives to purchase 200,000 shares and may also
      provide options to other employees in similar circumstances. The exercise
      price for the options is $4.40 per share, 110% of the fair market value at
      the date of grant. The options became exercisable in January 1994, after
      commencement of principal photography of a motion picture based on a
      character licensed from the Company, and expire in January 1999.

      STOCK OPTION PLAN OF 1997 - In December 1996, the Board of Directors
      authorized (subject to stockholder approval) the 1997 Stock Option Plan,
      which provides for the granting of up to 300,000 shares to employees,
      directors and certain other third parties.

      Transactions under the plans during 1996 and 1995 were as follows:




<TABLE>
<CAPTION>
                                                 1993 SPECIAL
                                          1993      STOCK        1994      OPTION PRICE
                                          PLAN    OPTION PLAN    PLAN       PER SHARE

<S>                                      <C>        <C>          <C>     <C>
Options outstanding, January 1, 1995     372,000    180,000      5,000  $4.00 - $7.25
Options granted                                                164,000  $        7.25
Options exercised                        (13,000)   (18,000)            $4.00 - $7.25
Options canceled                          (1,000)                       $        7.50
                                        --------   --------   --------
Options outstanding, December 31, 1995   358,000    162,000    169,000  $4.00 - $7.25
Options granted                           20,000                19,000           7.25
Options exercised                        (12,000)                                7.25
Options canceled                         (32,000)               (1,000)          7.25
                                        --------   --------   --------
Options outstanding, December 31, 1996   334,000    162,000    187,000  $4.00 - $7.25
                                        ========   ========   ========  =============
</TABLE>




      In December 1996, the Board of Directors authorized that all options
      outstanding with an exercise price in excess of $7.25 be repriced to $7.25
      per share. The new exercise price was in excess of the trading price of
      the Company's common stock.

      At December 31, 1996, 30,000 and 12,000 shares were available for grant
      under the 1993 Plan and the 1994 Plan, respectively. At December 31, 1996,
      194,000, 162,000 and 80,000 options were exercisable under the 1993 Plan,
      the Special Stock Option Plan of 1993, and the 1994 Plan, respectively. No
      options has been granted under the 1997 Plan.

      STOCK REPURCHASE PROGRAM - In January 1997, the Board of Directors
      authorized (subject to stockholder approval) a stock repurchase program
      whereby the Company may, from time to time, in market transactions,
      purchase up to $10% of its outstanding common stock. Through February 14,
      1997, the Company has repurchased 35,000 shares.







                                      F-15



<PAGE>   31


      OTHER - In connection with a terminated consulting agreement (see Note 8),
      the Company granted an option during 1990 to a corporation owned by a
      former member of the Board of Directors to purchase 99,000 shares of
      common stock of the Company at 70% of the fair market value at the time
      such option is exercised, subject to certain conditions as specified in
      the consulting agreement. The Company has previously recognized the
      expense related to this option.

      WARRANTS - In connection with a public offering in 1993, the underwriters
      received warrants to acquire 120,000 shares of the Company's common stock
      for 145% of the offering price ($10.88 per share). During 1995, warrants
      were exercised for 63,000 shares of common stock.

      In February 1994, the Company issued warrants to purchase 100,000 shares
      of its common stock at $13.48 per share (110% of the average closing price
      of the Company's common stock on the ten days preceding the agreement
      date) to a producer of a motion picture featuring one of the Company's
      characters. The warrant expires five years from the date of grant.

      In January 1997, the Company issued warrants to purchase 100,000 shares of
      its common stock at $10.00 per share to advisors of the Company. The
      warrants vest 50% upon date of grant and 50% one year from the date of
      grant, but only if the Company requests the advisors to perform services
      for 1998. The warrants expire five years from the date of vesting.

8.    RELATED PARTIES

      Through July 1993, the Company had a month-to-month consulting agreement
      with a corporation owned by a former member of the Board of Directors of
      the Company (see Note 5) whereby the Company paid a $5,000 per month
      retainer against a fee equal to 10% of the gross margin, as defined, of
      designated transactions. In addition, the related corporation receives
      certain compensation when Universal develops motion pictures featuring
      certain characters owned by the Company. The Company expensed $100,000 for
      the year ended December 31, 1993 under this agreement, which is included
      in accounts payable and accrued expenses at December 31, 1996 and 1995.

      Another corporation owned by this former member of the Board of Directors
      is the music publisher for certain films owned by the Company. The Company
      will also share in future music publishing income, if any, generated by
      these films. To date, no material income has been generated from music
      publishing.

      Note receivable consisted of a loan to the Company's Chairman/Chief
      Executive Officer, collateralized by a deed of trust. This note was repaid
      in 1996. Interest income on this note totaled $10,000 for each of the
      years ended December 31, 1996 and 1995.

9.    PROFIT-SHARING PLAN

      The profit-sharing plan covers substantially all employees with over one
      year of service with the Company. Contributions under the profit-sharing
      plan are at the discretion of the Company and are limited to 15% of
      eligible employee compensation. The profit-sharing plan expense totaled
      $76,000 and $59,000 in 1996 and 1995, respectively, and is included in
      accounts payable and accrued expenses.




                                     ******


                                      F-16


<PAGE>   32
                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT


ITEM 10.         EXECUTIVE COMPENSATION


ITEM 11.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


ITEM 12.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company will file a definitive Proxy Statement pursuant to
Regulation 14A for its annual meeting of shareholders presently scheduled to be
held on June 2, 1997.  The called for by Items 9-12 above will be included in
such definitive Proxy Statement under the captions "Election of Directors,"
"Management and Directors," "Executive Compensation and Other Remuneration,"
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions," which are hereby incorporated herein
by reference.


ITEM 13.         EXHIBITS, LIST AND REPORTS ON FORM 8-K

      EXHIBIT
      NUMBER              DESCRIPTION

         3.1     Second Amended and Restated Articles of Incorporation of the
                 Registrant (incorporated herein by reference to Exhibit 3.1 of
                 Company's Registration Statement No. 33-63363-LA)

         3.2     First Amendment to Second Amended and Restated Articles of
                 Incorporation of the Registrant (incorporated herein by
                 reference to Exhibit 3.2 of Company's Registration Statement
                 No. 33-63363-LA)

         3.3     Second Restated and Amended Bylaws of the Registrant
                 (incorporated herein by reference to Exhibit 3.3 of Company's
                 Registration Statement No. 33-63363-LA)

         3.4     First Amendment to Second Restated and Amended Bylaws of the
                 Registrant (incorporated herein by reference to Exhibit 3.4 of
                 Company's Registration Statement No. 33-63363-LA)

         4       Form of Stock Certificate (incorporated herein by reference to
                 Exhibit 4 of Company's Registration Statement No. 33-63363-LA)

         10.1    Registration Agreement, dated as of December 7, 1990, by and
                 among the Company, AKAUSA and MCA (incorporated herein by
                 reference to Exhibit 10.11 of Company's Registration Statement
                 No. 33-63363-LA)

         10.2    Shareholders Agreement, dated as of December 7, 1990, by and
                 among the Company, AKAUSA and MCA (incorporated herein by
                 reference to Exhibit 10.12 of Company's Registration Statement
                 No. 33-63363-LA)

         10.3    Memorandum of Distribution Agreement, dated as of December 7,
                 1990, by and among the Company, Harvey and MCA (portions of
                 which have been filed under a confidentiality request)





                                      -16-
<PAGE>   33
                 (incorporated herein by reference to Exhibit 10.13 of
                 Company's Registration Statement No. 33-63363-LA)


         10.4    Employment Agreement, effective as of July 10, 1989, between
                 Jeffrey A. Montgomery and the Company (incorporated herein by
                 reference to Exhibit 10.14 of Company's Registration Statement
                 No. 33-63363-LA)

         10.5    Amendment to Employment Agreement, effective April 1, 1993,
                 between Jeffrey A. Montgomery and the Company (incorporated
                 herein by reference to Exhibit 10.15 of Company's Registration
                 Statement No. 33-63363-LA)

         10.6    Employment Agreement, effective as of April 1, 1993, between
                 Gregory M. Yulish and the Company (incorporated herein by
                 reference to Exhibit 10.17 of Company's Registration Statement
                 No. 33-63363-LA)

         10.7    Syndication Agreement, dated as of November 28, 1990, by and
                 among Claster Television, Inc. and Harvey (incorporated herein
                 by reference to Exhibit 10.23 of Company's Registration
                 Statement No. 33-63363-LA)

         10.8    License Agreement, dated as of March 1, 1990, by and among HIT
                 Communications Plc. and Harvey (incorporated herein by
                 reference to Exhibit 10.24 of Company's Registration Statement
                 No. 33-63363-LA)

         10.9    Distribution Acquisition Agreement, dated as of March 15,
                 1992, by and among MCA Home Video, Inc. and Harvey (portions
                 of which have been filed under a confidentiality request)
                 (incorporated herein by reference to Exhibit 10.25 of
                 Company's Registration Statement No. 33-63363-LA)

         10.10   Publishing Agent Agreement, dated as of July 1, 1990, and
                 Amendment, dated as of June 1992, by and among Marvel
                 Entertainment Group, Inc. and Harvey (incorporated herein by
                 reference to Exhibit 10.27 of Company's Registration Statement
                 No. 33-63363-LA)

         10.11   Agreement, dated as of September 1, 1990, between ATI
                 Enterprises and the Company (incorporated herein by reference
                 to Exhibit 10.39 of Company's Registration Statement No.
                 33-63363-LA)

         10.12   Agreement, dated as of December 19, 1991, between Stallion
                 Music, Inc. and Harvey (incorporated herein by reference to
                 Exhibit 10.40 of Company's Registration Statement No.
                 33-63363-LA)

         10.13   1993 Stock Option Plan and Stock Option Agreements
                 (incorporated herein by reference to Exhibit 10.41 of
                 Company's Registration Statement No. 33-63363-LA)

         10.14   Special Salary Reduction Stock Option Plan of 1993 and Stock
                 Option Agreements (incorporated herein by reference to Exhibit
                 10.42 of Company's Registration Statement No. 33-63363-LA)

         10.15   Profit Sharing Plan and Trust Adoption Agreement (incorporated
                 herein by reference to Exhibit 10.43 of Company's Registration
                 Statement No. 33-63363-LA)

         10.16   Promissory Note dated November 1, 1992 executed by Jeffrey A.
                 Montgomery in favor of Harvey together with short form deed of
                 trust (incorporated herein by reference to Exhibit 10.48 of
                 Company's Registration Statement No. 33-63363-LA)





                                      -17-
<PAGE>   34
         10.17   License Agreement, dated as of March 22, 1979, between Harvey
                 World Famous Comics Inc. and Hanna-Barbera Productions, Inc.
                 (incorporated herein by reference to Exhibit 10.49 of
                 Company's Registration Statement No. 33-63363-LA)

         10.18   License Agreement, dated as of January 29, 1991, between
                 Merchandising Corporation of America, Inc. and Harvey
                 (incorporated herein by reference to Exhibit 10.52 of
                 Company's Registration Statement No. 33-63363-LA)

         10.19   License Agreement, dated as of October 1, 1991, and amended
                 December 6, 1991, between MCA/Universal Merchandising, Inc.
                 and Harvey (incorporated herein by reference to Exhibit 10.56
                 of Company's Registration Statement No. 33-63363-LA)

         10.20   License Agreement, dated as of January 1, 1992, between Jim
                 Henson Productions, Inc. and Harvey (incorporated herein by
                 reference to Exhibit 10.57 of Company's Registration Statement
                 No. 33-63363-LA)

         10.21   License Agreement, dated as of January 9, 1992, between Turner
                 and Harvey (incorporated herein by reference to Exhibit 10.60
                 of Company's Registration Statement No. 33-63363-LA)

         10.22   Distribution Contract, dated as June 1, 1990, between CINAR
                 Films Inc. and Harvey (incorporated herein by reference to
                 Exhibit 10.68 of Company's Registration Statement No.
                 33-63363-LA)

         10.23   Letter Agreement between Claster Television Incorporated and
                 Registrant dated December 22, 1993 and amendment thereto dated
                 January 27, 1994 (incorporated herein by reference to the
                 Company's Annual Report on Form 10-KSB for the year ended
                 December 31, 1993)

         10.24   September 28, 1993, Amendment to Memorandum of Distribution
                 Agreement dated December 7, 1990 (incorporated herein by
                 reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1993)

         10.25   Amendment to Employment Agreement between Registrant and
                 Gregory M. Yulish dated as of November 17, 1993 (incorporated
                 herein by reference to the Company's Annual Report on Form
                 10-KSB for the year ended December 31, 1993)

         10.26   Warrant Agreement between Registrant and MCA, Inc. dated
                 November 18, 1993 (incorporated herein by reference to the
                 Company's Annual Report on Form 10-KSB for the year ended
                 December 31, 1993)

         10.27   Office Lease between Registrant and 100 Wilshire Associates
                 dated December 8, 1993 (incorporated herein by reference to
                 the Company's Annual Report on Form 10-KSB for the year ended
                 December 31, 1993)

         10.28   Revolving Loan and Security Agreement between Registrant and
                 City National Bank dated October 27, 1993 (incorporated herein
                 by reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1993)

         10.29   Publishing License Agreement between Turner Publishing, Inc.
                 and Registrant dated as of May 26, 1993 (incorporated herein
                 by reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1993)

         10.30   1994 Stock Option Plan (incorporated by reference to the
                 Registrant's 1994 definitive Proxy Statement)





                                      -18-
<PAGE>   35

         10.31   Agreement dated July 25, 1994 between Marvel Entertainment
                 Group, Inc. and the Company (incorporated herein by reference
                 to the Company's Quarterly Report on Form 10-QSB for the
                 quarter ended September 30, 1994)

         10.32   Agreement dated September 22, 1994 between MCA, Inc. and the
                 Company (incorporated herein by reference to the Company's
                 Quarterly Report on Form 10-QSB for the quarter ended
                 September 30, 1994)

         10.33   Letter Agreement dated June 30, 1994 between the Company and
                 Barry Blumberg regarding his separation and consulting
                 services (incorporated herein by reference to Exhibit 10.80 of
                 Company's Registration Statement No. 33-86652)

         10.34   Letter of Intent dated as of November 9, 1994 between the
                 Company and Arnhold and S. Bleichroeder, Inc. (incorporated
                 herein by reference to Exhibit 10.81 of Company's Registration
                 Statement No. 33-86652)

         10.35   Letter re Sharing Agreement dated October 7, 1994 among AKAUSA
                 Holdings Limited, Registrant and Jeffrey A. Montgomery
                 (incorporated herein by reference to the Company's Annual
                 Report on Form 10-KSB for the year ended December 31, 1995)

         10.36   Multi-Agreement Amendment No. 2 dated as of November 1, 1994
                 among Harvey Comics, Inc. and City National Bank (incorporated
                 herein by reference to the Company's Annual Report on Form
                 10-KSB for the year ended December 31, 1995)

         10.37   Multi-Agreement Amendment No. 3 dated as of September 1, 1995
                 among Harvey Comics, Inc. and City National Bank (incorporated
                 herein by reference to the Company's Annual Report on Form
                 10-KSB for the year ended December 31, 1995)

         10.38   Sublease Agreement dated as of November 14, 1995 between the
                 Company and Travelers Management, Inc., a California
                 corporation (incorporated herein by reference to the Company's
                 Annual Report on Form 10-KSB for the year ended December 31,
                 1995)

         10.39   Amended and Restated Employment Agreement effective as of
                 April 17, 1995 between the Company and Jeffrey A. Montgomery
                 (incorporated herein by reference to the Company's Annual
                 Report on Form 10-KSB for the year ended December 31, 1995)

         10.40   Amended and Restated Employment Agreement effective as of
                 April 17, 1995 between the Company and Gregory M. Yulish
                 (incorporated herein by reference to the Company's Annual
                 Report on Form 10-KSB for the year ended December 31, 1995)

         10.41   Stock Option Agreement dated as of July 13, 1995 between the
                 Company and Jeffrey A. Montgomery (incorporated herein by
                 reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1995)

         10.42   Stock Option Agreement dated as of July 13, 1995 between the
                 Company and Gregory M. Yulish (incorporated herein by
                 reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1995)

         10.43   Letter Agreement dated as of March 15, 1995 between MCA, Inc.
                 and the Company re: Baby Huey (incorporated herein by
                 reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1995)





                                      -19-
<PAGE>   36

         10.44   Agreement dated August 16, 1995 among the Company, Oppenheimer
                 & Co. and Arnhold and S. Bleichroeder, Inc. (incorporated
                 herein by reference to the Company's Annual Report on Form
                 10-KSB for the year ended December 31, 1995)

         10.45   Termination of Agreement dated January 18, 1996 among the
                 Company, Oppenheimer & Co. and Arnhold and S. Bleichroeder,
                 Inc.  (incorporated herein by reference to the Company's
                 Annual Report on Form 10-KSB for the year ended December 31,
                 1995)

         10.46   Note Extension Agreement dated December 31, 1995 between the
                 Company and Jeffrey A. Montgomery (incorporated herein by
                 reference to the Company's Annual Report on Form 10-KSB for
                 the year ended December 31, 1995)

         10.47   Casper Live Action Direct-To-Video Agreement dated May 28,
                 1996 between the Company and Saban Entertainment Inc.
                 (incorporated herein by reference to the Company's Quarterly
                 Report on Form 10-QSB for the quarter ended June 30, 1996)

         10.48   Sublease dated September 22, 1996 between MCA Records, Inc.
                 and the Company*

         10.49   Warrant Agreement with Arnhold and S. Bleichroeder dated
                 January 16, 1997*

         10.50   Warrant Agreement with Michael Doherty dated January 16, 1997*

         10.51   Richie Rich Live Action Direct-To-Video Agreement between the
                 Company and Saban Entertainment Inc. (incorporated herein by
                 reference to the Company's Quarterly Report on Form 10-QSB for
                 the quarter ended June 30, 1996)*

         10.52   Summary of lease terms for the premises located at 1999 Avenue
                 of the Stars, Los Angeles*

         10.53   Extension Agreement with City National Bank dated June 1, 1996*

         11      Computation of Earnings Per Share*

         21      List of subsidiaries of Registrant (incorporated herein by
                 reference to Exhibit 22 of Company's Registration Statement
                 No.  33-63363-LA)

         23.1    Consent of Deloitte & Touche LLP*

         24.1    Power of Attorney to sign Annual Report on Form 10-KSB, dated
                 March 28, 1997, executed by Gary M. Gray*

         24.2    Power of Attorney to sign Annual Report on Form 10-KSB, dated
                 March 28, 1997, executed by Allan R. Raphael*

         27      Financial Data Schedule

         ______________________

         * Filed herewith





                                      -20-
<PAGE>   37
                                   SIGNATURES

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



                                             THE HARVEY ENTERTAINMENT COMPANY
(Registrant)


Date:  March 28, 1997                        By:  /s/ Gregory M. Yulish
                                                --------------------------------
                                                  Gregory M. Yulish
                                                  Chief Financial Officer

         Pursuant to the requirements of 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>
         SIGNATURE                                        TITLE                             DATE
         ---------                                        -----                             ----
<S>                                                <C>                                 <C>
 /s/ Jeffrey A. Montgomery                         Director and Chief                  March 28, 1997
------------------------------------------         Executive Officer
Jeffrey A. Montgomery



 /s/ Gary M. Gray*                                 Director                            March 28, 1997
-----------------------------------------
Gary M. Gray



 /s/ Allan R. Raphael*                             Director                            March 28, 1997
---------------------------------------------
Allan R. Raphael
</TABLE>




*        By signing his name hereto, Jeffrey A. Montgomery, signs this document
as Chairman and Chief Executive Officer of the Company and on behalf of the
persons indicated above pursuant to powers of attorney duly executed by such
persons and filed herewith.


By:   /s/ Jeffrey A. Montgomery
      ----------------------------------
      Jeffrey A. Montgomery
      Attorney-in-Fact





                                      -21-