U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2001.

      Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from     to     .

                                   ----------

                         ALADDIN SYSTEMS HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

          NEVADA                                         86-0866757
(State or Other Jurisdiction of                   I.R.S. Employer Identification
Incorporation or Organization)                    Number

               245 WESTRIDGE DRIVE, WATSONVILLE, CALIFORNIA 95076
              (Address of Principal Executive Offices and Zip Code)

                    Issuer's Telephone Number: (831) 761-6200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

Indicate by mark (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 the past 90 days.

      YES |X| NO |_|

Indicate by mark (X) if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|

Issuer's revenues for its most recent fiscal year: $7,627,386


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Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on March 1, 2002:

$733,251

Number of shares outstanding of each of the registrant's classes of common stock
as of March 1, 2002:

Common Stock: 9,792,635

DOCUMENTS INCORPORATED BY REFERENCE:

List hereunder the following documents if incorporated by reference and the Part
of the 10-KSB into which the document is incorporated.

None


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                         ALADDIN SYSTEMS HOLDINGS, INC.
                         2001 FORM 10-KSB ANNUAL REPORT
                                Table of Contents

Trademarks/Definitions

PART I
Item 1.  Business                                                             4
Item 2.  Properties                                                          15
Item 3.  Legal Proceedings                                                   15
Item 4.  Submission of Matters to a Vote of Security Holders                 15

PART II
Item 5.  Market for the Registrant's Common Equity and Related
     Stockholder Matters                                                     15
Item 6.  Management's Discussion and Analysis of Financial
     Condition and Results of Operations                                     16
Item 7.  Financial Statements                                                22
Item 8.  Changes in and Disagreements with Accountants on
     Accounting and Financial Disclosure                                     34

PART III
Item 9.  Directors and Executive Officers of the Registrant                  34
Item 10. Executive Compensation                                              36
Item 11. Security Ownership of Certain Beneficial Owners and Management      39
Item 12. Certain Relationships and Related Transactions                      40

PART IV
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K Signatures  41

TRADEMARKS/DEFINITIONS

      "Aladdin", "Aladdin Systems", "StuffIt", "StuffIt Deluxe", "DropStuff",
"Secure Delete", "DropZip", "StuffIt Expander", "Expander", "StuffIt Express",
"InstallerMaker", "StuffIt InstallerMaker", "ShrinkWrap", "Flashback", "GoBar",
"PrivateFile", and "iClean" are trademarks and service marks of Aladdin Systems,
Inc. and Aladdin Systems Holdings, Inc. "Spring Cleaning" is a registered
trademark of Aladdin Systems, Inc. All other trademarks, service marks or
tradenames referred to in this Form 10-KSB are the property of their respective
owners. Except as otherwise required by the context, all references in this Form
10-KSB to (a) "we," "us," "our," the "Company" or "Aladdin" refer to the
consolidated operations of Aladdin Systems Holdings, Inc., a Nevada corporation,
and its wholly-owned subsidiary, Aladdin Systems, Inc., a Delaware corporation,
(b) "you" refers to the readers of this Form 10-KSB, (c) the "Web" refers to


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the World Wide Web, and (d) the "sites" refer to our Web sites
(www.aladdinsys.com and "www.stuffIt.com").

PART I

Item 1: Business

General

      Aladdin is a leader in software and technology solutions to help
individuals and enterprises facilitate the transmission and access of
information across the Internet, networks and mixed computing environments.
Under the StuffIt brand, Aladdin has established a leading proprietary data
compression standard.

      Aladdin Systems, Inc., our subsidiary, was formed in January 1989 to
develop and publish software and has been located in Watsonville, California
since 1991. In addition to StuffIt, we also publish several other popular
software applications including Spring Cleaning with iClean, a software
uninstaller package for the Macintosh; GoBar, a replacement application launcher
for the Palm OS; and DragStrip, a quick launch application for both the Windows
and Macintosh markets.

The Company

      Aladdin Systems Holdings, Inc. owns 100% of the common stock of Aladdin
Systems, Inc., a Delaware corporation. Aladdin Systems Holdings, Inc. exists
primarily as a stock holding company, and accordingly, the operations described
in this document, unless otherwise specified, are those of the subsidiary,
Aladdin Systems, Inc.

      Our software products are all branded under the "Aladdin Systems" name and
are either developed internally by our staff of software developers or are
acquired or licensed from third party developers in exchange for royalty
payments pursuant to publishing agreements. The publishing agreements we enter
into either assign to us all rights in the software or give us a right to modify
and publish the software, in exchange for royalties which have historically
ranged from 3% to 20% of our net revenue from the sales and licensing of such
software. We attempt to negotiate limits on the amounts of royalties that are to
be paid to the developer of the product.

      Whether we create a product or acquire it from a developer, Aladdin
assumes all costs associated with publishing, including the costs of producing
documentation, packaging, marketing, advertising and distribution as well as the
costs of technical support for the products.

Business Overview

      In 2001, Aladdin launched a new product called StuffIt Express that allows
enterprises and individuals to create custom drop box applications that can
automate


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virtually any file transfer task. We also launched the "OneSource" licensing
program targeted at organizations that have a mixed computing environment.
Additionally we launched StuffIt.com, a new web site dedicated to providing our
customers with information about the StuffIt product line. Versions of StuffIt
for Linux and Solaris were released and new versions to StuffIt for Windows and
Macintosh, and Spring Cleaning and iClean were also released.

      Aladdin was not immune to the economic downturn of 2001 and as such the
company made adjustments to the cost structure. We reduced our manufacturing
costs by performing a portion of it in our corporate office instead of
outsourcing it to a third party. We also returned approximately 8,000 sq. feet
of office space. Combined with a reduction of staff of 15 people, 2001 was a
year of cost restructuring. We also terminated and discontinued products for
which the market conditions had changed.

Products

      Our products are divided into two different product groups, StuffIt
Products and General Utilities and Palm Products. All of the products below are
sold through the retail software distribution channel or through our website
except for StuffIt InstallerMaker and StuffIt Engine that are licensed directly
from Aladdin.

StuffIt Products

StuffIt Deluxe (Macintosh)
StuffIt for Windows
StuffIt for Linux
StuffIt for Solaris
DropStuff (Windows and Macintosh)
StuffIt Expander (Windows, Macintosh and Linux)
StuffIt Lite (Macintosh)
DropZip (Windows and Macintosh)
StuffIt Express (Windows and Macintosh)
StuffIt InstallerMaker (Macintosh)
StuffIt Engine SDK (Windows, Linux, Solaris, and Macintosh)
ShrinkWrap (Macintosh)

General Utilities and Palm Products

Spring Cleaning (Macintosh)
DragStrip (Windows and Macintosh)
iClean (Macintosh)
HotTme (Palm)
GoBar (Palm)


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StuffIt Products

      The StuffIt product line runs on the following operating systems:
Microsoft Corporation's Windows OS, Apple Computer, Inc.'s Mac OS, Sun
Microsystems' Solaris OS and Linux. The StuffIt product line is based upon or
includes Aladdin's data compression technology. This technology is a suite of
compression standards including Aladdin's proprietary format.

      The StuffIt products are designed to help individuals and enterprises send
and access information safely, securely, and quickly over the internet and
networks. The software's basic function allows customers to compress files,
directories, hard drives or other media for accelerated transmission over
computer networks, the Internet, and for archival purposes. Because files
encoded in a compressed format are smaller than ordinary files, compressed files
can be transmitted faster than non-compressed files over computer networks and
the Internet, regardless of connection type - dial-up modem, DSL, cable modem,
etc.

      Aladdin commenced publishing StuffIt in 1989 when it acquired the
publishing rights to the product in exchange for royalty payments. In 1995, we
purchased all rights to StuffIt from the developer. Since we first published
StuffIt in 1989, Aladdin has continually improved and updated the product.
StuffIt was originally designed to run only on Macintosh computers. In 1995,
Aladdin started to publish versions of some of our StuffIt products for the
Microsoft Windows operating systems.

      StuffIt has been adopted as a worldwide compression standard for the
Macintosh computer by Apple Computer and America Online. In 1990, America Online
adopted StuffIt as their standard for compressing Macintosh files utilizing
StuffIt to automatically compress files for transmission. StuffIt products have
been shipped to over 15 million users worldwide over the last two years,
including 11 million copies distributed by Apple Computer shipped pre-loaded on
Apple Computer's products. While originally Apple Computer paid us for the right
to distribute StuffIt products, currently, Aladdin receives no compensation for
it.

      StuffIt Deluxe (Macintosh) - StuffIt Deluxe is a full featured product
offering a complete compression and expansion solution to users. StuffIt Deluxe
is sold commercially through Aladdin's worldwide network of distributors,
resellers, catalogs, Internet retailers, and through our sites. StuffIt Deluxe
was first released for commercial sale in 1990. The software is localized into
Japanese, German, and French and is distributed through a distributor partner in
the local country.

      StuffIt for Windows - Originally released in September 2000, a new version
was released in October 2001. This new version has Windows XP logo
certification. StuffIt for Windows is the complete compression and expansion
solution for Windows users. It includes the most comprehensive set of
compression, expansion, and decoding formats available for the Windows market.
This software is available in English, French and German and distributed on our
web sites and through our distribution partners.


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      StuffIt for Linux - Released in 2001, this product gives Linux users the
ability to access StuffIt (.sit) compress files as well as create compress files
on their Linux computers. This software is distributed direct from Aladdin.

      StuffIt for Solaris - Released in 2001, this product gives Solaris users
the ability to access StuffIt compressed files as well as create compressed
files on their Sun computers. This software is distributed direct from Aladdin.

      DropStuff (Windows and Macintosh) - DropStuff allows users to quickly and
easily compress a file by simply moving the file's icon directly over the
DropStuff icon on the user's desktop. DropStuff is distributed as shareware.
Shareware is generally recognized in the software industry as being on the
"honor system" with the software freely distributed at no charge pursuant to a
license agreement which requires payment as a condition of continued use after
30 days. We expect that the vast majority of shareware users will not register
the software or pay the license fee. However, we believe that on a historical
basis, the distribution of DropStuff as shareware has benefited Aladdin through
an increase in the number of users of our StuffIt compression standard as well
as increasing Aladdin's goodwill in the computer industry. In 1999, we started
distributing DropStuff for both Macintosh and Windows versions.

      StuffIt Expander (Windows, Macintosh and Linux) - StuffIt Expander for
Macintosh, Windows and Linux are corresponding products which automatically
decompress files that are compressed. These products do not compress files
themselves. Expander is distributed as freeware in order to encourage the wide
distribution of files in StuffIt format and to seed the market for our
commercial products. Despite being distributed free of charge, Expander is
protected by copyright law and its use is subject to a license agreement. In
addition to decoding files in StuffIt format, Expander also decodes files in
other popular compression and encoding formats, including Zip, Binhex, Base64
(MIME) and TAR, further increasing its popularity and usefulness. We have
entered into agreements allowing distribution of StuffIt Expander with third
parties such as Apple Computer, Netscape, IDG Communications and PC Treasures,
Inc. Generally, we receive no revenue from such agreements. We also distribute
Expander free of charge, from our sites.

      StuffIt Lite (Macintosh) - StuffIt Lite is a shareware/trialware
compression product designed to provide basic compression and expansion
capabilities. The software is distributed electronically and is available for
download through multiple sources. StuffIt Lite is primarily distributed via our
sites.

      DropZip (Windows and Macintosh) -DropZip allows users to quickly and
easily compress a file into the industry-standard "Zip" format by simply moving
the file's icon directly over the DropZip icon on the user's desktop. DropZip is
distributed as shareware.

      StuffIt Express (Windows and Macintosh) - StuffIt Express is designed to
allow customers to create custom drop box applications that can automate
virtually any file


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transfer task. The product was launched in January 2001 at MacWorld San
Francisco and was developed by Aladdin for the Enterprise, Government, and
Educational marketplaces. In the third quarter of 2001, Aladdin released StuffIt
Express Personnal Edition which is distributed with StuffIt Deluxe (Macintosh)
and StuffIt for Windows.

      StuffIt InstallerMaker (Macintosh) - StuffIt InstallerMaker, first
published in 1991, allows software developers to create custom installers for
the distribution of their products. The software is licensed directly to
developers. InstallerMaker's licensees include Apple Computer, Lexmark, the
Learning Company and Real Networks.

      StuffIt Engine (Windows, Linux, Solaris and Macintosh) - The StuffIt
Engine is licensed directly to software developers who wish to incorporate
Aladdin's compression technology into their software. Companies that have
licensed the StuffIt Engine are America Online and DataViz.

      ShrinkWrap (Macintosh) - Shinkwrap, which incorporates the StuffIt Engine,
creates disk image files, allowing the users to create exact copies of their
hard disk, floppies, or CD ROMs. ShrinkWrap's only competition is Disk Copy from
Apple Computer. ShrinkWrap is distributed directly from Aladdin via our sites
and by other Internet based retailers in a time-locked "trialware" format.
ShrinkWrap is localized into Japanese and distributed by our Japanese
distributor.

General Utilities and Palm Products

      Spring Cleaning (Macintosh) - Spring Cleaning is a software uninstaller
product for the Macintosh market which removes unwanted and unused software and
related files from a user's computer. In May 2000, Aladdin purchased all rights
to the software from The Excelsior Group, terminating the previous publishing
agreement with The Excelsior Group. Spring Cleaning is sold commercially through
Aladdin's worldwide network of distributors, resellers, mail order houses,
Internet retailers, and through our sites. Spring Cleaning is localized into
Japanese, German, French and Italian. The localized versions of the product are
distributed by our international distributors. In November 2000, Aladdin entered
into a bundling agreement for Spring Cleaning with Symantec Corporation to
distribute the product with Norton SystemsWorks for the Macintosh.

      DragStrip (Windows and Macintosh) - DragStrip allows users to launch,
find, organize, and access applications and documents quickly and efficiently,
allowing users to become better organized. DragStrip is sold commercially
through Aladdin's physical and electronic worldwide distribution network of
resellers, and through our sites.

      iClean (Macintosh) - iClean allows a user to remove specific unwanted or
unneeded files gathered by your Web browser every time you surf the Internet.
Removing these files recovers disk space and helps ensure online privacy. iClean
is included in our Spring Cleaning product but is also sold as a separate
product. In November 2000, Aladdin entered into a bundling arrangement for the
product with Symantec Corporation. The software is localized into Japanese,
French, and German.


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      GoBar (Palm) - GoBar is an application launcher for the Palm OS. It is
designed to allow users to organize Palm OS device similar to their Desktop
computer.

      HotTime (Palm) - HotTime automatically adjusts the date and time on the
Palm device to that of your desktop computer when you use HotSync.

      The primary method of distribution for Aladdin's Palm products is
Aladdin's sites and Internet retailers like PalmGear and Handango and direct
from Aladdin.

Resale of Third Party Products

            In addition to publishing our own products, we utilize our resources
and customer list to act as a reseller of software products published by other
software companies. Historically, we resold limited numbers of third-party
products through "bundling" offers with our products that were distributed via
direct mail. In the last two years, we have been focusing on offering third
party products for sale via our site, primarily through a download model, where
the customer receives the product downloaded directly to their computer after
credit card information is entered and verified. Our resale agreements run for a
period of up to one year and all are non-exclusive. We receive a percentage of
the net sales ranging from 3% to 70%.

Royalty Payments

      Pursuant to our publishing agreements with third party developers, we have
made total royalty payments in 2001 and 2000 totaling $19,420 and $60,430,
respectively. The decrease in royalty payments in 2001 was due to the buyout of
all rights to Spring Cleaning which terminated the previous royalty agreement
and the termination of the previous royalty agreement for MacTicker.

Product Support

      We believe that technical support is an important part of the Aladdin's
overall performance and success. We employ 4 full-time support personnel. These
employees provide technical support services to our customers by email, via our
site, telephone, or fax. Support services include explaining how the customer's
computer works, how the customer's other software works in relation to our
products, solving problems with software operation and suggesting solutions to
business and personal computing issues. We offer product support free of charge
to registered users of our products. The majority of support calls from
customers occur within 60 days of customers' purchases of our products.

Distribution and Marketing

      Our products are marketed through independent distributors in the United
States and Canada, through numerous resellers and mail order companies and
distributors in other countries, directly to corporate and educational accounts
under site


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licensing agreements, volume purchasing agreements and directly to end-users
through direct marketing campaigns and through our sites.

      Of the Company's total net revenues for 2001, approximately 22% was as a
result of sales through independent, domestic, nonexclusive distributors. Sales
to one such distributor, Ingram Micro, accounted for nearly 21% of total net
revenues. Domestic distributors purchase product at a discount of approximately
20% to 23% from list prices.

      Of the Company's total net revenues for 2001, approximately 11% was as a
result of sales made through independent, international distributors. Several of
these distributors are limited by contract to distribution within a specified
geographic area. We currently provide translations of certain products in
Japanese, German, Dutch, French, and Italian languages. Sales to two of these
distributors, Act2 (Japan), and Softline (United Kingdom), accounted for
approximately 4%, and 1%, of total net revenues in 2001, respectively.
International distributors generally require somewhat larger discounts in return
for various advertising, customer service, and customer registration duties
performed by them in connection with the software. This discount normally ranges
from 40% to 60% off of the suggested retail price of the products.

      The Company gives its distributors industry-standard rights of return for
stock balancing and for defective products and replacement rights when products
are upgraded to new versions. A reserve for returns has been recorded and was
$75,410 and $229,094 at December 31, 2001 and 2000, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on our financial results because of the Company's low cost to replace
such returns. Returns from end users have not historically been significant.

Product Development

      The personal computer software industry continues to undergo rapid
technological change, requiring a continuous high level of enhancement of
existing products and development of new products. We intend to continue the
enhancement of our existing products and to develop additional products which we
believe will be marketable to our existing customer base and new customers and
which will extend our current products to new computing platforms.

      We regularly upgrade our existing products to add new features in response
to customer requests for additional features and to match or exceed features
contained in competing products. Historically, 10% to 50% of the registered
users of a software product have purchased the upgraded version of the same
product.

      During the years 2001 and 2000, we spent approximately $2,288,080 and
$2,376,550, respectively, on research and development and enhancement
activities, representing approximately 30%, and 23%, respectively, of net
revenues in each of these periods.


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      Our future financial performance will depend in part on the successful
development, completion, and introduction of such new software products, and on
such enhanced versions of existing products, and customer acceptance of those
products. There is no assurance that we will avoid difficulties that could delay
or prevent the successful development of, or marketing of, new products and/or
enhancements of existing products. There also can be no assurance that such
products will yield positive results or that such results can be obtained on a
timely basis or without the expenditure of substantial funds.

Competition

      The personal computer software market is highly competitive and has been
subject to rapid change, which is expected to continue. Different competitors
exist for our different products. For our StuffIt product line for the
Macintosh, we believe that our long history of publishing compression software
for the Macintosh, the goodwill associated with our "Aladdin" and "StuffIt"
brands, our large installed base of users as well as our strategic relationships
with Apple Computer and America Online make StuffIt for the Macintosh the
leading product in its category. However, our attempts to extend the StuffIt
line of products to the Windows market face strong competition from the many
Windows-based compression products that use the "Zip" compression standard.
There are several major and numerous minor companies currently publishing "Zip"
products which directly compete with our StuffIt products in the Windows market.

      In addition, certain computer manufacturers may devote significant
resources to creating software, directly competitive with our products, for
inclusion with their computers and computer systems without additional charge to
consumers such as the Microsoft inclusion of a compression utility in its
Windows operating systems.

      Our competitors include many independent software vendors that have
financial, marketing, and technological resources far in excess of ours. Some of
these include Microsoft, Apple Computer Inc., Symantec Corporation, Network
Associates Technology, Inc., WinZip Computing, Inc. and OnTrack Corporation.

      Aladdin's software products are marketed through multiple distribution
channels. All of these products face competing products offering many similar
features. Aladdin believes that the principal competitive factors in the market
include product features and functions, ease of understanding and operating the
software, product reliability, price/performance characteristics, name
recognition, and availability and quality of support and training services.
Price competition could become an increasing factor in the personal computer
software market, which could, in turn, be expected to increase pressures on
profit margins in the future.

      As the Internet and e-commerce become an increasing important channel for
the distribution and sales of software products, the Company has increased its
efforts to sell both our products and third-party products to consumers via our
sites. In order to continue this effort, we may need to invest money, effort and
other resources into our


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Web efforts that may divert attention and resources from our traditional sales
channels. In addition, we may be competing against existing and new companies
that have financial, marketing, and technological resources far in excess of
Aladdin's. In the event that we are not able to successfully compete against
such companies it could have a material adverse effect upon our business,
results of operations and financial condition.

Intellectual Property

      The Company regards the protection of our copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our future success. We
rely on a combination of copyright, trademark, service mark and trade secret
laws, patents and contractual restrictions to establish and protect our
proprietary rights in products and services. Software products are generally
protected against copying pursuant to the Copyright Act and license agreements.
In addition, many software companies implement schemes designed to reduce
unauthorized copying by requiring that users enter a unique registration code to
activate the software. Where applicable, some companies also seek for patent
protection for specific technologies embodied in their products.

      Aladdin regards its software as proprietary and attempts to protect it
with copyrights, patents, trade secret laws, and internal nondisclosure
safeguards, as well as restrictions on disclosure and transferability that are
incorporated into our software license agreements. The copyrights on our
products run for a period of at least 95 years from the first creation of the
work in accordance with the provisions of the Copyright Act. None of Aladdin's
products lack the necessary copyright or trademark protection. Aladdin licenses
its software products to customers rather than transferring title. Despite these
restrictions, it may be possible for competitors or users to copy aspects of the
Aladdin's products or to obtain information which Aladdin regards as trade
secrets. Computer software generally can be patented only with difficulty, and
existing copyright laws afford only limited practical protection. On a regular
basis, we evaluate our development efforts to determine if patent protection
would be applicable. In 2000, we filed for two patents.

      Aladdin products require that a product registration number be entered in
order for the product to be activated. It is our belief that this system helps
to reduce unauthorized copying of our products. The range of product
registration numbers distributed is changed from time to time in order to
further deter copying of the software. However, because of the rapid pace of
technological change in its industry, we believe that such protections are less
significant than factors such as frequent product enhancements, and the
timeliness and quality of Aladdin support services. Policing unauthorized use of
such a broadly disseminated product as computer software is difficult, and
software piracy can be expected to be a persistent problem for the packaged
software industry. These problems may be particularly acute in international
markets. We do not have specific information regarding how unauthorized copying
affects our sales in either the United States or foreign markets; however, we
believe that such unauthorized copying has had limited effects on our revenues.


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      Although we do not believe that any of our products infringe the
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by us with respect to past, current or
future technologies. The Company expects that participants in our markets will
be increasingly subject to infringement claims as the number of software
products and competitors in our industry segment grows. Any such claim, whether
meritorious or not, could be time-consuming, result in costly litigation, cause
software upgrade delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us or at all, as a result, any such claim could have a material
adverse effect upon our business, results of operations and financial condition.

Employees

      As of December 31, 2001, the Company employed 44 full-time employees. We
started the year with 59 employees but during 2001, the Company reduced its
workforce by 15 as part of our cost cutting program.

      The future success of the Company will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and geographical location is intense, and there can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, the Company also employs independent contractors
to support our research and development, marketing, sales, support and
administrative organizations. The Company has never had a work stoppage, and no
employees are represented under collective bargaining agreements. We consider
our relations with our employees to be good.

Subsidiaries

      The Company currently has two subsidiaries, Aladdin Systems, Inc., a
Delaware Corporation, wholly-owned by the Company, and Transaction Services,
Inc. ("TSI"), a California corporation, which was incorporated in 1996 and is a
wholly owned subsidiary of Aladdin Systems, Inc. TSI was formed in order to
provide technology and services to other software publishers that allowed such
companies to make trial versions of their software available. In 2000, Aladdin
discontinued its trialware software technology business so there is no current
business activity in TSI.

Forward-looking statements

      The Company or management may make or may have made certain
forward-looking statements, orally or in writing, such as those within
Management's Discussion and Analysis contained in its various SEC filings. The
Company wishes to ensure that such statements are accompanied by meaningful
cautionary statements, so as to ensure to the fullest extent possible the
protections of the safe harbor established in the Private


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Securities Litigation Reform Act of 1995. Such statements are therefore
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from those described in such forward-looking statements.

      The Company cautions the reader that this list of factors is not intended
to be exhaustive. The Company operates in a continually changing business
environment, and new risk factors emerge from time to time. Management cannot
predict such factors, nor can it assess the impact, if any, of such factors on
the Company's business or the extent to which any factors may cause actual
results to differ materially from those described in any forward-looking
statement. None of the Company's forward-looking statements should be relied
upon as a prediction of actual results.

      The Company faces risks and uncertainties that could render actual events
materially different than those described in our forward-looking statements.
These risks and uncertainties include, but are not limited to:

      o Products and product upgrades may not be released on a timely basis due
      to technological difficulties
      o Products and product upgrades may not achieve market acceptance within
      the desired markets
      o The prevalence and functionality of available free compression software
      may erode revenues
      o The Company might not be able to fund its working capital needs from
      cash flows

      The Company's products are sold in markets that change rapidly and the
Company must continually anticipate and adapt its products to emerging computer
technologies and capabilities. The Company may not be able to successfully adapt
to these changing markets. The Company may experience material fluctuations in
future revenues and operating results on a quarterly or annual basis resulting
from a number of factors, including but not limited to the risks discussed
above.

Item 2: Properties

      In November 2000, the Company moved to a new office facility located at
245 Westridge Drive, Watsonville, California 95076. In January 2002, the Company
returned 8,150 square feet of this new facility to the building owner. Our
executive offices now comprise of approximately 17,230 square feet and our
subsidiaries, Aladdin Systems, Inc. and Transactions Services, Inc. are housed
in this location. This facility is leased pursuant to a lease expiring October
2010. The monthly rent is currently $22,891 and our leased space is still
sufficient to cover future growth.


--------------------------------------------------------------------------------
                                                                         Page 14
<PAGE>

Item 3: Legal Proceedings

      In October 31, 2001, a former distribution partner, Merisel Americas,
Inc., filed a suit against Aladdin in the Superior Court of California,
Southwest Unlimited District, seeking to collect $66,103 for returned product
and marketing services. Aladdin believes there is no outstanding balance due to
Merisel since all payments due to Merisel were made for marketing services and
returned product in 2000 before the termination of the distribution agreement.
The Company intends to contest this claim and at this time cannot estimate the
outcome.

Item 4: Submission of Matters to a Vote of Security Holders

      None

PART II

Item 5: Market for Registrant's Common Equity and Related Stockholder Matters

      As of December 31, 2001, there were 57 stockholders of record. The Company
believes that it has approximately 300 beneficial stockholders.

      The Company's common stock trades on the NASD's Over The Counter Bulletin
Board under the symbol: ALHI.

      The following table sets forth the range of high and low bid prices per
share of common stock as provided by Commodity Systems, Inc. The quotations
shown below reflect inter-dealer prices, without mark-up, mark-down or
commissions and may not present actual transactions.

                                                   Common Stock

                                                 Low           High
                                             -------------------------
Quarter ended:
March 31, 2000                                   $4.00         $5.13
June 30, 2000                                    $3.13         $5.00
September 30, 2000                               $2.19         $4.31
December 31, 2000                                $0.50         $2.31
March 31, 2001                                   $0.56         $0.94
June 30, 2001                                    $0.51         $0.84
September 30, 2001                               $0.24         $0.75
December 31, 2001                                $0.30         $0.70


--------------------------------------------------------------------------------
                                                                         Page 15
<PAGE>

      The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain any earnings to finance
future growth and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.

Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations

RESULTS OF OPERATIONS

      The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
Historical results and percentage relationships are not necessarily indicative
of the operating results for any future period. Within this discussion and
analysis, all dollar amounts (except for per share amounts) have been rounded to
the nearest thousand.

      The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues for each of
the years in the two-year period ended December 31, 2001.

                                                    Years ended December 31,

                                                        2001          2000
                                                        ----          ----

Percentage of sales:
Sales                                                   100%          100%
Cost of sales                                            20%           16%
                                                    -----------------------
Gross profit                                             80%           84%

Sales, marketing and support                             50%           50%
Research and development                                 30%           23%
General and administrative                               15%           16%
                                                    -----------------------

Total operating expenses                                 95%           89%

Loss from operations                                    (15%)          (5%)

Other (expense) income, net                               0%            0%

Loss  before income taxes                               (15%)          (5%)

Income tax benefit                                        0%           (1%)

Net loss                                                (15%)          (4%)
                                                    =======================


--------------------------------------------------------------------------------
                                                                         Page 16
<PAGE>

NET REVENUES

      Overall revenues decreased from $10,168,755 in 2000 to $7,627,386 in 2001
mostly due to the weakness in the economy for the year. In 2001, we decided to
change our product strategy and exit the internet information utility market to
focus on our core products. We therefore discontinued the following products:
MacHeadlines, WeatherTracker, and AladdinTuner. We also terminated the
publishing agreement for MacTicker. While we shipped more units of StuffIt
Deluxe in 2001, we dropped the average selling price and therefore the total
revenue for our top selling product dropped.

      Revenues from sales over our sites accounted for 42% of revenue in 2001 as
compared with 35% of revenue in 2000. The Company believes that sales over its
sites will represent an increasingly important component of the Company's sales
strategy and will allow the Company to reach a large number of potential
consumers at lower costs than sales through distributors.

      Third-party product sales decreased to $446,610 for the year ended
December 31, 2001 from $661,383 for the year ended December 31, 2000.

COST OF REVENUES AND GROSS MARGIN

      The Company's cost of revenues is composed primarily of:

            o the cost of product materials such as CD-ROMS and packaging
            o amortization of capitalized purchased software
            o royalties paid to outside developers
            o amortization of capitalized manufacturing overhead
            o shipping expenses

      Cost of revenues, as a percentage of net revenues increased to 20% in 2001
from 16% in 2000. This increase in costs was mostly due to additional
amortization expense of approximately $200,000 for MacTicker to completely
amortize the capitalized software since the Company stopped developing it. There
were also additional amortization expenses recorded for Spring Cleaning and
StuffIt Express to match expected revenues for the next 3 years. An increase in
promotional rebates and a decrease in the average selling price for StuffIt
Deluxe also contributed to the decrease in the gross margin in 2001.

MARKETING, SALES AND SUPPORT

      Marketing, sales and support expenses decreased to $3,814,337 in 2001 from
$5,048,095 during 2000. This decrease was mostly due to spending less in product
advertising and promotion, to $847,459 in 2001 from $1,510,159 in 2000. We also
decreased our sales and marketing staff by three and this decreased the payroll
and related sales commissions. Sales commissions decreased because of this
reduction in staff and we also terminated two external commission contracts.


--------------------------------------------------------------------------------
                                                                         Page 17
<PAGE>

RESEARCH AND DEVELOPMENT

      Research and development expenses were $2,288,080 and $2,376,550 in 2001
and 2000, respectively. These expenses were 30% and 23% of net revenues,
respectively. Although we had a decrease of 7 in our staff and therefore a
decrease in payroll, we were still able to continue the development on the major
products with the remaining staff plus one outside contractor. There was an
increase of $104,230 in facilities related expenses from moving into the new
facility that partially offset the decrease in payroll from the reduced staff.

GENERAL AND ADMINISTRATIVE

      General and administrative expenses are composed principally of salaries
of administrative personnel, fees for professional services and facilities.
These expenses decreased to $1,108,674 in 2001 from $1,577,814 during 2000. This
decrease was mostly related to a decrease in legal fees and investor relations
fees, although we also reduced the staff by two.

INCOME TAXES

      The Company's effective tax rate was 0.5% for fiscal 2001 and (26%) for
fiscal 2000. The Company has a valuation allowance of $612,450, covering all of
its deferred tax assets as of December 31, 2001 due to the uncertainty of
realizing the deferred tax assets, consisting primarily of loss and credit carry
forwards.

LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by operating activities during 2001 was $276,673, an
increase of $148,595 compared with net cash provided by operating activities of
$128,078 in 2000. Cash provided by accounts receivable increased in 2001 mostly
due to the collection of one payment of $523,000 in January from a sale in
December 2000. Cash provided by inventory also increased due to bringing a
portion of our production in house and keeping lower levels of inventory in
stock.

      Net cash used in investing activities in 2001, primarily for the
acquisition of software rights, was $121,339, a decrease of $448,481 compared
with net cash used in investing activities of $569,820 in 2000. In 2000, we
purchased the rights to Spring Cleaning which included a cash payment of
$382,500 made to its developer.

      Net cash used in financing activities in 2001 was $324,251 for payments on
capital leases, demand notes and the Spring Cleaning note, as compared with
$400,713 used in 2000. In 2000, the balance of $94,517 for the StuffIt note was
paid. During 1997, certain Stockholders, the Company's former President, a key
employee, and a relative of a stockholder lent the Company a total of $225,062,
in the form of demand notes with interest payable monthly at 8.92%. The notes
are convertible into common stock at the


--------------------------------------------------------------------------------
                                                                         Page 18
<PAGE>

lesser of $1.74 per share or at the lowest price shares of common stock are sold
after the date the notes were issued. The notes are payable upon thirty (30)
days notice by the holder. During 1999, the Company paid $65,000 against these
notes, and during 2001, the company paid $50,000 against these notes, resulting
in a balance remaining of $110,062 as of December 31, 2001.

      Our capital requirements are dependent on several factors, including
market acceptance of our software and services, timely updating of the Company's
existing software products, developing new software products or acquiring the
rights to existing software products from third parties, the resources devoted
to marketing and selling the Company's services and brand promotions and other
factors. At December 31, 2001, the Company had cash and cash equivalents
totaling $96,973.

      We believe that our current cash and cash equivalents along with cash to
be generated by operations in 2002 will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next fiscal
year. We expect our sales revenue in 2002 to be consistent with 2001 levels and
the Company believes that sales of its core StuffIt products and other general
utility products will be sufficient to maintain revenues through 2002. If our
revenues decrease, if product returns increase, or if our customers fail to make
timely payments on open receivables, our cash generated from operations will
likely not be sufficient to fund operations. If this occurs, we may need to
reduce operating expenses or raise additional capital through debt or equity
financing.

      We currently have available credit of $300,000 through our facility with
Merrill Lynch that is renewable on a monthly basis. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or obtain a larger credit facility.
The sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. The incurrence of indebtedness would
result in an increase in our fixed obligations and could result in borrowing
covenants that would restrict our operations. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
If financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our products or services. In
addition, we may be unable to take advantage of business opportunities or
respond to competitive pressures. Any of these events could have a material and
adverse effect on our business, results of operations and financial condition.

RISKS AND UNCERTAINTY

      Our business is subject to the effects of general economic conditions, and
in particular, market conditions in the software and computer industries. Our
operating results have been and continue to be affected as a result of the
recent unfavorable global economic conditions and reduced consumer spending.

      This slowdown and the recent tragic events of September 11, 2001 amplified
the weakness in the United States and global economy and in the software
business overall. If these economic conditions do not improve, or if we
experience a continued


--------------------------------------------------------------------------------
                                                                         Page 19
<PAGE>

weakening, we may experience material adverse impacts on our business operating
results and financial condition. For the foreseeable future, we expect sales in
the consumer retail channel to continue to be weak. The economic downturn has
also put financial pressure on our distribution and retail partners for software
products worldwide. This could result in potential financial risk to Aladdin by
affecting our ability to collect our receivables.

      The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could render them materially different, including, but
not limited to, the risk that new products and product upgrades may not be
available on a timely basis, the risk that such products and upgrades may not
achieve market acceptance, the risk that competitors will develop similar
products and reach the market first, and the risk that the Company would not be
able to fund its working capital needs from cash flow.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition and Returns

      The Company's revenues from our distribution channels and through our
sites are recognized when products are shipped or downloaded to the customer.
Our distributors and resellers have the right to return products so long as the
products are in the original packaging. Revenues are booked net of estimated
returns and rebates, and the allowance for returns is established based on the
determination of excess inventory in the channel, estimated product sell-through
and expected future product upgrades. We believe our estimate for future returns
is adequate. However, because of factors outside the Company's control such as
changes in customer demand, new product releases from our competitors or changes
in the purchasing practices of our distributors, actual returns may exceed our
estimates. If this were to occur, we would be required to increase our return
reserve, lowering our earnings.

Capitalized Software

      The Company's capitalized software costs include the acquisition of
software rights as well as external contracting fees paid to developers once the
point of technological feasibility is reached. The amortization charged to each
product is the greater of the amount computed using (a) the ratio of current
gross revenues to the total of current and anticipated future gross revenues for
the product or (b) 60 months. Our estimates of total revenues are based on sales
forecasts for the products. If sales volumes were to unexpectedly decrease for
reasons such as changes in customer demand or the introduction of new products
by our competitors, we would need to increase the amortization of our
capitalized software, decreasing our earnings.


Item 7: Financial Statements


--------------------------------------------------------------------------------
                                                                         Page 20
<PAGE>

Index to Item 7: Financial Statements                                      Page
Report of Independent Certified Public Accountants                         20
Consolidated Balance Sheet                                                 21
Consolidated Statements of Operations                                      22
Consolidated Statement of Stockholders' Equity                             23
Consolidated Statements of Cash Flows                                      23
Notes to Consolidated Financial Statements                                 25


--------------------------------------------------------------------------------
                                                                         Page 21
<PAGE>

Report of Independent Certified Public Accountants

Board of Directors and Stockholders
Aladdin Systems Holdings, Inc.

We have audited the accompanying consolidated balance sheet of Aladdin Systems
Holdings, Inc., and Subsidiaries (the "Company") as of December 31, 2001, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2001, and the consolidated results of its operations and its
consolidated cash flows for each of the two years then ended, in conformity with
accounting principles generally accepted in the United States of America.


/s/ Grant Thornton LLP
San Jose, California
February 14, 2002


--------------------------------------------------------------------------------
                                                                         Page 22
<PAGE>

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2001

           ASSETS

Current assets:
Cash                                                             $    96,973
Accounts receivable, net of allowance of $75,410                     916,298
Inventories                                                           39,866
Prepaid expenses and other current assets                            147,377
Income tax receivable                                                195,499
                                                                 -----------
           Total current assets                                    1,396,013

Capitalized software, net                                            289,339
Property and equipment, net                                          345,230
                                                                 -----------

                                                                 $ 2,030,582
                                                                 ===========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt                             $    93,355
Related party notes                                                  110,062
Accounts payable                                                     488,808
Accrued expenses and other liabilities                               249,856
                                                                 -----------
   Total current liabilities                                         942,081

Long-term debt                                                        78,035

Commitments and contingencies                                             --

Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued and outstanding                                               --
Common stock, $.001 par value; 50,000,000 shares authorized;
9,792,635 issued and outstanding                                       9,793
Paid-in capital                                                    1,581,751
Retained deficit                                                    (581,078)
                                                                 -----------
Total stockholders' equity                                         1,010,466
                                                                 -----------

                                                                 $ 2,030,582
                                                                 ===========

          See accompanying notes to consolidated financial statements.


--------------------------------------------------------------------------------
                                                                         Page 23
<PAGE>

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                      Year ended December 31,
                                                       2001            2000
                                                       ----            ----

Sales                                              $  7,627,386    $ 10,168,755
Cost of sales                                         1,529,780       1,655,059
                                                   ----------------------------
Gross profit                                          6,097,606       8,513,696

Operating expenses:
     Marketing, sales and support                     3,814,337       5,048,095
     Research and development                         2,288,080       2,376,550
     General and administrative                       1,108,674       1,577,814
                                                   ----------------------------
          Total operating expenses                    7,211,091       9,002,459

Loss from operations                                 (1,113,485)       (488,763)

Other income (expense):
Interest expense                                        (36,164)        (40,743)
Other                                                     7,064          39,424
                                                   ----------------------------

Loss before income taxes                             (1,142,585)       (490,082)

Income tax expense (benefit)                              5,736        (127,339)
                                                   ----------------------------

Net loss                                            ($1,148,321)      ($362,743)
                                                   ============================

Loss per share - basic and diluted                       ($0.12)         ($0.04)

Shares used in computing loss per share               9,792,635       9,792,635

          See accompanying notes to consolidated financial statements.


--------------------------------------------------------------------------------
                                                                         Page 24
<PAGE>

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                           Retained
                                                     Common Stock             Paid-in      Earnings/
                                                   Shares       Amount        Capital      (Deficit)        Total
                                                -----------   -----------   -----------   -----------    -----------
<S>                                               <C>         <C>           <C>           <C>            <C>
Balance at January 1, 2000                        9,778,117   $     9,779   $ 1,304,321   $   929,986    $ 2,244,086
Issuance of common stock pursuant to employee
stock option plan                                     4,215             4         7,295            --          7,299
Issuance of common stock for products                10,303            10        42,490            --         42,500
Compensation expense on issuance of stock
options to third parties                                 --            --       221,045            --        221,045
Net loss                                                 --            --            --      (362,743)      (362,743)
                                                --------------------------------------------------------------------

Balance at December 31, 2000                      9,792,635         9,793     1,575,151       567,243      2,152,187

Compensation expense on issuance of stock
options to third parties                                 --            --         6,600            --          6,600
Net loss                                                 --            --            --    (1,148,321)    (1,148,321)
                                                --------------------------------------------------------------------

Balance at December 31, 2001                      9,792,635   $     9,793   $ 1,581,751     ($581,078)   $ 1,010,466
                                                ====================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


--------------------------------------------------------------------------------
                                                                         Page 25
<PAGE>

                  Aladdin Systems Holdings, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                        ----------------------

                                                          2001           2000
                                                          ----           ----
<S>                                                    <C>            <C>
Cash flows from operating activities:
   Net loss                                            ($1,148,321)     ($362,743)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Depreciation and amortization                        668,802        605,820
      Compensation expense on stock options granted
           to third parties                                  6,600        221,045
      Loss on disposal of property and equipment             8,267             --
      Deferred income taxes                                198,835       (104,466)
      Changes in operating assets and liabilities:
          Accounts receivable                              674,502       (238,313)
           Inventories                                     273,326       (209,290)
           Prepaid expenses and other current assets        39,435         92,586
            Income tax receivable                         (170,227)            --
           Accounts payable                               (220,657)       155,121
           Accrued expenses and other liabilities          (53,889)        37,594
           Income tax payable                                   --        (69,276)
                                                       --------------------------
Cash provided by operating activities                      276,673        128,078

Cash flows from investing activities:
     Acquisition of property and equipment                 (24,112)      (133,211)
     Proceeds from sales of property and equipment           4,000             --
     Acquisition of software rights                       (101,227)      (436,609)
                                                       --------------------------
Cash used in investing activities                         (121,339)      (569,820)

Cash flows from financing activities:
     Net proceeds from issuance of common stock                 --          7,299
     Net payment on line of credit                          (5,523)            --
     Repayment of long-term debt                          (268,728)      (408,012)
     Repayment of related party notes                      (50,000)            --
                                                       --------------------------
Cash used in financing activities                         (324,251)      (400,713)

Net decrease in cash and cash equivalents                 (168,917)      (842,455)

Cash and cash equivalents at beginning of period           265,890      1,108,345
                                                       --------------------------
Cash and cash equivalents at end of period             $    96,973    $   265,890
                                                       ==========================
</TABLE>

--------------------------------------------------------------------------------
                                                                         Page 26
<PAGE>

<TABLE>
<S>                                                    <C>            <C>
Cash paid during the period for:
   Interest                                            $    36,164    $    40,743
                                                       ==========================

   Income taxes                                                 --    $    69,276
                                                       ==========================
</TABLE>

Noncash Transactions:

During 2001, the Company financed $31,251 for its Directors' and Officers'
insurance premium.

During 2000, the Company acquired assets under capital leases in the amount of
$123,641.

During 2000, the Company issued 10,303 shares of common stock as partial payment
on the purchase of Spring Cleaning software rights. At the time of issuance, the
value of the shares was $42,500.

          See accompanying notes to consolidated financial statements.


--------------------------------------------------------------------------------
                                                                         Page 27
<PAGE>

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2001

NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Aladdin Systems Holding, Inc. ("Holdings") and its wholly owned subsidiaries
(collectively the "Company"), develop, publish, and distribute computer software
for the Macintosh, Windows, Solaris, Linux, and Palm software market. Products
are marketed through independent distributors in the United States and Canada,
through resellers and mail order companies in other countries, directly to
corporate accounts under site licensing agreements, and directly to end-users
through direct marketing and the Internet.

Principles of Consolidation

The consolidated financial statements include the accounts of Holdings and its
wholly owned subsidiaries, Aladdin Systems, Inc. and Transaction Services, Inc.
All significant intercompany transactions and balances are eliminated in
consolidation.

Revenue recognition

Revenues and accounts receivable are principally derived from:

o     Distributors and resellers of the Company's products
o     Our sites
o     Third party products
o     Licensing contracts

Sales to distributors and resellers are subject to agreements permitting rights
of return for stock balancing. These revenues are recognized net of reserves for
returns and rebates. Return reserves are based on actual inventory held by
distributors or resellers that is in excess of levels appropriate for that
channel and is likely to be returned. Based on our estimated release dates for
the next versions, we monitor the channel inventory and only ship product when
the sell through to the customer will be probable. The Company recognizes
revenue, net of estimated returns and rebates, upon shipment or


--------------------------------------------------------------------------------
                                                                         Page 28
<PAGE>

delivery of the product, when no significant obligations remain and
collectability is probable. Revenues from our internet sales are recognized when
the software is downloaded or shipped to the customer. Revenues from third party
products make up a portion of our internet sales and we recognize as revenue the
net fee we collect for facilitating the sale. Licensing fees are recognized when
the customer has committed to renew their annual fee, as we are not obligated to
provide any other deliverables or customer support in connection with these
licenses.

Capitalized Software

Costs incurred in the initial design phase of software development are expensed
as incurred as research and development. Once the point of technological
feasibility is reached, direct production costs are capitalized. The Company
ceases capitalizing computer software costs when the product is available for
general release to customers. Costs associated with acquired completed software
are capitalized. Total capitalized software development costs at December 31,
2001 were $2,061,187 less accumulated amortization of $1,771,849.

The Company amortizes capitalized software development costs on a
product-by-product basis. The amortization charged to operations in each period
for each product is the greater of the amount computed using (a) the ratio of
current gross revenues to the total of current and anticipated future gross
revenues for the product or (b) 60 months. In addition, the Company evaluates
the net realizable value of each software product at each balance sheet date and
records write-downs to net realizable value for any products for which the
carrying value is in excess of the estimated net realizable value. Total
amortization expense for capitalized software, all of which was charged to cost
of sales, was $472,093 and $397,629 in fiscal years 2001 and 2000, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.

Inventories

Inventories are valued at the lower of cost or market and are accounted for on
the first-in, first-out basis. Management performs periodic assessments to
determine the existence of obsolete, slow moving and non-salable inventories,
and records necessary provisions to reduce such inventories to net realizable
value.


--------------------------------------------------------------------------------
                                                                         Page 29
<PAGE>

Property and Equipment

Property and equipment are stated at cost. Capital leases are recorded at the
present value of the minimum lease payments at the date of acquisition.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets or lease term, whichever is shorter.

Research and Development

Research and development costs are charged to operations when incurred.

Advertising

The Company expenses advertising costs as they are incurred. Advertising and
related promotion expenses for fiscal years 2001 and 2000 were $847,459 and
$1,510,159 respectively.

Income Taxes

Income taxes are computed using the asset and liability method in Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.

Stock-Based Compensation

 The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant between the
quoted market price of the Company's stock and the amount an employee must pay
to acquire the stock.

Earnings Per Share

Basic and diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period. Potentially dilutive
securities consist of


--------------------------------------------------------------------------------
                                                                         Page 30
<PAGE>

the incremental common shares issuable upon conversion of convertible debt
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). A total of 2,473,528
shares issuable upon the exercise of outstanding stock options as of December
31, 2001 and 2,048,835 shares issuable upon the exercise of outstanding stock
options as of December 31, 2000 have been excluded from the diluted earnings per
share calculation, as the inclusion would be anti-dilutive. In addition, shares
issuable upon the conversion of convertible debt totaling 220,123 shares as of
December 31, 2001 and 134,990 shares as of December 31, 2000 were excluded from
the diluted earnings per share calculation as the inclusion would be
anti-dilutive.

Fair Value of Financial Instruments

The fair value of accounts receivable and accounts payable approximate carrying
value due to the short term nature of such instruments. The fair value of long
term obligations with third-parties approximates carrying value based on terms
available for similar instruments. The fair value of debt with related parties
is not determinable due to the terms of the debt and no comparable market for
such debt.

Segment reporting

The Company's business is conducted in a single operating segment. The Company's
chief operating decision maker is the Chief Executive Officer who reviews a
single set of financial data that encompasses the Company's entire operations
for purposes of making operating decisions and assessing performance.

NOTE 2 - PROPERTY AND EQUIPMENT

  Property and equipment at December 31, 2001 consist of:

                                      Useful lives (years)
                                      -------------------
Computer equipment                            5                  $  880,598
Office equipment                              5                     172,033
Furniture and fixtures                        5                     304,734
Displays                                     5-7                    121,306
                                                                 ----------
                                                                  1,478,671
Less accumulated depreciation                                     1,133,441
                                                                 ----------
                                                                 $  345,230
                                                                 ==========


--------------------------------------------------------------------------------
                                                                         Page 31
<PAGE>

NOTE 3 - CREDIT LINE

In September 2000, the Company was approved for a $300,000 line of credit with
Merrill Lynch. Interest is variable at a per annum rate equal to the sum of
3.15% plus the 30-Day Commercial Paper Rate. The line of credit is renewable
monthly and has currently been renewed through February 28, 2002. The credit
line contains two covenants: (1) the line of credit may not be used to purchase
or carry securities, and (2) the Company will continue and maintain its
business, existences, ownership and good standing. At December 31, 2001, the
full amount of the credit line was available to the Company.

NOTE 4 - LONG-TERM DEBT AND RELATED PARTY NOTES

Long-term debt at December 31, 2001 consists of:

Capital lease obligations                 $149,245
Other                                       22,145
                                          --------
                                           171,390
Less current portion                        93,355
                                          --------
                                          $ 78,035
                                          ========

Fixed installments due on debt principal are as follows:

                       Year ending December 31,
                       -----------------------

                               2002             $ 93,355
                               2003               68,355
                               2004                9,680
                                                --------
                                                $171,390
                                                ========

Notes Payable to Related Parties

Notes payable to related parties are payable on demand. Interest is compounded
daily and is payable monthly at an annual rate of 8.92%. The notes are
convertible into common stock at the lesser of $1.74 per share or at the lowest
price shares of common stock are sold. At December 31, 2001 notes payable to
related parties are convertible at $0.50 per share.


--------------------------------------------------------------------------------
                                                                         Page 32
<PAGE>

NOTE 5 - INCOME TAXES

Income tax expense (benefit) for the years ended December 31, consists of:

                                                    2001                 2000
                                                    ----                 ----
Current
   Federal                                       ($195,499)           ($ 25,273)
   State                                             2,400                2,400
                                                 ------------------------------
Total current                                     (193,099)             (22,873)

Deferred
    Federal                                        153,389              (72,729)
    State                                           45,446              (31,737)
                                                 ------------------------------
Total deferred                                     198,835             (104,466)
                                                 ------------------------------

                                                 $   5,736            ($127,339)
                                                 ==============================

The tax effect of temporary differences that give rise to significant portions
of net deferred tax assets at December 31, 2001 is presented below:

Net operating loss carry forwards                                     $ 200,972
Tax credit carry forwards                                               246,902
Depreciation and amortization                                           136,050
Other                                                                    28,526
                                                                      ---------
Net deferred tax asset                                                  612,450
Less valuation allowance                                               (612,450)
                                                                      ---------
                                                                             --
                                                                      =========

A valuation allowance is required for those deferred tax assets that are not
likely to be realized. Realization is dependent upon future earnings during the
period that temporary differences and carry forwards are expected to be
available. Because of the uncertain nature of their ultimate realization, a full
valuation allowance is recorded against these deferred tax assets.


--------------------------------------------------------------------------------
                                                                         Page 33
<PAGE>

The effective tax rate as a percentage of income before income taxes differs
from the statutory federal income tax rate (when applied to income before income
taxes) for the years ended December 31, as follows:

                                                               2001       2000
                                                               ----       ----
Statutory federal income tax (benefit) rate                     (34%)      (34%)
Increase (decrease) resulting from:
Expenses not deductible for taxes                               0.3       15.8
State income taxes, net of federal tax benefit                  2.8       (5.8)
Increase in valuation allowance                                31.4         --
Other                                                            --       (2.0)
                                                             -----------------
Effective tax (benefit) rate                                    0.5%     (26.0%)
                                                             =================

NOTE 6 - MAJOR CUSTOMERS

The Company has one major customer that accounted for $1,597,746 or 21% and
$2,176,551 or 21% of revenues in 2001 and 2000, respectively.

NOTE 7 - STOCKHOLDERS' EQUITY

Stock Options

The Aladdin Systems Holdings, Inc. 1999 Stock Option Plan allows for the
issuance of incentive stock options and non-qualified stock options to purchase
shares of the Company's common stock. The option plan has authorized 3,000,000
shares of which 526,472 remain available for granting at December 31, 2001.
Under the option plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options may be
granted to consultants, employees, directors, and officers of the Company.
Options granted under the option plan are for periods not to exceed ten years,
and must be issued at prices not less than 100% of the fair market value of the
stock on the date of grant. Options granted to shareholders who own greater than
10% of the outstanding stock are for periods not to exceed five years and must
be issued at prices not less than 110% of the fair market value of the stock on
the date of grant. Options granted under the option plan generally vest within 4
years.


--------------------------------------------------------------------------------
                                                                         Page 34
<PAGE>

Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                             Shares     Weighted Average
                                                                          Exercise Price
<S>                                                          <C>                   <C>
Balance at January 1, 2000                                   1,653,810             $1.35
Granted                                                        521,397              2.86
Cancelled                                                     (122,157)             1.62
Exercised                                                       (4,215)             1.07
                                                            ----------------------------
Balance at December 31, 2000                                 2,048,835             $1.72
Granted                                                        691,126               .70
Cancelled                                                     (266,433)             1.29
                                                            ----------------------------
Balance at December 31, 2001                                 2,473,528             $1.48
                                                            ============================
</TABLE>

The following table summarizes information about stock options outstanding as of
December 31, 2001:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                   Average
                                              Weighted            Remaining                                  Weighted
                             Number            Average         Contractual Term        Number            Average Exercise
Range of Exercise Price   Outstanding       Exercise Price          (Years)          Exercisable               Price
-------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                  <C>                   <C>             <C>                      <C>
$0.50 - $1.07              1,210,004            $0.86                 7.39              889,944                $0.94
$1.15 - $1.85                832,928            $1.35                 6.56              660,900                $1.31
$1.91 - $4.87                430,596            $3.48                 5.44              329,667                $3.38
                          ----------                                                  ---------
                           2,473,528                                                  1,880,511
                           =========                                                  =========
</TABLE>

The fair value of option grants has been determined using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life of 10 years; interest rate of 5.0%, volatility of 95% in 2001 and 96% in
2000 and no dividend yield. The weighted average fair value of options granted
to employees was $0.68 and $0.63 for 2001 and 2000, respectively.


--------------------------------------------------------------------------------
                                                                         Page 35
<PAGE>

The following table depicts the pro forma results of operations had compensation
expense for employee options been determined based on the fair value at the
grant dates, as prescribed in SFAS No. 123.

                                                  Year Ended December 31,
                                                  -----------------------

                                               2001                    2000
                                               ----                    ----
Net loss
   As reported                              ($1,148,321)            ($362,743)
   Pro forma                                ($1,489,254)            ($576,042)
Basic and diluted net loss per share
   As reported                                   ($0.12)               ($0.04)
   Pro forma                                     ($0.15)               ($0.06)

NOTE 8 - RETIREMENT PLAN

The Company has established a 401(k) retirement plan for all employees.
Employees may elect to contribute up to 15% of their gross salary not to exceed
federal tax law limitations. The Company may elect to match a portion of the
employee contributions. No matching contributions were made for the years ended
December 31, 2001 and 2000.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Leases

The Company conducts its operations from one facility that is leased under an
operating lease expiring October 2010. Rent expense was $383,439 and $187,290 in
2001 and 2000, respectively.

The Company also has furniture and equipment under capital leases. The cost of
assets acquired under capital leases is $500,070. Accumulated amortization on
these assets at December 31, 2001 was $335,551.


--------------------------------------------------------------------------------
                                                                         Page 36
<PAGE>

Future minimum commitments under capital leases and non-cancelable operating
leases as of December 31, 2001 are as follows:

                                              Capital              Operating
Year ending December 31,                       Leases                Leases
                                               ------                ------
                  2002                       $   88,051            $  274,692
                  2003                           70,363               274,692
                  2004                            7,860               274,692
                  2005                               --               274,692
                  2006                               --               274,692
              Thereafter                             --             1,052,986
                                             --------------------------------
Total minimum lease payment                     166,274             2,426,446
Less amount representing interest                17,029                    --
                                             --------------------------------
                                             $  149,245            $2,426,446
                                             ================================

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

PART III

Item 9: Directors and Executive Officers of the Registrant

The following table sets forth the names and positions of our directors and
executive officers:

Name                        Age      Position
----                        ---      --------

Jonathan Kahn               44       Chairman, President, Chief Executive
                                     Officer, Treasurer and Director
Darryl Lovato (1)           35       Chief Technology Officer and Director
Brad Peppard (2)(3)         46       Director
Paul Goodman (2)(3)         42       Director
David Schargel (2)(3)       37       Director
Benna Lovato (1)            35       Director

(1) Darryl Lovato and Benna Lovato are married
(2) Member of the Compensation Committee
(3) Member of the Audit Committee

      The following sets forth biographical information concerning our directors
and executive officers for at least the past five years:


--------------------------------------------------------------------------------
                                                                         Page 37
<PAGE>

      JONATHAN KAHN is currently Chairman, President and CEO of Aladdin. Mr.
Kahn is one of the original founders of Aladdin Systems and has served as a
Director since 1988. Prior to becoming CEO in 1998, he served as President, and
Vice President of Sales. Mr. Kahn has extensive expertise in software industry
sales, marketing, business development and licensing arrangements. Mr. Kahn is a
graduate of the University of Rhode Island with a B.A. in Economics.

      DARRYL LOVATO has been Chief Technology Officer of Aladdin since 1997. In
February 2002, Mr. Lovato resigned the title of President to focus on the
technology of the Company. Mr. Lovato is a co-founder of Aladdin Systems and has
been responsible for overseeing the Company's technical operations and leading
research on new technologies and products. Mr. Lovato has served as a Director
since the company's founding in 1988. Prior to holding his current title, Mr.
Lovato was Aladdin's Vice President and Chief Technology Officer. Prior to
co-founding Aladdin, Mr. Lovato worked at Apple Computer as a Senior Software
Engineer. Mr. Lovato has over fifteen-years of software programming and
development experience.

      BRAD PEPPARD is President of CinemaScore Online, Inc. a leading Internet
Web site providing ratings of top Hollywood movies through its weekly
E-newsletter. Prior to that, Mr. Peppard served as Vice President of Marketing
at Aladdin Systems from 1996 through 1998. In 1998, Mr. Peppard became a
Director of Aladdin. Prior to joining Aladdin, Mr. Peppard was responsible for
worldwide marketing at Quarterdeck Office Systems, during which time the company
grew from $20 million to $120 million in revenue. He was also Vice President of
Marketing at Software Publishing Corporation, as well as President and founder
of SoftMail Corporation, a leading direct marketing agency, and president of
Monogram Software. Mr. Peppard has an MBA from Stanford University and a B.A.
from Amherst College.

      DAVID SCHARGEL is the Chairman and President of Aportis Technologies
Corp., a leader in software for carryable and wearable computers (focusing on
Palm Pilot and Window CE computers), which he founded in 1997. Mr. Schargel is
one of the co-founders of Aladdin and served as its President from 1988 to 1994.
Mr. Schargel has served as a Director since 1988. From 1994 through 1997, he
performed various executive roles at Aladdin. Prior to co-founding Aladdin, Mr.
Schargel was Vice President at Olduvai Corporation, a publisher of software for
the Macintosh computer and also had served as Technical Editor at MacUser
Magazine. Mr. Schargel has extensive experience in software product management
and marketing.

      PAUL GOODMAN has been a partner in the New York City law firm of Ellenoff,
Grossman, Schole & Cyruli, LLP, and its predecessor firm, Elias, Goodman and
Shanks for over 5 years. He concentrates on representing software and Web
companies in a wide range of business and financing transactions. He has
represented Aladdin since its inception. In addition to a Juris Doctor degree,
Mr. Goodman holds a BA and MA degree in Computer Science. He was a former member
of the Computer Science faculty of Queens College, is the author of five books
on microcomputer programming.


--------------------------------------------------------------------------------
                                                                         Page 38
<PAGE>

      BENNA LOVATO is one of the co-founders of Aladdin. She was a past
President and has been a current board member of Nurture for the past 5 years.
Nurture is a non-profit organization located in Santa Cruz county, devoted to
the goal that all woman have education, advocacy and support in the
child-bearing years. She is also a member of the Board of Directors of the Birth
Network of Santa Cruz County.

Item 10: Executive Compensation

COMPENSATION SUMMARY

      The following table sets forth the compensation earned by our Chief
Executive Officer and all our other executive officers who earned in excess of
$100,000 in salary and bonus (collectively the "Named Executives") for services
rendered to us during the fiscal year.

SUMMARY COMPENSATION TABLE (1)

                                                          Long term compensation
                                                           Number of securites
Name and position                   Year      Salary      Underlying options (2)
-----------------                   ----      ------      ----------------------

Jonathan Kahn, President and CEO    1999    $164,120              20,000
                                    2000     147,933                0
                                    2001     137,866              48,407
Darryl Lovato, CTO                  1999     161,420              20,000
                                    2000     148,433                0
                                    2001    $137,866              48,407

      (1)   The columns for "Bonus", "Other Annual Compensation", "Restricted
            Stock Awards", "LTP Payouts" and "All other Compensation" have been
            omitted because there is no such compensation to be reported.

      (2)   Represents options granted to such executives.

The following table sets forth certain information concerning options granted to
the named executives.


--------------------------------------------------------------------------------
                                                                         Page 39
<PAGE>

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                 Number of       % of Total
                                Securities         Options        Exercise Price
                                Underlying        Granted to         Per Share
Name               Year         Options (1)      Employees (2)         ($/SH)       Expiration Date (3)
----               ----         -----------      -------------         ------       -------------------
<S>                <C>            <C>                <C>              <C>                <C>
Jonathan Kahn      2001           26,591             3.8              $0.84              April 2006
                   2001           21,816             3.2               0.63              June 2006
Darryl Lovato      2001           26,591             3.8               0.84              April 2006
                   2001           21,816             3.2              $0.63              June 2006
</TABLE>

      (1)   Each option represents the right to purchase one share of our common
            stock.

      (2)   We granted officers, employees and consultants options to purchase
            an aggregate of 691,126 shares of our common stock in 2001.

      (3)   Options may terminate before their expiration dates if the
            optionee's status as an employee or consultant is terminated or upon
            the optionee's death or disability.

OPTION EXERCISES AND YEAR-END OPTION VALUES

      The following table sets forth certain information with respect to the
named executives concerning exercisable and unexercisable stock options held by
them as of December 31, 2001. None of these executive officers exercised options
to purchase common stock in 2001.

AGGREGATE OPTION EXERCISES AND YEAR END OPTION VALUES (1)

<TABLE>
<CAPTION>
                               Number of Unexercised       Value of Unexercised In-the-
                                Options At year End         Money Options at Year End
                                -------------------         -------------------------

Name               Year     Exercisable    Unexercisable   Exercisable    Unexercisable
----               ----     -----------    -------------   -----------    -------------
<S>                <C>        <C>             <C>           <C>             <C>
Jonathan Kahn      2001       268,668         51,144        $174,634        $ 33,244
Darryl Lovato      2001       274,080         51,144        $178,152        $ 33,244
</TABLE>

      (1)   Based on a per share fair market value of our common stock equal to
            $0.65 per share, the trading price market value of our common stock
            on December 31, 2001.


--------------------------------------------------------------------------------
                                                                         Page 40
<PAGE>

COMPENSATION OF DIRECTORS

      In 2001, Benna Lovato, Brad Peppard, David Schargel and Paul Goodman, each
received options to purchase up to 25,000 shares of Common Stock, respectively,
with exercise prices of $0.75 per share. The options were granted for board
services and were immediately vested.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

      On October 25, 1999, we entered into an employment agreement with Jonathan
Kahn (the "Kahn Employment Agreement"). Under the Kahn Employment Agreement,
Jonathan Kahn is to serve as our Chief Executive Officer and perform such duties
as may be reasonably assigned to him by the Board of Directors. The Kahn
Employment Agreement provides for an annual base salary of $150,000. The Kahn
Employment Agreement also provides that Jonathan Kahn is to receive options to
purchase shares of our Common stock in an amount as to be determined, from time
to time, by the Board of Directors of the Company, and that he is eligible to
receive vacation in accordance with the Company's policies. He is also eligible
to participate in the health, life insurance, medical, retirement and other
benefit programs which we may offer from time to time.

      The term of the Kahn Employment Agreement lasts until October 24, 2002
unless terminated pursuant to the terms thereof. We may terminate the Kahn
Employment Agreement only for cause. The term "cause" is defined in the Kahn
Employment Agreement as: (i) the willful neglect of duties reasonably assigned
by the Board of Directors; (ii) material breach of the agreement; or (iii)
willful gross misconduct. If Jonathan Kahn is terminated without cause or in the
event of a change of control of the Company, defined as a change in control of
at least 40% of the voting shares of the Company, he is to receive severance pay
through September 30, 2002 equal to: (i) the base salary; (ii) bonus
compensation; (iii) vested options to purchase Common stock; (iv) health
insurance; and (v) any unused vacation time. If Jonathan Kahn resigns from his
position for good cause, including a substantial reduction in his position,
duties or a material breach of the agreement by us, he is to be deemed
terminated without cause and is eligible to receive severance.

      On October 25, 1999, we entered into an employment agreement with Darryl
Lovato (the "Lovato Employment Agreement"). Under the Lovato Employment
Agreement, Darryl Lovato is to serve as our President and Chief Technology
Officer and perform such duties as may be reasonably assigned to him by the
Board of Directors. The Lovato Employment Agreement provides for an annual base
salary of $150,000. The Lovato Employment Agreement also provides that Darryl
Lovato is to receive options to purchase shares of our Common stock, in an


--------------------------------------------------------------------------------
                                                                         Page 41
<PAGE>

amount as to be determined, from time to time, by the Board of Directors of the
Company, and that he is eligible to receive vacation in accordance with the
Company's policies. He is also eligible to participate in the health, life
insurance, medical, retirement and other benefit programs which we may offer
from time to time.

      The term of the Lovato Employment Agreement lasts until October 24, 2002
unless terminated pursuant to the terms thereof. We may terminate the Lovato
Employment Agreement only for cause. The term "cause" is defined in the Lovato
Employment Agreement as: (i) the willful neglect of duties reasonably assigned
by the Board of Directors; (ii) material breach of the agreement; or (iii)
willful gross misconduct. If Darryl Lovato is terminated without cause or in the
event of a change of control of the Company, defined as a change in control of
at least 40% of the voting shares of the Company, he is to receive severance pay
through September 30, 2002 equal to: (i) the base salary; (ii) bonus
compensation; (iii) vested options to purchase Common stock; (iv) health
insurance; and (v) any unused vacation time. If Darryl Lovato resigns from his
position for good cause, including a substantial reduction in his position,
duties or a material breach of the agreement by us, he is to be deemed
terminated without cause and is eligible to receive severance.

Item 11: Security Ownership of Certain Beneficial Owners and Management

The following tables shows all directors and officers of the Company and all
persons known to the Company to be the beneficial owner of more than five
percent of the Company's common stock as of December 31, 2001.

<TABLE>
<CAPTION>
                                                  Amount and Nature of         Percent of
Name of Beneficial Owner                         Beneficial Ownership (1)         Class
------------------------                         ------------------------         -----
<S>                                                       <C>                     <C>
EXECUTIVE OFFICERS AND DIRECTORS

Jonathan Kahn (2)                                         2,010,388               20.53%
David Schargel (3)                                        1,666,921               17.02%
Darryl Lovato (4)                                         1,955,363               19.97%
Brad Peppard (5)                                             77,400                0.79%
Benna Lovato (6)                                          1,699,407               17.35%
Paul Goodman (7)                                             25,000                0.26%
                                                          -----------------------------
All directors and executive officers
As a group (6 persons)                                    7,434,479               75.92%

OTHER 5% STOCKHOLDERS

Marco Gonzalez                                              697,812                7.13
                                                          -----------------------------

All directors, excutive officers and 5%
stockholders as a group                                   8,132,291               83.04%
</TABLE>


--------------------------------------------------------------------------------
                                                                         Page 42
<PAGE>

      (1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants, rights
or conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person, but
are not deemed outstanding for the purpose of calculating the percentage owned
by each other person listed.

      (2) Includes 268,668 shares of Common Stock subject to options that are
exercisable at December 31, 2001 and 6,950 shares of Common Stock subject to
options that are exercisable within 60 days of the date hereof.

      (3) Includes 25,132 shares of Common Stock subject to options that are
exercisable at December 31, 2001.

      (4) Includes 274,080 shares of Common Stock subject to options that are
exercisable at December 31, 2001 and 6,950 shares of Common Stock subject to
options that are exercisable within 60 days of the date hereof.

      (5) Includes 77,400 shares of Common Stock subject to options that are
exercisable at December 31, 2001.

      (6) Includes 25,074 shares of Common Stock subject to options that are
exercisable at December 31, 2001.

      (7) Includes 25,000 shares of Common Stock subject to options that are
exercisable at December 31, 2001.

Item 12: Certain Relationships and Related Transactions

In 2001, Brad Peppard received options to purchase up to 20,000 shares of Common
Stock with an exercise price of $0.63, in exchange for marketing work. These
options were immediately vested.

PART IV

Item 13: Exhibits, Financial Statements, and Reports on Form 8-K

(a) The following documents are filed as a part of this Report:

1. Financial Statements

The following consolidated financial statements of Aladdin Systems Holdings,
Inc., and Subsidiaries, and the Independent Auditors' Report issued thereon,


--------------------------------------------------------------------------------
                                                                         Page 43
<PAGE>

are incorporated by reference in Part II, Item 7:

Report of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

2. Exhibits

The following exhibits are filed as part of, or incorporated by reference into,
this Report:

2.1   Agreement and Plan of Reorganization dated as of October 12, 1999 by and
      among FGT, Gary Ulmer, Aladdin Systems, Inc. and the shareholders of
      Aladdin Systems, Inc.*
3.1   Articles of Incorporation of the Registrant.*
3.2   Certificate of Amendment to the Articles of Incorporation of the
      Registrant.*
3.3   By-Laws of Registrant.*
4.1   Sample Stock Certificate of the Registrant.*

10.1  Letter Agreement, dated July 14, 1999 by and between Bay Tree Capital
      Associates, LLC and the Registrant.**
10.2  Employment Agreement dated October 25, 1999 by and between Mr. Jonathan
      Kahn and the Registrant. **
10.3  Employment Agreement dated October 25, 1999 by and between Mr. Darryl
      Lovato and the Registrant. **
10.4  Stock Option Plan of the Registrant. **
10.5  Form of Stock Option Agreement issued under the Stock Option Plan of the
      Registrant. **
21.1  Subsidiaries of Registrant
23.1  Consent of Grant Thornton LLP

Legend

* Incorporated into this Report by reference to the Registrant's Registration
Statement on Form 10 dated November 15, 1999.

** Incorporated into this Report by reference to the Registrant's Amendment No.
2 to the Registration Statement on Form 10 dated March 13, 2000.


--------------------------------------------------------------------------------
                                                                         Page 44
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ALADDIN SYSTEMS HOLDINGS, INC.
(Registrant)

By /s/ Jonathan Kahn
  ------------------------------
  (Jonathan Kahn, President, Chief Executive Officer, and Director)

By /s/ Alexandra Gonzalez
  ------------------------------
  (Alexandra Gonzalez, Principal Accounting Officer, Secretary)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below.

 Signature                             Title                            Date

 /s/ Jonathan Kahn         President, Chief Executive                  3/15/02
-------------------------  Officer and Director
  (Jonathan Kahn)

 /s/ Darryl Lovato         Chief Technology Officer and Director       3/15/02
-------------------------
  (Darryl Lovato)

/s/ Brad Peppard           Director                                    3/15/02
-------------------------
  (Brad Peppard)

/s/ David Schargel         Director                                    3/15/02
-------------------------
  (David Schargel)

/s/ Benna Lovato           Director                                    3/15/02
-------------------------
  (Benna Lovato)

/s/ Paul Goodman           Director                                    3/15/02
-------------------------
  (Paul Goodman)


--------------------------------------------------------------------------------
                                                                         Page 45
<PAGE>

EXHIBIT INDEX

Exhibit Reference (*)
Number or Page #

2.1   Agreement and Plan of Reorganization dated as of October 12 1999 by and
      among FGT, Gary Ulmer, Aladdin Systems, Inc. and the shareholders of
      Aladdin Systems, Inc.*
3.1   Articles of Incorporation of the Registrant.*
3.2   Certificate of Amendment to the Articles of Incorporation of the
      Registrant.*
3.3   By-Laws of Registrant.*
4.1   Sample Stock Certificate of the Registrant.*
10.1  Letter Agreement, dated July 14, 1999 by and between Bay Tree Capital
      Associates, LLC and the Registrant. **
10.2  Employment Agreement dated October 25, 1999 by and between Mr. Jonathan
      Kahn and the Registrant. **
10.3  Employment Agreement dated October 25, 1999 by and between Mr. Darryl
      Lovato and the Registrant. **
10.4  Stock Option Plan of the Registrant. **
10.5  Form of Stock Option Agreement issued under the Stock Option Plan of the
      Registrant*.
21.1  Subsidiaries of Registrant
23.1  Consent of Grant Thornton LLP

Legend

* Incorporated into this Report by reference to the Registrant's Registration
Statement on Form 10 dated November 15, 1999.

** Incorporated into this Report by reference to the Registrant's Amendment No.
2 to the Registration Statement on Form 10 dated March 13, 2000.


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