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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, 1997

/ /       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:/X/

        State issuer's revenue for its most recent fiscal year:  $15,404,000.00

        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 6, 1998, a date
within the past 60 days, is: $20,709,510.

        State the number of shares outstanding of each of issuer's classes of
common equity, as of March 6, 1998: 3,572,940.

        Transitional Small Business Disclosure Format:  Yes: / /   No: /X/


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                                     PART I

ITEM 1.        BUSINESS

                                  INTRODUCTION

GENERAL:

        The Harvey Entertainment Company (the "Company") owns and exploits a
library of celebrated classic characters (the "Harvey Classic Characters") and
other intellectual property assets, including a related film library of animated
short features (the "Harvey Classic Film Library"). The roster of Harvey Classic
Characters includes the following well known characters:

        -      Casper, the Friendly Ghost
        -      Richie Rich
        -      Baby Huey
        -      Wendy, the Good Little Witch
        -      Fatso, Stinkie and Stretch (the Ghostly Trio)
        -      Hot Stuff

as well as Little Audrey, Little Lotta, Little Dot, Herman and Katnip, Stumbo
the Giant, Buzzy the Funny Crow among others. (All characters referred to in
this filing are the copyrighted and trademarked property of Harvey Comics, Inc.,
a wholly owned subsidiary of The Harvey Entertainment Company.) The Harvey
Classic Film Library includes 274 six- to eight-minute animated short features,
which in most cases star one or more of the Harvey Classic Characters.

HISTORY:

        The Company is the successor to Harvey Comics, Inc. ("Harvey Comics")
founded in 1939 by the Harvey family. In the late 1950s Harvey Comics acquired
rights to many of the popular Paramount Pictures cartoon stars, including
Casper, Baby Huey, Little Audrey and many others. Harvey Comics was active
during the "golden age" of comics, the 1950s and 1960s. However, as its founders
retired in the early 1980s, the family-owned Harvey Comics became dormant. In
1989 the Company's predecessor purchased Harvey Comics to exploit the Harvey
Classic Characters and the Harvey Classic Film Library.

               In 1990, the Company sold an approximate 20% equity share to an
affiliate of Universal Studios, Inc. ("Universal") and entered into a
merchandising and distribution agreement with Universal. In 1993, the Company
completed its initial public offering of common stock. In 1994 and 1995, two
motion pictures licensed by the Company were released featuring Harvey Classic
Characters -- Richie Rich (Warner Bros.) and Casper (Universal). In 1996, the
weekly animated television series "Casper" premiered on Fox Kid's Network
produced in conjunction with Universal Cartoon Studios (52 episodes produced
during two seasons). In 1996 and 1997, the Company contracted with Saban
Entertainment to produce two direct-to-video live action full-length "Casper"
films and one direct-to-video live action full-length "Richie Rich" film. In
addition, in order to exert more direct control over its character rights and
merchandising activities, the Company reacquired from Universal control of all
merchandising rights (except those relating to a Casper or Casper character
motion picture produced or released by Universal, as further described below)
and rights of First Negotiation/First Refusal and First Negotiation in all the
Harvey Classic Characters (other than certain rights to Casper, Casper
characters and new characters appearing in the "Casper" movie). The Company
agreed to provide Universal an exclusive release window for the first sequel to
the 1995 "Casper" movie, the right of First Refusal/First Negotiation for the
first direct-to-video production featuring Casper after the release of any
"Casper" sequel, and the right to exploit related movie merchandising. In 1997,
the Company also terminated a license agreement with Marvel Comics and
reacquired the right to publish, distribute and license comic books based upon
the Harvey Classic Characters. Starting in 1998, the Fox Family Channel is
scheduled to run a daily program entitled "Harvey Toons."

BUSINESS STRATEGY:

        The Company's business strategy centers around exploiting the Harvey
Classic Characters through filmed entertainment and capitalizing upon the
relationship between filmed entertainment, merchandising and ancillary



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activities. Over the past two years, the Company has focused on efforts to
increase the demand for merchandise featuring the Harvey Classic Characters. In
October 1996, the Company began an in-house merchandising department to find and
evaluate merchandising and licensing opportunities and to negotiate
merchandising and licensing agreements. The Company cannot ascertain at this
time whether this strategy will ultimately be successful.

                               RECENT DEVELOPMENTS

CHANGE IN MANAGEMENT:

        On March 20, 1998, the Company's Board of Directors voted not to renew
the employment agreements of the Company's Chief Executive Officer, Jeffrey A.
Montgomery, and Chief Financial Officer and Executive Vice President, Gregory M.
Yulish which expire on April 17, 1998. On March 27 and March 30, respectively,
Messrs. Yulish and Montgomery resigned from the Board of Directors. The Board of
Directors retained the non-exclusive services of Anthony J. Scotti as the
Company's Interim Chief Executive Officer and Michael S. Hope as the Company's
Interim Chief Financial Officer, effective as of March 23, 1998, through a
management services agreement with Global Media Management Group, LLC for an
initial six-month term. Pursuant to the management services agreement, the
Company will agree to pay Global Media Management Group, LLC $75,000 per month
during the six-month term and granted warrants to purchase an aggregate 200,000
shares, and options to purchase an aggregate 50,000 shares, of the Company's
Common Stock to Messrs. Scotti, Hope and Leonard Breijo of Global Media
Management Group, LLC. See "Recent Sales of Unregistered Securities."

        Mr. Scotti, Chairman of Global Media Management Group, LLC, has been a
leading executive in the entertainment industry for over 30 years. Most
recently, Mr. Scotti served as Chairman and Chief Executive Officer of All
American Communications, Inc. ("All American"). Mr. Scotti recently completed
the sale of All American to Pearson PLC. Mr. Scotti, the founder of Scotti
Brothers Entertainment, also has served as Chairman of the Board of LIVE
Entertainment Inc. and as a consultant to Carolco Pictures Inc.

        Michael S. Hope served as Executive Vice President of
Metro-Goldwyn-Mayer Inc. from 1993 to 1997. At MGM, he was responsible for all
financial and administrative functions of the studio, and was jointly
responsible for all businesses outside the areas of film and television
production and distribution. Prior to joining MGM, Mr. Hope was Executive Vice
President, Planning and Operations and Chief Financial Officer for Paramount
Communications Inc.

DIRECT-TO-VIDEO:

               Over the last two years, the Company has derived a substantial
portion of its revenues from the licensing of the Harvey Classic Characters for
direct-to-video productions. Direct-to-video productions are full-length feature
films released on video without a prior theatrical release. In September 1997,
Saban Entertainment released "Casper: A Spirited Beginning." "Casper Meets
Wendy" and "Richie Rich's Christmas Wish" are to be released in September 1998
and November 1998, respectively. The Company is considering further sequels to
these "Casper" and "Richie Rich" videos and a spin-off "Wendy the Witch" video,
tentatively slated for release in 1999. Saban Entertainment has a right of First
Refusal/First Negotiation with respect to the next Richie Rich direct-to-video
production which expires on June 30, 2000. While the Company to date has
co-produced direct-to-video product through agreements with third parties who
bear the economic risks of production, it is possible that the Company may
decide in the future to produce and market product directly in order to capture
a greater share of the potential profits of such product, which would involve a
significant investment and correspondingly greater risk. There can be no
assurance that the sequels or the spinoff will be produced or released, or, if
produced and released, that they will be successful.

        "CASPER, A SPIRITED BEGINNING"

        In September 1997, the Company released, through Twentieth Century Fox
Home Entertainment, its first direct-to-video feature, "Casper, a Spirited
Beginning," a co-production of Saban Entertainment and the Company. The Company
received a nonrefundable advance from Saban Entertainment in 1996 and retained a
net profit interest after recoupment by Saban Entertainment.

        "CASPER MEETS WENDY"



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        In December 1997, the Company and Saban Entertainment commenced
principal photography on "Casper Meets Wendy," starring George Hamilton and
Academy Award nominees Shelly Duvall, Cathy Moriarity and Terri Garr. Principal
photography was completed on February 9, 1998. The feature length, live-action,
direct-to-video film, based on the Company's Casper and Wendy the Witch
characters, is slated for a fall 1998 release. 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. There can be no assurance that
"Casper Meets Wendy" will be successful. The Company recognized a nonrefundable
advance from Saban Entertainment in 1997 (a small portion of which is payable in
1998) and retained a net profit interest, after certain distribution fees and
recoupment by Saban Entertainment.

        "RICHIE RICH'S CHRISTMAS WISH"

        In May 1996, the Company and Saban Entertainment agreed to co-produce a
feature-length live-action direct-to-video feature based on the Harvey Classic
Character Richie Rich, entitled "Richie Rich's Christmas Wish." Principal
photography is scheduled to commence in spring 1998 and "Richie Rich's Christmas
Wish" is tentatively scheduled for release in November 1998. 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 Company will share in net profits, if
any, after Saban Entertainment first recovers its marketing, production and
distribution costs plus a distribution fee.

HARVEY CLASSIC FILM LIBRARY:

        In January 1998, the Company reached an initial one-year agreement with
The Fox Family Channel, a wholly owned subsidiary of the Fox Kids Worldwide, a
cable network reaching over 70 million homes in the United States, to air a
daily thirty-minute program using 65 episodes from the Harvey Classic Film
Library as "Harvey Toons."

        In 1997 the Company reacquired home video rights to the Harvey Classic
Film Library. In March 1998, the Company hired a foreign distribution consultant
based in London to assist with and oversee foreign sales of the Harvey Classic
Film Library. The Company's prior distribution agreement with its foreign
distributor expired in November 1997.

THEATRICAL LICENSING:

        In May 1997, the Company entered into an agreement with Universal to
produce and distribute a motion picture sequel to the original "Casper" movie
(which had box office gross receipts in excess of $307 million) to be produced
by Universal Pictures & Amblin Entertainment. The Company received a
non-refundable up-front advance for the sequel rights and, if a sequel is
produced, is contractually entitled to receive additional advances against a
percentage of the gross receipts from all sources of exploitation of the motion
picture. As part of the Company's agreement with Universal, the Company was also
paid a non-refundable advance against the Company's share of its profit
participation from the first 1995 "Casper" movie. See "Business-Theatrical
Licensing." There can be no assurance that the sequel will be produced or
completed, or that if completed, the scheduled release date will be met, or that
the sequel will be successful.

        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.

                                    BUSINESS

        The Company derives its revenues from filmed entertainment and
licensing. In 1997 and 1996, the Company's operating revenues were divided among
these sources as follows:


<TABLE>
<CAPTION>
                                                                                1997      1996
<S>                                                                             <C>       <C> 
Filmed Entertainment.....................................................        69%       64%
Merchandising............................................................        31%       36%

TOTAL....................................................................       100%      100%
=========================================================================       ===       ===
</TABLE>



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FILMED ENTERTAINMENT:

DIRECT-TO-VIDEO (HOME VIDEO):

        Based on the success of "Casper, a Spirited Beginning," as well as the
success of the Walt Disney Company and Universal with family fare
direct-to-video sequels to theatrical motion pictures, the Company believes the
direct-to-video business is an attractive market in which to capitalize on the
recognition of certain Harvey Classic Characters. The Company also hopes to use
direct-to-videos as a tool to reintroduce other less-well-known Harvey Classic
Characters to children of all ages.

        "CASPER, A SPIRITED BEGINNING"

        In September 1997 the Company released, through Twentieth Century Fox
Home Entertainment, its first direct-to-video feature, "Casper, a Spirited
Beginning," a co-production of Saban Entertainment and the Company.

        "CASPER MEETS WENDY"

        On December 9, 1997, the Company and Saban Entertainment commenced
principal photography on "Casper Meets Wendy," starring George Hamilton and
Academy Award nominees Shelly Duvall, Cathy Moriarity and Terri Garr. Principal
photography was completed on February 9, 1998. The feature length, live-action,
direct-to-video film, based on the Company's Casper and Wendy the Witch
characters, is slated for a fall 1998 release. 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. The agreement for "Casper Meets
Wendy" requires that Saban Entertainment bear production, marketing and
distribution expenses, and allows the Company to share in the net profits, if
any, after Saban Entertainment first recovers its marketing, production and
distribution costs plus a distribution fee.

        "RICHIE RICH'S CHRISTMAS WISH"

        In May 1996, the Company and Saban Entertainment agreed to co-produce a
feature-length live-action direct-to-video feature based on the Harvey Classic
Character Richie Rich, entitled "Richie Rich's Christmas Wish." 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. Principal photography is scheduled to
commence in spring 1998 and "Richie Rich's Christmas Wish" is tentatively
scheduled for release in November 1998. Saban Entertainment will retain
distribution rights in perpetuity for "Richie Rich's Christmas Wish." The
agreement for "Richie Rich's Christmas Wish" requires that Saban Entertainment
bear production, manufacturing or marketing expenses, and allows the Company to
share in net profits, if any, after Saban Entertainment first recovers its
marketing, production and distribution costs plus a distribution fee.

        The Company is considering developing sequels to the Casper and Richie
Rich videos and a spinoff Wendy the Witch video, for release in 1999. The
Company may find it necessary to fund part or all of the production and
marketing budgets for these videos. No decision has been made by the Company to
provide such funding. There can be no assurance that the sequels or the spinoff
will be produced or released or, if produced and released, that they 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. Portions of the
library are currently broadcast in more than 25 countries worldwide. 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 half-hour episodes from the original 248 shorts and entitled them
"Casper and Friends" (to be shown on the Fox Family Channel in 1998 as "Harvey
Toons"). 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



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receives music performance royalties when the cartoons are shown publicly
utilizing the original music 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 each of Baby Huey and Richie Rich.

        In March 1998, the Company hired a foreign distribution consultant based
in London to assist with and oversee foreign sales of the Harvey Classic Film
Library. The Company's prior distribution agreement with its foreign distributor
expired in November 1997.

        In January 1998 the Company reached an agreement with The Fox Family
Channel, a wholly owned subsidiary of the Fox Kids Network, a cable network
reaching over 70 million homes in the United States, to air 65 episodes from the
Harvey Classic Film Library as "Harvey Toons."

        TELEVISION PRODUCTION

        From 1995 to 1997, the Universal/Harvey Animation Studios, a joint
venture of the Company and Universal, produced a total of 52 new half-hour
television episodes of the animated series "Casper," which currently airs in
more than 50 countries around the world. For each episode produced, the Company
receives a fixed license fee and is entitled to share in a percentage of the
profits, if any. The Company controls the merchandising rights associated with
the new animated episodes. There are no current plans to produce additional
animated television episodes of "Casper."

THEATRICAL LICENSING:

        Motion pictures featuring Casper, the Friendly Ghost and Richie Rich
were released in May 1995 and December 1994, respectively. To date, Universal's
"Casper" and Warner Bros.' "Richie Rich" have generated reported worldwide box
office gross receipts in excess of $307 million and $80 million, respectively.
While the Company received certain character movie licensing fees and
merchandising participations for both features, it has not received revenues
from its defined profit participations except for a payment from Universal
received in 1997. (As part of the Company's agreement with Universal for a
sequel to this film, the Company was also paid a non-refundable advance against
the Company's share of its profit participation for the 1995 "Casper" movie.)
There can be no assurance it will receive any further profit shares in the
future from this film.

        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 January
29, 2000. In the event Warner Bros. produces a sequel, the Company would become
entitled to an additional amount.
There can be no assurance that the sequel will be produced or released.

        In May 1997, the Company entered into an agreement with Universal to
produce and distribute a motion picture sequel to the original "Casper" movie to
be produced by Universal Pictures & Amblin Entertainment. The Company received a
non-refundable up-front advance for the sequel rights and, if a sequel is
produced, is contractually entitled to receive additional advances against a
percentage of the gross receipts from all sources of exploitation of the motion
picture. As part of the Company's agreement with Universal, the Company was also
paid a non-refundable advance against the Company's share of its profit
participation from the first 1995 "Casper" movie. There can be no assurance that
the sequel will be produced or completed, or that if completed, the scheduled
release date will be met, or that the sequel will be successful.

        Pursuant to a May 1997 amendment to the Company's 1990 Distribution
Agreement and subsequent agreements with Universal (currently being reduced to a
long form Amended and Restated Memorandum of Distribution Agreement), Universal
has the exclusive right to initiate, develop and produce further Casper sequels.
The rights fees for the second and subsequent sequels will be negotiated in good
faith, and subject to resolution by "baseball" arbitration. The Company agreed
to a "window" around the theatrical release of any Casper sequel during which
time the Company would not permit the initial release of any Casper filmed
entertainment product. Universal also has certain rights to other pictures in
which Casper may make a "guest appearance," and first negotiation rights for
pictures involving other characters appearing in the Casper pictures. The
Company reimbursed Universal the unrecouped costs on the Harvey Classic Video
Library, the rights to which reverted to the Company.



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MERCHANDISING:

        In May 1997 the Company reacquired from Universal control of all
merchandising rights (except those relating to a Casper or Casper character
motion picture produced or released by Universal, as further described below)
and rights of First Negotiation/First Refusal and First Negotiation in all the
Harvey Classic Characters (other than certain limited rights to Casper, Casper
characters and new characters appearing in the "Casper" movie) in exchange for
the Company providing Universal an exclusive release window for the first sequel
to the "Casper" movie, a First Negotiation/First Refusal right with respect to
the first direct-to-video production featuring Casper after the release of any
"Casper" sequel and the right to exploit related merchandising. In October 1996
the Company hired a Senior Vice President of Consumer Products to assist in the
management of its reacquired merchandising rights. Merchandising revenue was
approximately $4.8 million in 1997, an increase of approximately $1.5 million
over merchandising revenue of approximately $3.3 million in 1996. The Company
cannot ascertain at this time whether the new strategy will ultimately be
successful.

LOCATION-BASED FAMILY ENTERTAINMENT CENTERS:

        In 1995 the Company entered into a licensing agreement with an
Indonesian company for the construction of a 50,000 square-foot family
entertainment center based on the Harvey Classic Characters and featuring Harvey
character rides and merchandising areas. The facility opened in the largest
shopping mall in Jakarta, Indonesia, on November 1, 1997. The Company recognized
a license fee for the initial term, payable in six annual installments, and is
entitled to a portion of the licensee's merchandising revenue. The Company is
unable to predict what effect the current political and economic turmoil in
Indonesia will have on receipts from the licensing agreement.

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 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 vigorously to 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 involving Casper and other characters were not renewed by
the Harvey family and such registrations have expired. By virtue of the
expiration of the copyrights in these original cartoon shorts and comic books,
certain rights may have fallen into the public domain and 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, those claims have not
prevailed.

COMPETITION:

        Competition is intense in the filmed entertainment, merchandising and
animation industries in which the Company is engaged. The Company's licensed
products compete with products produced and/or distributed by major
entertainment companies, as well as numerous smaller entertainment companies.
The Company believes that its principal competitors include The Walt Disney
Company, Warner Brothers, Fox Kids Worldwide and Nickelodeon, all of which have
children's networks and far greater resources and distribution capabilities than
the Company.



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EMPLOYEES:

        The Company employs approximately 20 persons on its full-time staff. For
the Company's filmed entertainment productions, the Company has hired
independent contractors or production facilities for creative work on an
as-needed basis. In February 1998, the Company hired a Senior Vice President -
Home Entertainment, whose primary responsibilities are overseeing the domestic
marketing and distribution of home videos and other home entertainment products
of the Company, and, in March 1998, the Company hired a foreign distribution
consultant based in London to coordinate foreign distribution of the Harvey
Classic Film Library with sales agents. The Company has recently created new
Creative Affairs and Consumer Products divisions. None of the Company's
employees are represented by a union and the Company believes relations with its
employees are good. In March 1998, the Company retained certain services from
Global Media Management Group, LLC.


                     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 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.

        UNCERTAINTY OF RESULTS IN 1998. As noted elsewhere in this filing, the
revenues and profits of the Company fluctuate according to the nature and timing
of its entertainment products and related merchandising. For example, results
during 1997 were significantly impacted by the receipt of nonrefundable advances
or releases of direct-to-video product, none of which events have occurred
during the first quarter of 1998. New management is currently examining the
Company's business plan and results from operations. The Company is uncertain as
to whether its revenues and profits, if any, during 1998 will match its revenues
and profits for similar periods in 1997 and there can be no assurance that the
Company's past results will be repeated in the future.

        NEW MANAGEMENT. On March 20, 1998, the Company's Board of Directors
voted not to renew the employment agreements of the Company's Chief Executive
Officer, Jeffrey A. Montgomery, and Chief Financial Officer and Executive Vice
President, Gregory M. Yulish which expire on April 17, 1998. On March 27 and
March 30, respectively, Messrs. Yulish and Montgomery resigned from the Board of
Directors. To replace Messrs Montgomery and Yulish, the Board of Directors
obtained the non-exclusive services of Anthony J. Scotti as the Company's
Interim Chief Executive Officer and Michael S. Hope as the Company's Interim
Chief Financial Officer, effective as of March 23, 1998, through a management
services agreement being negotiated with Global Media Management Group, LLC for
an initial six-month term. Pursuant to the management services agreement, the
Company will agree to pay Global Media Management Group, LLC $75,000 per month
and granted warrants to purchase an aggregate of 200,000, and options to
purchase an aggregate of 50,000, shares of the Company's Common Stock to Messrs.
Scotti, Hope and Leonard Breijo of Global Media Management Group, LLC. See
"Recent Sales of Unregistered Securities." If this management services agreement
is not renewed, there can be no assurance that the Company can replace Mr.
Scotti and Mr. Hope without a material adverse effect on the business and
prospects of the Company. New management is currently evaluating the Company's
business plan and results from operations. It is too early to tell whether the
new management will continue that plan or will adopt a new business strategy or
that any such strategy or plan will be successful.

        FLUCTUATION IN REVENUE RECOGNITION FROM FILM LICENSING AND
MERCHANDISING. 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, revenues are typically 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, until additional products are
licensed, excess royalties are remitted by existing licensees, or existing
licensing agreements expire and are renewed or replaced, no additional revenue
will be recognized from the rights the Company has licensed. Therefore, the
Company believes that period-to-period comparisons of its results from
operations are not necessarily an accurate indication of future performance.

        SUCCESS OF EXPANSION STRATEGY. The exploitation of the Harvey Classic
Characters and related ancillary



                                       8

<PAGE>   9



rights through the financing and 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, television and
merchandising, are relatively new to the Company, and the Company has not, in
the past, invested material amounts of its own capital in production activities.
There can be no assurance that the Company's direct-to-video, television and
licensing activities will be successful, or that it will be able to develop new
products successfully or compete effectively in new markets. In addition, there
can be no assurance that the Harvey Classic Characters will enjoy sustained
popularity as the Company expands into new areas such that the Company can
recover any of its up-front development or production costs. Further, there can
be no assurance that any acquisition of additional characters or of any business
in the future as part of the Company's expansion strategy will be successful. As
a result, there is substantial risk that the Company will be unable to implement
successfully its expansion strategy.

        NEW MERCHANDISING ACTIVITIES. Prior to May 1997, the Company relied upon
Universal to merchandise the Harvey Classic Characters. The Company is now
merchandising the Harvey Classic Characters for its own account. The Company has
hired several new personnel to handle merchandising, including a Senior Vice
President of Consumer Products. There can be no assurance that the Company,
despite its additions to staff and related overhead, will be able to promote and
compete effectively in the merchandising marketplace. To the extent the Company
performs merchandising functions internally, there can be no assurance that its
merchandising revenues will increase or be sustained at current levels or be
sufficient to defray the additional costs associated with its new 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, not all are currently popular and there can be
no assurance that they will, despite the Company's increased efforts and
expenditures, become popular, or that those that are popular 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/SELF-DISTRIBUTION. Historically, the
Company relied on one foreign distributor for sales of the Harvey Classic Film
Library. In November 1997, the Company's agreement for the Harvey Classic Film
Library with its the foreign distributor expired. In March 1998, the Company
hired a foreign distribution consultant based in London to assist with and
oversee foreign sales of the Harvey Classic Film Library. With respect to its
direct-to-video productions, with certain exceptions, the Company is free to
contract with any distributor in connection with a given production. For
upcoming productions, the Company has engaged through Saban Entertainment the
worldwide distribution services of Warner Brothers (for "Richie Rich's Christmas
Wish") and Twentieth Century Fox Home Entertainment (for "Casper Meets Wendy").
Saban Entertainment will handle ancillary worldwide sales. More than 69% of the
Company's revenues in 1997 were derived from the Company's agreements with Saban
Entertainment and Universal. A termination of the Company's relationship with
these distributors or Saban Entertainment during the respective product's life
cycle could adversely affect the Company's results.

        COMPETITION IN CLASSIC FILMED ENTERTAINMENT AND MERCHANDISING.
Competition is intense in the filmed entertainment, merchandising and animation
industries in which the Company is engaged. The Company believes that its
products are in competition with products produced and/or distributed by major
entertainment companies, as well as numerous smaller entertainment companies.
The Company believes that its principal competitors include The Walt Disney
Company, Warner Brothers, Fox Kids Worldwide and Nickelodeon, all of which have
children's networks and far greater resources and distribution capabilities than
the Company.



                                        9

<PAGE>   10



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 $7,500
per month through October 31, 1999. The Company's principal business address is
1999 Avenue of the Stars, Suite 2050, Los Angeles, California 90067.

ITEM 3.        LEGAL PROCEEDINGS

THE HARVEY ENTERTAINMENT COMPANY V. JEFFREY FRANKLIN ET AL.
THE HARVEY ENTERTAINMENT COMPANY V. STEVEN T. WATERMAN ET AL.
AMERICAN CASUALTY CO. ET AL. V. THE HARVEY ENTERTAINMENT COMPANY ET AL.

        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., seeking to recover damages arising from wrongful usurpation of corporate
business opportunities. The Company filed a related claim against Franklin's
business partner Stephen Waterman in May 1996. The Company was also named in a
related action filed by the defendants' insurers in which the insurers sought
determinations as to their obligations to provide insurance coverage for the
claims made by the Company against the defendants. In June 1997, judgment was
granted in favor of the Company in the Franklin action an amount in excess of
$800,000, and the cross-complaint brought by defendant ATI against the Company
was dismissed. The defendants appealed. In March 1998 the parties in all three
actions reached a settlement agreement conditional on the approval of the
bankruptcy court and on obtaining certain outstanding third-party signatures.
Neither of the two conditions has yet been satisfied.

REALTY TRUST ADVISORS, INC. V. THE HARVEY ENTERTAINMENT COMPANY

        On December 31, 1997, Realty Trust Advisors, Inc. filed suit against the
Company in Los Angeles Superior Court seeking damages arising out of the alleged
failure of the Company to pay certain commissions. The Company's response to the
First Amended Complaint in this case is due on May 11, 1998.

        The Company is not currently involved in any other material legal
proceedings.

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

        None.


                                     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, 1996:
           First Quarter.........................................     $10.00         $6.25
           Second Quarter........................................      12.00          6.75
           Third Quarter.........................................       9.63          6.50
</TABLE>



                                       10

<PAGE>   11



<TABLE>
<S>                                                                    <C>           <C> 
           Fourth Quarter........................................       9.13          5.25

     Fiscal year ended December 31, 1997:
           First Quarter.........................................       8.50          5.63
           Second Quarter........................................      14.25          7.50
           Third Quarter.........................................      18.00         12.25
           Fourth Quarter........................................      16.50          9.13

     Fiscal year ended December 31, 1998:
           First Quarter.........................................      15.25          9.37
</TABLE>

HOLDERS

     As of March 6, 1998, there were approximately 176 holders of record of the
Company's Common Stock.

DIVIDENDS

     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 February 1994, the Company issued a warrant to purchase 100,000 shares
of Common Stock at $13.475 per share (110% of the average closing price of the
Common Stock on the ten days preceding the agreement date) to the SAM Trust, an
affiliate of the producer of the "Casper" motion picture. The warrant expires on
February 24, 1999.

        In January 1997, the Company issued two warrants to purchase Common
Stock to Arnhold and S. Bleichroeder, Inc. as compensation for investor
relations and other related services. The first warrant, for 25,000 shares, for
services to the Company in 1997 vested immediately and is exercisable at any
time through January 16, 2002. The second warrant, also for 25,000 shares,
vested upon the Company's request that Arnhold and S. Bleichroeder perform
services for calendar year 1998 and is exercisable through January 16, 2003. In
January 1997, the Company also issued two warrants to purchase Common Stock to
Michael Doherty on similar terms. At the time of issuance, Mr. Doherty was an
advisor to the Company and a former employee of Arnold and S. Bleichroeder and
is presently a director of the Company. The first warrant, for 25,000 shares,
vested immediately and is exercisable at any time through January 16, 2002. The
second warrant, also for 25,000 shares, vested upon Mr. Doherty's rendering of
services to the Company in 1998 and is exercisable at any time through January
16, 2003.

        In March 1998, the Company issued three warrants to purchase Common
Stock, each of which vested upon issuance, may be exercised by the holder at any
time through March 23, 2003 and has a strike price of $12.75 per share (the
closing price of a share of Common Stock on the Nasdaq Stock Market on the date
the warrants were authorized). The first warrant, for a total of 155,200 shares
of the Company's Common Stock, was issued to Anthony J. Scotti as compensation
for services to be rendered as the Company's Interim Chief Executive Officer.
The second warrant, for a total of 38,800 shares of the Company's Common Stock,
was issued to Michael S. Hope as compensation for services to be rendered as the
Company's Interim Chief Financial Officer. The third warrant, for a total of
6,000 shares of the Company's Common Stock, was issued to Leonard Breijo of
Global Media Management Group, LLC as compensation for services to be rendered
as head of business affairs of the Company.

        All warrants described above 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's revenues are derived from two principal
sources: (I) filmed entertainment and (ii) merchandising. This report includes
forward-looking statements made based on the expectations of current management
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and actual outcomes may differ materially from what is expressed or forecasted.
There are many factors that affect the Company's business and its results of
operations, including the factors discussed below.

CONSOLIDATED STATEMENT OF OPERATIONS

        The following table sets forth, for the periods indicated, certain data
derived from the Company's consolidated statements of income.

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                  -----------------------
                                                                  1997             1996
                                                                  ----             ----
<S>                                                          <C>                <C>       
     Filmed Entertainment Revenues...........................$10,565,000        $5,824,000
     Merchandising Revenues..................................  4,839,000         3,344,000
                                                               ---------         ---------
     Total Operating Revenues................................ 15,404,000         9,168,000
     Cost of Sales...........................................  3,900,000         2,492,000
     Selling, General &
       Administrative Expenses...............................  5,774,000         4,008,000
     Interest, Depreciation and
       Amortization..........................................    827,000           806,000
                                                                 -------           -------

     Income from Operations..................................  4,903,000         1,862,000
     Other Income............................................    255,000           377,000
                                                                 -------           -------

     Income before Provision
       for Income Taxes......................................  5,158,000         2,239,000
     Provision for Income Taxes..............................  1,980,000           972,000
                                                               ---------           -------

     Net Income.............................................. $3,178,000        $1,267,000
                                                              ==========        ==========
     Basic Net Income Per Share Income.......................      $0.89             $0.35
                                                                   =====             =====
     Diluted Net Income Per Share............................      $0.80             $0.33
                                                                   =====             =====
</TABLE>

RESULTS FROM OPERATIONS

Fiscal Year 1997 Compared to Fiscal Year 1996

        The Company's net operating revenues in 1997 and 1996 were $15,404,000
and $9,168,000 respectively, an increase of $6,236,000 or 68%. The increase in
revenues from 1996 to 1997 includes an increase of $4,741,000 in filmed
entertainment revenues and an increase of $1,495,000 in merchandising revenues.

REVENUES

         Net filmed entertainment revenues were $10,565,000 and $5,824,000 in
1997 and 1996, respectively, an increase of $4,741,000 or 81.4%. The increase in
filmed entertainment revenues was primarily due to home video revenues of
approximately $7.3 million during the period, including the revenues associated
with the Company's first feature-length, direct-to-video "Casper, A Spirited
Beginning" which was released on September 9, 1997. Home video revenues in 1997
also included a non-refundable advance received from Saban Entertainment
("Saban") for an agreement the Company entered into in the third quarter of 1997
with Saban to co-produce a second feature length, direct-to-video film based on
the Company's Casper and Wendy The Witch characters. The production, tentatively
entitled "Casper Meets Wendy", is slated for a fall 1998 release. Additionally,
in the second quarter of 1997 the



                                       12

<PAGE>   13



Company entered into an agreement with Universal to produce and distribute a
motion picture sequel to the original "Casper" movie for theatrical release. The
Company received a non-refundable up-front advance for the sequel rights and may
receive additional advances and other payments if the sequel is produced. In
addition, Universal paid the Company a non-refundable advance against the
Company's share of its profit participation for the first 1995 "Casper" movie.
There were no such revenues in 1996. A portion of the 1996 filmed entertainment
revenues consisted of a non-refundable advance the Company received from Saban
in the second quarter of 1996 for the Company's first feature length,
direct-to-video "Casper, A Spirited Beginning". Also included in the 1996 filmed
entertainment revenues was a non-refundable cash payment advance the Company
received from Universal for a distribution agreement wherein Universal was
granted the right to broadcast episodes of "Casper and Friends" in the United
States for a period of twenty-seven months. There were no such revenues in 1997.
Other sources of filmed entertainment revenues in 1997 and 1996 consisted of
license fees generated from the "Casper" animated television show which aired on
the Fox Kids Network (no new episodes will be produced and there will be no
additional license fees), license fees from sales to foreign broadcasters of the
Harvey film library, domestic syndication of the "Richie Rich Show," and other
miscellaneous sources. In November 1997, the Company's agreement with the
foreign distributor of its Harvey Classic Film Library expired. Although no
decision has yet been made, the Company may fund all or part of the production
and marketing of future filmed entertainment of the Company.

        Net merchandising revenues were $4,839,000 and $3,344,000 in 1997 and
1996, respectively, an increase of $1,495,000 or 45%. The increase in
merchandising revenue was due to the Company's newly formed, in-house licensing
division, Harvey Consumer Products. A number of the licensees participating in
the Company's worldwide Casper merchandising program, which began in 1995 with
the release of the first "Casper" theatrical feature, have generated revenues
which exceed minimum guaranteed amounts, resulting in additional revenue to the
Company. The Company cannot accurately project future merchandising revenues
derived from Casper or any of the other Harvey Classic Characters because the
ongoing success of the merchandising program is in part dependent upon the
exposure, attractiveness and marketability of the particular Harvey Character,
and there can be no assurance that merchandising revenues will increase or
continue at the same level in the future. 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.

COST OF SALES

        The cost of sales relating to filmed entertainment revenues was
$1,773,000 and $1,660,000 in 1997 and 1996, respectively. The increase in the
cost of sales is due to an increase in filmed entertainment activity for the
year. As a percentage of net filmed entertainment revenues, the cost of sales
was 17% and 29% in 1997 and 1996, respectively. The decrease in the cost of
sales as a percentage of revenues is due to lower costs associated with certain
1997 production and distribution agreements.

        The cost of sales relating to merchandising was $2,127,000 and $832,000
in 1997 and 1996, respectively. As a percentage of net merchandising revenues,
the cost of sales was 44% and 25% in 1997 and 1996, respectively. The increase
in cost of sales is due to the shift in control of merchandising for all the
Company's characters, including Casper, to the Company and Universal becoming a
third party participant sharing in a portion of the Company's revenues from
Casper. Pursuant to the Company's 1997 agreement with Universal, Universal's
participation in Casper revenues will continue for a limited period of time.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Selling, general and administrative expenses ("SG&A") were $5,774,000
and $4,008,000 for 1997 and 1996, respectively, an increase of $1,766,000 or
44%. The increase in SG&A is due to the additional overhead expenses related to
the Company's two new divisions, Harvey Consumer Products and Creative Affairs.
Additionally, SG&A expenses in 1997 include a reserve against accounts
receivable to cover the currently estimated impact on payments from the family
entertainment center in Jakarta of political and economic turmoil in Indonesia
and a charge for the write-off of the remaining receivable due from Marvel
Comics. Marvel Comics filed for bankruptcy reorganization in December 1996 and
the Company's remaining receivable from Marvel Comics has become uncollectible.
The Company has reacquired its comic book publishing rights from Marvel Comics.
As a percentage of net operating revenues, SG&A was 37% and 44% for 1997 and
1996, respectively. The Company expects that SG&A will continue to increase as
the Company expands its personnel and enters into the management agreement with
Global Media Management



                                       13

<PAGE>   14



Group, LLC.

DEPRECIATION AND AMORTIZATION

        Depreciation expense was $97,000 and $53,000 in 1997 and 1996,
respectively. The increase in depreciation was due to additions of leasehold
improvements and furniture, fixtures and equipment in 1997. Amortization of the
film library was $520,000 and $558,000 in 1997 and 1996, 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 $53,000 in
1997 and $51,000 in 1996. Amortization of goodwill was $130,000 in both 1997 and
1996.

INTEREST EXPENSE

        Interest Expense was $27,000 and $14,000 in 1997 and 1996, respectively.
Interest expense in 1997 and 1996 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 $255,000 and $377,000 in
1997 and 1996, respectively. The decrease in other income was due to lower cash
balances invested throughout the period, which generated decreased interest
income.

INCOME TAXES

        Provision for income taxes was $1,980,000 and $972,000 in 1997 and 1996,
respectively. The increase in the provision for income taxes is due to the
Company's increased profitability in 1997 versus 1996.

LIQUIDITY AND CAPITAL RESOURCES

        Even though net income increased from $1,267,000 in 1996 to $3,178,000
in 1997, net cash provided by operating activities decreased from $1,833,000 in
1996 to $1,601,000 in 1997. The decrease in net cash provided by operating
activities was primarily due to the increase in accounts receivable to
$5,261,000 in 1997, compared to a decrease of $1,355,000 in 1996. Approximately
50% of the accounts receivable outstanding in 1997 were due from Saban 
Entertainment.

        The Company believes that debtors liable on all receivables are of good
quality and that the allowance for doubtful accounts at December 31, 1997 in the
amount of $606,000 is adequate. The Company continually reevaluates its
receivables to reassess its allowance for bad debts.

        Net cash used in investing activities was $495,000 and $199,000 in 1997
and 1996 respectively. The increase in cash used in investing activities is
attributed to the Company's purchase of furniture and equipment of $358,000 in
1997 as compared to $160,000 in 1996. In addition, the net cash used in
investing activities in 1996 was reduced by $128,000 from the receipt of
proceeds from the repayment of a note receivable from an officer stockholder.

        Net cash (used in) provided by financing activities was $(847,000) in
1997 compared to $56,000 net cash provided by financing activities in 1996. The
decrease is due to the Company's repurchase of 96,000 shares of its common stock
for $1,035,000, or an average price of $10.78 per share in 1997. Under the
Company's stock buy back program, the Company may continue to buy shares on the
market from time to time.

        The Company has a $5,000,000 revolving credit facility (the "Revolving
Facility") with City National Bank, which expires on June 1, 1998. Interest on
advances made under the Revolving Facility accrues at 1% above the prime rate as
reported by the lender. The credit agreement obligates the Company to maintain a
minimum net worth and current ratio and disallows the payment of dividends. The
Company has not drawn on this facility. The Revolving Facility is secured by
substantially all of the assets of the Company. The Company plans to seek to
extend or replace the Revolving Facility prior to its expiration but there can
be no assurance that it will be able to do so on acceptable terms or at all.
Management believes that the Company's current sources of working capital,
including amounts expected to be available under existing or future credit
facilities, will provide adequate working capital for the Company's current



                                       14

<PAGE>   15



requirements for at least the next 12 months.

INFLATION AND SEASONALITY

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

UNCERTAINTY OF RESULTS IN 1998

        As noted elsewhere in this filing, the revenues and profits of the
Company fluctuate according to the nature and timing of its entertainment
products and related merchandising. For example, results during 1997 were
significantly impacted by the receipt of nonrefundable advances or releases of
direct-to-video products, none of which events have occurred during the first
quarter of 1998. New management currently is examining the Company's business
plan and results from operations. As a result, the Company is uncertain as to
whether its revenues and profits during 1998 will match its revenues and profits
for similar periods in 1997 and there can be no assurance that the Company's
past results will be repeated in the future.

YEAR 2000

        The Company utilizes various computer software packages as tools in
running its accounting operations. Management plans to implement any necessary
vendor upgrades and modifications to ensure continued functionality with respect
to the software problems associated with the year 2000. At present, management
does not expect that material incremental costs will be incurred, or significant
Company resources dedicated, in the aggregate or in any single future year to
become year 2000 compliant.


ITEM 7.        FINANCIAL STATEMENTS

        [Pages F-1 through F-18 follow.]


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

        [NONE.]

[PART III FOLLOWS PAGE F-18, AT PAGE 16.]



                                       15

<PAGE>   16
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,
    1997 AND 1996:

    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-18
</TABLE>



                                      F - 1

<PAGE>   17



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders 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, 1997 and
1996, 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, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.





March 9, 1998



                                      F - 2

<PAGE>   18



THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                                            1997               1996
<S>                                                                           <C>                <C>        
CURRENT ASSETS:
  Cash and cash equivalents                                                   $ 6,316,000        $ 6,057,000
  Accounts receivable, net (Note 3)                                             6,239,000          2,342,000
  Prepaid expenses and other current assets                                       219,000            226,000
  Prepaid income taxes (Note 4)                                                                      620,000
                                                                              -----------        -----------
          Total current assets                                                 12,774,000          9,245,000

LONG-TERM ACCOUNTS RECEIVABLE (Note 3)                                          1,774,000            410,000

FILM LIBRARY, Net of accumulated amortization of $3,373,000
   and $2,853,000 in 1997 and 1996, respectively (Note 2)                      10,236,000         10,108,000

FURNITURE AND EQUIPMENT, Net of accumulated depreciation
  of 497,000 and $345,000 in 1997 and 1996, respectively                          483,000            277,000

GOODWILL, Net of accumulated amortization of $1,092,000 and
  $962,000 in 1997 and 1996, respectively                                       1,503,000          1,633,000

TRADEMARKS AND COPYRIGHTS, Net of accumulated
  amortization of $210,000 and $160,000 in 1997 and 1996, respectively            590,000            503,000

OTHER ASSETS                                                                      270,000            128,000
                                                                              -----------        -----------
TOTAL (Note 5)                                                                $27,630,000        $22,304,000
                                                                              ===========        ===========
</TABLE>



See notes to consolidated financial statements.
                                                                     (Continued)



                                      F-3


<PAGE>   19



THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                             1997                1996
<S>                                                                         <C>                 <C>         
CURRENT LIABILITIES:
  Accounts payable and accrued expenses (Notes 10 and 11)                   $  2,300,000        $  1,075,000
  Income taxes payable (Note 4)                                                  498,000
                                                                            ------------        ------------
           Total current liabilities                                           2,798,000           1,075,000

DEFERRED INCOME TAXES (Note 4)                                                 3,788,000           2,610,000

ACCRUED RENT (Note 6)                                                            131,000             137,000
                                                                            ------------        ------------
          Total liabilities                                                    6,717,000           3,822,000
                                                                            ------------        ------------

COMMITMENTS AND CONTINGENCIES (Notes 6, 10 and 11)

STOCKHOLDERS' EQUITY:
  Preferred stock, $1 par value; authorized, 3,000,000 shares;
    none issued (Note 7)
  Common stock, no par value; 10,000,000 common shares authorized;
    3,573,000 shares issued and outstanding in 1997 and 3,642,000 in
    1996 (Notes 8 and 9)                                                      18,153,000          18,900,000
  Retained earnings (accumulated deficit)                                      2,760,000            (418,000)
                                                                            ------------        ------------

          Total stockholders' equity                                          20,913,000          18,482,000
                                                                            ------------        ------------
TOTAL                                                                       $ 27,630,000        $ 22,304,000
                                                                            ============        ============
</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, 1997 AND 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                1997               1996
<S>                                                                         <C>                <C>        
OPERATING REVENUES (Note 3):
  Filmed entertainment                                                      $10,565,000        $ 5,824,000
  Merchandising                                                               4,839,000          3,344,000
                                                                            -----------        -----------

           Total operating revenues                                          15,404,000          9,168,000
                                                                            -----------        -----------

OPERATING EXPENSES:
  Cost of sales (Note 3)                                                      3,900,000          2,492,000
  Selling, general and administrative expenses (Notes 8, 10 and 11)           5,774,000          4,008,000
  Amortization of film library, goodwill, trademarks and copyrights,
    and other                                                                   703,000            739,000
  Depreciation and amortization                                                  97,000             53,000
  Interest expense (Note 5)                                                      27,000             14,000
                                                                            -----------        -----------

           Total operating expenses                                          10,501,000          7,306,000
                                                                            -----------        -----------

INCOME FROM OPERATIONS                                                        4,903,000          1,862,000

OTHER INCOME (Note 10)                                                          255,000            377,000
                                                                            -----------        -----------

INCOME BEFORE PROVISION FOR INCOME TAXES                                      5,158,000          2,239,000

PROVISION FOR INCOME TAXES (Note 4)                                           1,980,000            972,000
                                                                            -----------        -----------

NET INCOME                                                                  $ 3,178,000        $ 1,267,000
                                                                            ===========        ===========


BASIC NET INCOME PER SHARE (Note 9)                                         $      0.89        $      0.35
                                                                            ===========        ===========

DILUTED NET INCOME PER SHARE (Note 9)                                       $      0.80        $      0.33
                                                                            ===========        ===========
</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, 1997 AND 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                         Retained  
                                                        Common Stock                     Earnings  
                                              ---------------------------------        (Accumulated
                                                 Shares               Amount              Deficit)              Total
                                              ------------         ------------         ------------         ------------
<S>                                           <C>                  <C>                 <C>                   <C>         
BALANCE,
  JANUARY 1, 1996                                3,630,000         $ 18,844,000         $ (1,685,000)        $ 17,159,000

  Exercise of stock options (Note 8)                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

  Exercise of stock options, including
    income tax benefit (Notes 4 and 8)              27,000              288,000                                   288,000

  Shares repurchased and retired                   (96,000)          (1,035,000)                               (1,035,000)

  Net income                                                                               3,178,000            3,178,000
                                              ------------         ------------         ------------         ------------
BALANCE,
  DECEMBER 31, 1997                              3,573,000         $ 18,153,000         $  2,760,000         $ 20,913,000
                                              ============         ============         ============         ============
</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, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  1997                1996
<S>                                                                           <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                  $ 3,178,000         $ 1,267,000
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization                                                  97,000              53,000
    Amortization of film library, goodwill, trademarks and copyrights,
      and other                                                                   703,000             739,000
    Loss on disposals                                                              55,000
    Deferred income taxes                                                       1,278,000             886,000
    Changes in operating assets and liabilities:
      Accounts receivable, net                                                 (5,261,000)          1,355,000
      Prepaid expenses and other current assets                                     7,000             (55,000)
      Prepaid income taxes                                                        620,000            (620,000)
      Film library                                                               (648,000)         (2,008,000)
      Other assets                                                               (145,000)            (58,000)
      Accounts payable and accrued expenses                                     1,225,000             287,000
      Income taxes payable                                                        498,000             (87,000)
      Accrued rent                                                                 (6,000)             74,000
                                                                              -----------         -----------

          Net cash provided by operating activities                             1,601,000           1,833,000
                                                                              -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of furniture and equipment                                            (358,000)           (160,000)
  Investments in trademarks and copyrights                                       (137,000)           (167,000)
  Proceeds from notes receivable - officer/stockholder                                                128,000
                                                                              -----------         -----------
          Net cash used in investing activities                                  (495,000)           (199,000)
                                                                              -----------         -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of stock options                                         188,000              56,000
  Repurchased and retired common stock                                         (1,035,000)
                                                                              -----------         -----------
          Net cash (used in) provided by financing activities                    (847,000)             56,000
                                                                              -----------         -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                         259,000           1,690,000

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    6,057,000           4,367,000
                                                                              -----------         -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        $ 6,316,000         $ 6,057,000
                                                                              ===========         ===========
</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, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                           1997              1996
<S>                                                     <C>               <C>      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
 Cash paid (received) during the year for:
    Interest                                            $  37,500         $  14,000
    Income taxes                                        $(416,000)        $ 797,000
</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, 1997 AND 1996
--------------------------------------------------------------------------------


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.

        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.

        USE OF ESTIMATES - The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities 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.

        FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
        instruments consist primarily of cash and cash equivalents, accounts
        receivable, and accounts payable. 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 - Film costs are stated at the lower of cost less
        accumulated amortization or estimated net realizable value. Film costs
        consist of direct production costs, production overhead, and capitalized
        interest and are amortized using the individual film forecast
        computation method. The individual film forecast method amortizes costs
        in the ratio that the current period's gross revenues bear to the total
        estimated gross revenues to be derived from all sources. Such estimates
        are revised periodically, and estimated losses, if any, are provided for
        in full at the time determined.

        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. Leasehold improvements are amortized over the shorter
        of the lease term or the estimated life of the improvement. Repairs and
        maintenance are charged to expense as incurred; replacements and
        betterments are capitalized.

        GOODWILL - Goodwill is amortized on a straight-line basis over 20 years.

        LONG-LIVED ASSETS - As of each balance sheet date, the Company evaluates
        the recovery of its long-lived assets and recognizes impairment if it is
        probable that the recorded amounts are not recoverable based upon future
        undiscounted cash flows or if there is an event or change in
        circumstances which indicates that the carrying amount of an asset may
        not be recoverable.

        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.



                                      F - 9

<PAGE>   25



        CONCENTRATION OF CREDIT RISK - The Company at times maintains cash
        balances at certain financial institutions in excess of federally
        insured deposits. 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.

        INCOME TAXES - Deferred income taxes represent the tax consequences on
        future years of differences between the income tax basis of assets and
        liabilities and their basis for financial reporting purposes.

        STOCK-BASED COMPENSATION - In fiscal 1997, the Company adopted the
        disclosure-only provisions of Statement of Financial Accounting
        Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
        The Company continues to account for its stock compensation arrangements
        using the intrinsic value method in accordance with Accounting
        Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
        Employees."

        EARNINGS PER SHARE - In fiscal 1997, the Company adopted SFAS No. 128,
        "Earnings per Share ("EPS")." SFAS No. 128 replaces the presentation of
        primary EPS with a presentation of basic EPS and diluted EPS. It also
        requires dual presentation of basic EPS and diluted EPS on the face of
        the income statement for all publicly held entities with complex capital
        structures and requires a reconciliation of the numerator and
        denominator of the basic EPS computation to the numerator and
        denominator of the diluted EPS computation.

        RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
        Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
        Income," and No. 131, "Disclosure about Segments of an Enterprise and
        Related Information." These statements are effective for financial
        statements issued for periods beginning after December 15, 1997. The
        Company has not yet determined the impact of adopting these statements.

        RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
        consolidated financial statements to conform with the current year's
        presentation.



                                     F - 10

<PAGE>   26



2.       FILM INVENTORY

         Film inventory consists of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                    1997               1996
<S>                                                             <C>                <C>        
         Films released, net of accumulated amortization        $ 9,728,000        $10,108,000
         Development                                                508,000
                                                                -----------        -----------
         Total film inventory                                   $10,236,000        $10,108,000
                                                                ===========        ===========
</TABLE>

         Based upon the Company's estimates of future gross revenues at December
         31, 1997, approximately 17% of the unamortized film library will be
         amortized during the three-year period ending December 31, 2000. In
         addition, the Company estimates that approximately 62% 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.

3.       SIGNIFICANT DISTRIBUTORS AND EXPORT SALES

         Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                          1997                1996
<S>                                                                   <C>                 <C>        
         Accounts receivable:
           Domestic                                                   $ 4,098,000         $ 1,302,000
           Foreign                                                      4,521,000           2,023,000
                                                                      -----------         -----------

                                                                        8,619,000           3,325,000
         Allowance for doubtful accounts ($127,000 relating to
           long-term portion)                                            (606,000)           (573,000)
                                                                      -----------         -----------

                                                                        8,013,000           2,752,000
         Long-term portion                                             (1,774,000)           (410,000)
                                                                      -----------         -----------

                                                                      $ 6,239,000         $ 2,342,000
                                                                      ===========         ===========
</TABLE>

         Revenues earned from Universal Studios, Inc. ("Universal") accounted
         for 22% and 42% of consolidated revenues for the years ended December
         31, 1997 and 1996, respectively. At December 31, 1997 and 1996,
         accounts receivable due from Universal totaled $613,000 and $1,177,000,
         respectively. The revenues and receivables from Universal relate to the
         worldwide merchandising of the Company's classic characters and the
         production and distribution of the motion pictures "Casper" and the
         planned sequel. Through January 1997, Universal acted as the Company's
         exclusive merchandising agent. In January 1997, the Company and
         Universal entered into a new merchandising agreement whereby the
         Company serves as its own agent and, for a limited period of time, will
         remit a percentage of the merchandising revenues, net of certain
         expenses, to Universal. The amount due to Universal under this new
         agreement is $1,444,000 at December 31, 1997.

         In 1996, the Company licensed to Saban Entertainment ("Saban") the
         rights to co-produce a feature length direct to video based on the
         Company's character Casper. The first direct to video, "Casper, A
         Spirited Beginning" was released in September 1997. In 1997, the
         Company licensed to Saban the right to co-produce

                                       F - 11


<PAGE>   27



        a second feature length direct to video featuring the Company's Casper
        and Wendy the Witch characters, which is slated for a fall 1998 release.
        Revenues from Saban accounted for 47% and 36% of consolidated revenues
        for the years ended December 31, 1997 and 1996, respectively. At
        December 31, 1997, accounts receivable due from Saban totaled
        $4,291,000. No amounts were due from Saban at December 31, 1996.

        Export sales by geographic area for the years ended December 31, 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                          1997                  1996
<S>                                    <C>                   <C>       
         Asia                          $1,480,000            $  144,000
         Canada                            40,000               179,000
         Europe                         2,261,000             1,309,000
         Other                            625,000               360,000
                                       ----------            ----------
                                       $4,406,000            $1,992,000
                                       ==========            ==========
</TABLE>



4.      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.



                                     F - 12

<PAGE>   28



        The provision for income taxes for the years ended December 31, 1997 and
        1996 consists of the following:

<TABLE>
<CAPTION>
                                                                1997              1996

<S>                                                          <C>               <C>       
         Current                                             $  702,000        $   86,000
                                                             ----------        ----------

         Deferred                                             1,178,000           886,000
         Amounts related to exercise of stock options           100,000
                                                             ----------        ----------
         Total deferred                                       1,278,000           886,000
                                                             ----------        ----------
         Provision for income taxes                          $1,980,000        $  972,000
                                                             ==========        ==========
</TABLE>

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

         Income tax computed at the statutory federal income tax rate of 34% and
         35% for the years ended December 31, 1997 and 1996, respectively, and
         the provision for income taxes in the financial statements for the
         years ended December 31, 1997 and 1996 differ as follows:

<TABLE>
<CAPTION>
                                                                          1997                1996

<S>                                                                   <C>                 <C>        
         Provision computed at the statutory rate                     $ 1,754,000         $   784,000
         State income taxes, net of federal income tax benefit            247,000             143,000
         Amortization of goodwill                                          45,000              45,000
         Other                                                            (66,000)
                                                                      -----------         -----------
         Provision for income taxes                                   $ 1,980,000         $   972,000
                                                                      ===========         ===========
</TABLE>

5.       DEBT

         The Company has a revolving loan and security agreement that allows
         maximum borrowings of up to $5,000,000 and expires on June 1, 1998.
         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 (8.5% at December 31, 1997) plus 1% per annum. 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,
         1997, the Company was in compliance with these covenants. No amounts
         were outstanding under this line of credit at December 31, 1997 or
         1996.

6.       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:



                                      F-13

<PAGE>   29



<TABLE>
<CAPTION>
    YEAR ENDING             GROSS          SUBLEASE
    DECEMBER 31,           RENTALS         INCOME                    NET
<S>                     <C>               <C>                 <C>        
      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
      2002                  286,000                               286,000
      Thereafter            453,000                               453,000
                        -----------       ---------           -----------
                        $ 3,068,000       $ 692,000           $ 2,376,000
                        ===========       =========           ===========
</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 $259,000 and $216,000 for the
        years ended December 31, 1997 and 1996, respectively. Rent expense is
        net of sublease income of $257,000 and $162,000 in 1997 and 1996,
        respectively.

        EMPLOYMENT AGREEMENTS - The Company has employment contracts with its
        Chairman/Chief Executive Officer and Executive Vice President/Chief
        Financial Officer that require periodic payments aggregating $450,000
        per year through April 1998. In addition, the Company has employment
        contracts with three other employees and two consultants that require
        payments aggregating $629,000, $482,000 and $160,000 in 1998, 1999 and
        2000, respectively.

        YEAR 2000 - The Company utilizes various computer software packages as
        tools in running its accounting operations. Management plans to
        implement any necessary vendor upgrades and modifications to ensure
        continued functionality with respect to the software problems associated
        with the year 2000. At present, management does not expect that material
        incremental costs will be incurred, or significant Company resources
        dedicated, in the aggregate or in any single future year to become year
        2000 compliant.

7.      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.

8.      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. As of December 31, 1997, 200 shares
        remained unissued under the plans. 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.

        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



                                     F - 14

<PAGE>   30



        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 - The stock option plan of 1997 provides for
        the grant of options to purchase an aggregate of 250,000 shares of
        common stock. As of December 31, 1997, 133,800 shares remained unissued
        under the plan. Officers, directors and other key employees are eligible
        to receive grants of either incentive stock options or nonqualified
        stock options; non-employee directors may be granted only nonqualified
        stock options. The exercise price of each option granted under the 1997
        plan must be at least 100% of the fair market value per share on the
        date option is granted, except that 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 term of each option may not exceed 10 years from the date of grant
        (5 years for any 10% stockholder). Vesting of the options is determined
        on a case-by-case basis.

        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 the date of repricing.

        The following table summarizes option transactions during the two years
        ended December 31, 1997 under the aforementioned plans:

<TABLE>
<CAPTION>
                                                  NUMBER         WEIGHTED
                                                 OF SHARES       AVERAGE
                                                                  PRICE
                                                                PER SHARE
                                                 --------         -----
<S>                                              <C>            <C>  
         Balance, January 1, 1996                 689,000         $5.35
           Granted                                 39,000         $7.25
           Exercised                              (12,000)        $7.25
           Canceled                               (33,000)        $7.25
                                                 --------         -----

         Balance, December 31, 1996               683,000         $5.33
           Granted                                164,000         $8.33
           Exercised                              (26,000)        $6.44
                                                 --------         -----

         Balance, December 31, 1997               821,000         $5.89
                                                 ========         =====

         Vested as of December 31, 1997           662,000
                                                 ========
</TABLE>



                                     F - 15

<PAGE>   31



        The following summarizes pricing and term information for options
outstanding as of December 31, 1997:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                   -------------------------------------------   --------------------------
                                       WEIGHTED
      RANGE OF        NUMBER            AVERAGE       WEIGHTED                     WEIGHTED
      EXERCISE      OUTSTANDING        REMAINING      AVERAGE     EXERCISABLE       AVERAGE
       PRICES      AT DECEMBER 31,    CONTRACTUAL     EXERCISE   AT DECEMBER 31,   EXERCISE
                       1997             LIFE           PRICE          1997          PRICE

<S>                <C>               <C>              <C>        <C>               <C>   
$ 4.00 - $ 4.40       450,000        0.6 years         $ 4.39        390,000        $ 4.39
  7.25 -   7.75       323,000        8.8 years         $ 7.37        252,000        $ 7.52
  8.81                 23,000        9 years           $ 8.81
 10.63 -  11.00        25,000        9 years           $10.70         20,000        $10.63
                      -------                                        -------
$ 4.00 - $11.00       821,000        4.29 years        $ 5.89        662,000        $ 5.77
                      =======                                        =======
</TABLE>

        The Company has adopted the disclosure-only provisions of SFAS 123,
        "Accounting for Stock-Based Compensation." The estimated fair value of
        options granted during 1997 and 1996 pursuant to SFAS No. 123 was
        approximately $367,000 and $80,000, respectively. Had the Company
        adopted SFAS No. 123, pro forma net income would have been $2,729,000
        and $1,187,000, and pro forma net income per share would have been $0.77
        and $0.33 for 1997 and 1996, respectively. The fair value of each option
        grant was estimated using the Black-Scholes option-pricing model with
        the following weighted average assumptions: dividend yield of zero,
        volatility of 30%, a risk-free interest rate of 6.28% and expected
        option lives of three years.

        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 1997, warrants were exercised for 5,000 shares of common
        stock. At December 31, 1997, warrants to acquire 52,000 shares remained
        outstanding. The warrants expire in June 1998.

        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.

        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.

        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. The Company has
        repurchased 96,000 shares during the year ended December 31, 1997.

9.      EARNINGS PER SHARE

        Basic EPS excludes dilution and is computed by dividing income available
        to common stockholders by the weighted-average number of common shares
        outstanding for the period. Diluted EPS reflects the potential dilution
        that could occur if securities or other contracts to issue common stock
        were exercised or converted into common stock or resulted in the
        issuance of common stock that then shared in the earnings of the entity.



                                     F - 16

<PAGE>   32



        The following table reconciles basic EPS to diluted EPS for the years
ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                1997
                                            -------------------------------------------
                                             INCOME             SHARES        PER-SHARE
                                           (NUMERATOR)       (DENOMINATOR)     AMOUNT
<S>                                        <C>               <C>              <C>  
Basic EPS                                   $3,178,000         3,555,000        $0.89
                                                                                =====
Effect of dilutive securities:
  Options                                                        403,000
  Warrants                                                         6,000
                                            ----------         ---------
Diluted EPS -
  Net income and assumed conversions        $3,178,000         3,964,000        $0.80
                                            ==========         =========        =====
</TABLE>


<TABLE>
<CAPTION>
                                                                  1996
                                            -------------------------------------------
                                              INCOME             SHARES        PER-SHARE
                                            (NUMERATOR)       (DENOMINATOR)     AMOUNT
<S>                                         <C>               <C>              <C>  
Basic EPS                                   $1,267,000         3,639,000        $0.35
                                                                                =====
Effect of dilutive securities -
  Options                                                        243,000
                                            ----------         ---------
Diluted EPS -
  Net income and assumed conversions        $1,267,000         3,882,000        $0.33
                                            ==========         =========        =====
</TABLE>



        Warrants to purchase 100,000 shares of common stock at $13.48 per share
        were outstanding as of December 31, 1997; warrants to purchase 157,000
        shares of common stock at $10.88-$13.48 per share were outstanding as of
        December 31, 1996 but were not included in the computation of diluted
        EPS because the warrants' exercise price was greater than the average
        market price of the common shares. The warrants expire at various dates
        from June 1998 through January 1999.

10.     RELATED PARTIES

        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 the
        year ended December 31, 1996 and is included in other income.

        In September 1997, the Company entered into a related party
        consulting/producing arrangement with JEM Entertainment, Inc. The
        Company incurred $52,000 for the year ended December 31, 1997 under this
        arrangement and the Company is obligated to $125,000 for each of the two
        years ending December 31, 1999.


        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



                                     F - 17

<PAGE>   33


        December 31, 1993 under this agreement, which is included in accounts
        payable and accrued expenses at December 31, 1996.

        Another corporation owned by this former member of the Board of
        Directors is the present 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.

11.     PROFIT-SHARING PLAN

        The profit-sharing plan covers substantially all employees with more
        than 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 $129,000 and $76,000 in 1997 and 1996, respectively, and
        is included in accounts payable and accrued expenses.


                                     ******


                                     F - 18

<PAGE>   34



                                    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 anticipated to
be held in June, 1998. 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 10-KSB

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER          DESCRIPTION
      ------          -----------

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

        10.5   1993 Stock Option Plan and Stock Option Agreements (incorporated
               herein by reference to Exhibit
</TABLE>



                                       16

<PAGE>   35



<TABLE>
<S>            <C>
               10.41 of Company's Registration Statement No. 33-63363-LA)

        10.6   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)

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

        10.13  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)

        10.14  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)

        10.15  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)

        10.16  1994 Stock Option Plan (incorporated by reference to the
               Registrant's 1994 definitive Proxy Statement)

        10.17  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)

        10.18  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)

        10.19  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)

        10.20  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)

        10.21  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)

        10.22  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)

        10.23  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)

        10.24  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)

        10.25  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
</TABLE>



                                       17

<PAGE>   36



<TABLE>
<S>            <C>
               ended December 31, 1995)

        10.26  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)

        10.27  Sublease dated September 22, 1996 between MCA Records, Inc. and
               the Company (incorporated herein by reference to the Company's
               Annual Report on Form 10-KSB for the year ended December 31,
               1996)

        10.28  Warrant Agreement with Arnhold and S. Bleichroeder dated January
               16, 1997 (incorporated herein by reference to the Company's
               Annual Report on Form 10-KSB for the year ended December 31,
               1996)

        10.29  Warrant Agreement with Michael Doherty dated January 16, 1997
               (incorporated herein by reference to the Company's Annual Report
               on Form 10-KSB for the year ended December 31, 1996)

        10.30  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) (incorporated herein by
               reference to the Company's Annual Report on Form 10-KSB for the
               year ended December 31, 1996)

        10.31  Summary of lease terms for the premises located at 1999 Avenue of
               the Stars, Los Angeles (incorporated herein by reference to the
               Company's Annual Report on Form 10-KSB for the year ended
               December 31, 1996)

        10.32  Extension Agreement with City National Bank dated June 1, 1996
               (incorporated herein by reference to the Company's Annual Report
               on Form 10-KSB for the year ended December 31, 1996)

        10.33  The Harvey Entertainment Company 1997 Stock Option Plan
               (incorporated herein by reference to the Company's 1997
               definitive Proxy Statement)

        10.34  Term Sheet for Universal/Harvey Restated Agreement, dated May 15,
               1997 between the Company and Universal Studios, Inc.
               (incorporated herein by reference to the Company's Quarterly
               Report on Form 10-QSB for the quarter ended June 30, 1997
               (portions of which were redacted and filed under a
               confidentiality request))

        10.35  Casper Meets Wendy Direct-to-Video Agreement, dated September 5,
               1997, 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 September 30, 1997
               (portions of which were redacted and filed under a
               confidentiality request))

        10.36  Stock Option Agreement dated April 17, 1997 between the Company
               and Gregory M. Yulish*

        10.37  Stock Option Agreement dated April 17, 1997 between the Company
               and Jeffrey A. Montgomery*

        10.38  Multi-Agreement Amendment No. 5 dated June 1, 1997 to Revolving
               Loan and Security Agreement dated October 27, 1993, between the
               Company and City National Bank, N.A.*

        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*

        27     Financial Data Schedules
</TABLE>

----------
        * Filed herewith



                                       18

<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:  April 14, 1998                      By:  /s/ Anthony J. Scotti
                                                --------------------------------
                                                Anthony J. Scotti
                                                Interim Chief Executive Officer

Date:  April 14, 1998                      By:  /s/ Michael S. Hope
                                                --------------------------------
                                                Michael S. Hope
                                                Interim 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/ Gary M. Gray                     Director                    April 13, 1998
-------------------------
Gary M. Gray


 /s/ Michael S. Doherty               Director                    April 13, 1998
-------------------------
Michael S. Doherty


 /s/ Allan R. Raphael                 Director                    April 13, 1998
-------------------------
Allan R. Raphael
</TABLE>



                                       19