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, 2003.

      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.
            Incorporation or Organization)      Employer Identification
                                                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

<PAGE>

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: $8,535,515

Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on April 8, 2004:
$996,178

Number of shares outstanding of each of the registrant's classes of common stock
as of April 8, 2004:

Common Stock: 12,230,272

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.
                         2003 FORM 10-KSB ANNUAL REPORT
                                Table of Contents


Trademarks/Definitions                                                   5

PART I
Item 1.  Business                                                        4
Item 2.  Properties                                                     12
Item 3.  Legal Proceedings                                              12
Item 4.  Submission of Matters to a Vote of Security Holders            13

PART II
Item 5.  Market for the Registrant's Common Equity and Related
     Stockholder Matters                                                13
Item 6.  Management's Discussion and Analysis or Plan of Operations
of Financial                                                            13
     Condition and Results of Operations
Item 7.  Financial Statements                                           18
Item 8.  Changes In and Disagreements With Accountants on Accounting    34
and
      Financial Disclosure
Item 8a.Controls and Procedures                                         34

PART III
Item 9.   Directors and Executive Officers of the Registrant            35
Item 10. Executive Compensation                                         36
Item 11. Security Ownership of Certain Beneficial Owners and            38
Management
Item 12. Certain Relationships and Related Transactions                 39
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K        39
Signatures


TRADEMARKS/DEFINITIONS

      "Aladdin", "Aladdin Systems", "Aladdin Enterprise Solutions", "StuffIt",
"StuffIt Deluxe", "DropStuff", "Secure Delete", "DropZip", "StuffIt Expander",
"Expander", "StuffIt Express", "InstallerMaker", "StuffIt InstallerMaker",
"ShrinkWrap", "Flashback", "Ten for X", "NMX", "GameOn!" and "iClean" are
trademarks, registered trademarks or service marks of Aladdin Systems, Inc. and
Aladdin Systems Holdings, Inc. "Spring Cleaning", "Internet Cleanup", Easy
Uninstall" and "ZipMagic" are registered trademarks of Aladdin Systems, Inc. All
other trademarks, service marks or trade names 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 "Holdings" refer to the consolidated operations of Aladdin Systems
Holdings, Inc., a Nevada corporation, and its wholly-owned subsidiaries, Aladdin
Systems, Inc. (or "Aladdin Systems"), and Aladdin Enterprise Solutions, Inc.,
(or "Aladdin Enterprise"), both Delaware corporations, (b) "you" refers to the
readers of this Form 10-KSB, (c) the "Web" refers to the World Wide Web, and (d)
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the "sites" refer to our Web sites, www.aladdinsys.com, www.stuffIt.com and
www.aladdinenterprise.com.

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<PAGE>

PART I

Item 1: Business

GENERAL

      Aladdin Systems Holdings, Inc., ("Holdings" or the "Company") is a
technology holding company located in Watsonville, California. Through its two
wholly-owned subsidiaries, Aladdin Systems, Inc. ("Aladdin Systems") and Aladdin
Enterprise Solutions, Inc. ("Aladdin Enterprise"), the Company focuses on
providing software products that align people, business and technology, and
serves the consumers, small business and enterprise markets.

BUSINESS OVERVIEW

      Our business is divided into two distinct operating subsidiaries, which
focus their attention on different product lines and different markets:

      Aladdin Systems - Aladdin Systems, formed in 1989, develops and publishes
software primarily for the Macintosh and Windows markets.

      Aladdin Enterprise Solutions - In October 2002, we acquired Erevu
Incorporated, a development stage company that focuses on the enterprise
marketplace. Upon completion of the acquisition, Erevu was renamed Aladdin
Enterprise Solutions. Aladdin Enterprise addresses the needs of the distributed
computing environment, making it more manageable, robust, efficient and secure.
Enterprise's autonomic computing suite offers a unique business-adapting
platform governed by simple-language policy management tools. This virtual
computing framework intelligently controls the disparate systems and costs in a
distributed network improving the overall return-on-investment, lowering the
total cost of ownership while increasing productivity.

ALADDIN SYSTEMS

Aladdin Systems has organized its software product lines into three groups:

o     Compression, Access and Transmission (CAT)
o     Security and Internet
o     Software Compilations

Compression, Access and Transmission

      Aladdin Systems is a world leader in data compression software under our
StuffIt brand. StuffIt software products help millions of individuals, small
businesses, enterprises, government, and educational customers solve fundamental
problems that they all share:

o     Sending information in a way that is fast, safe and secure over the
      Internet or any network
o     Accessing information received

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o     Archiving information
o     Backing up information
o     Maximizing storage capacity and bandwidth
o     Automating the process of sending and receiving information

      StuffIt's basic function is to allow computer users to compress files,
directories, hard drives or other media for accelerated transmission over
computer networks, the Internet, as well as for archival purposes. Because files
encoded in a compressed format are smaller than ordinary files, they can be
transmitted faster than non-compressed files over computer networks and the
Internet. StuffIt also allows people to protect their information in a secure
package that can be encrypted and also has error correction functionality
applied to it, which provides a secure way to send and receive information.

      StuffIt has been adopted as a worldwide compression standard for the
Macintosh platform and is distributed by Apple Computer and America Online.
StuffIt products have been shipped to over 20 million users worldwide over the
last three years, including approximately 13 million copies distributed by Apple
Computer shipped pre-loaded on Apple Computer's products.

StuffIt Product Line

      StuffIt Deluxe (Windows and Macintosh) - StuffIt Deluxe is our
full-featured product, offering a complete compression and expansion solution to
users. StuffIt Deluxe is available for the Windows and Macintosh operating
systems and is sold commercially through our worldwide network of distributors,
resellers, catalogs, Internet retailers, and through our websites. StuffIt
Deluxe is also available in localized French, German, and Japanese versions.

      StuffIt Standard Edition (Windows and Macintosh) - StuffIt Standard
Edition is our basic or entry-level product that provides basic compression and
decompression functionality, as well as encryption. Standard Edition includes
StuffIt Expander and creates StuffIt and Zip files and is available for
Microsoft Corporation's Windows OS, Apple Computer, Inc.'s Macintosh OS, Sun
Microsystems' Solaris OS and Linux.

      StuffIt Expander (Windows and Macintosh) - StuffIt Expander is a free
expansion software product that decompresses and decodes the major compression
and encoding protocols such as StuffIt (.sit, sitx), Zip (.zip), Binhex, Base64
(MIME), TAR, gzip, plus others. Expander is distributed free of charge as a way
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,
StuffIt Expander is protected by copyright law and its use is subject to a
license agreement.

      StuffIt Express (Windows and Macintosh) - StuffIt Express is designed to
allow user to create custom applications that can automate virtually any file
transfer tasks. StuffIt Express is available in the following versions:

      * StuffIt Express Personal Edition that is distributed with StuffIt Deluxe
      * StuffIt Express (Windows only) standard version

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      * StuffIt Express Enterprise Edition (Windows and Macintosh) designed for
      the corporate marketplace

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

      StuffIt Engine SDK (Windows, Linux, Solaris and Macintosh) - StuffIt
Engine SDK 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.

Security and Internet Product Line

      Spring Cleaning (Windows and Macintosh) - Spring Cleaning is a software
"uninstaller" product that removes unwanted and unused software and their
related files from a user's computer. In December 2003, Aladdin released Spring
Cleaning for Windows, which was formerly called Easy Uninstall.

      SpamCatcher (Windows) - SpamCatcher is an anti-spam software solution
published by Aladdin Systems. SpamCatcher is designed to catch unwanted and
undesirable, unsolicited email that a person receives. SpamCatcher integrates
with Microsoft's Outlook email client and also works with most of the popular
email solution programs on the market today

      Internet Cleanup (Windows and Macintosh) - Internet Cleanup is an Internet
cleanup and privacy product, which allows a user to remove specific unwanted or
unneeded files gathered by a Web browser every time you surf the Internet.
Internet Cleanup also blocks pop-up and banner ads, and detects and removes
Spyware. Removing these files recovers disk space and helps ensure online
privacy.

      iClean (Windows and 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 (Macintosh) is included in our Spring Cleaning product but is
also sold as a separate product. In November 2000, Aladdin entered into a
bundling agreement for the Macintosh product with Symantec Corporation to
distribute the product with Norton Internet Security. iClean is targeted at the
OEM marketplace.

      DragStrip (Windows and Macintosh) - DragStrip allows users to launch,
find, organize and access applications and documents quickly and efficiently.

Software Compilations

      In July 2002, Aladdin Systems released its first software offering under
its new "Ten for X" brand. The Ten for X line was developed to take advantage of
the lack in functionality in many areas of the new Mac OS X operating system and
the many good software products that are being created by developers who do not

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<PAGE>

have access, ability, desire, or the organization to expand their software
offering beyond the shareware model. Ten for X allows these developers to reach
a wider audience. The software is sold at Apple Computer stores and other
retailers, as well as on Aladdin Systems' web sites.

      Ten for X: Utilities Volume 1 - Ten for X Utilities Volume 1 is a
collection of 11 Mac OS X utility software products. In January 2003, Ten for X
Utilities Vol. 1 was a Macworld Magazine Eddy Award finalist.

      Ten for X: Utilities Volume 2 - Ten for X Utilities Volume 2 is the second
collection of utilities and includes a spam solution along with ten other
popular software utilities for Mac OS X.

      Ten for X: Games Volume 1 - Ten for X Games Volume 1 was introduced at the
Macworld 2003 San Francisco trade show. The package is a collection of 13 games
for Mac OS X, including the very popular Bugdom 2.

      GameOn Action - GameOn Action is a collection of six action pack games for
the Macintosh. This compilation includes games like Spyhunter (TM) and Freedom
Force.

      GameOn Family - GameOn Family is a collection of games for the whole
family, designed to provide hours of endless fun. This compilation includes Zoo
Tycoon and Tony Hawk's Pro Skater 3 plus three other games.

      The Big Mix - The Big Mix is a collection of music and audio tools that
allow Macintosh users to learn, create, listen and share their music. This
collection was released in January 2004 at Macworld and includes nine products
that turn you into a conductor, a DJ, or lets you become the next great drummer.
The Big Mix also lets you organize your music and unleash your hidden musical
talents and create the next big hit.

RESALE OF THIRD PARTY PRODUCTS

      In addition to publishing our own products, we utilize our web sites,
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 web sites, 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 15% to 60%.

ALADDIN ENTERPRISE SOLUTIONS

      In 2003, Aladdin Enterprise deployed its software for its first client,
Reuters. The software is used to deploy Reuters' Plus software on the floor of
the New York Stock Exchange.

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      NMX ActionPoint(TM) is Aladdin Enterprise's first product offering. The
NMX ActionPoint is a robust solution comprised of three modules:

      NMX-VIP prioritizes network access and quality of service for particular
individuals with business-critical responsibilities. NMX-VIP can also change
network traffic priorities delivering the appropriate network services and
therefore aligning the network with the enterprise's business objectives.

      NMX-SURE allows prioritization of critical applications to run at
specified times and dates or to react to real time events, eliminating the
threat of increasingly disruptive but less important traffic overwhelming or
cluttering the network. NMX-SURE will detect system outages and re-direct users
to backup systems. Critical application activity is protected and productivity
maintained.

      NMX-SAFE provides internal control of network access to designated
information. Access can be permitted based upon times and dates, to specified
employees, or it can be used to block or deny access to the network and
applications based on personnel or date and time. NMX-SAFE will record network
traffic movements and provide management reports on access and usage for
detection of abuse or as part of an audit trail.


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<PAGE>


ROYALTY PAYMENTS

      Pursuant to our publishing agreements with third party developers, Aladdin
has made total royalty payments in 2003 and 2002 totaling $245,884 and $118,410,
respectively. The increase in royalty payments in 2003 was due to publishing the
following new products: SpamCatcher, GameOn Action, GameOn Family, Ten for OSX
Utilities Volume 2 and Ten for OSX Games.

PRODUCT SUPPORT

      We believe that technical support is an important part of our overall
performance and success. Aladdin Systems employs four full-time support
personnel. These employees provide technical support services to our customers
by email, via our web 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 30 days of customers' purchases of our
products.

DISTRIBUTION AND MARKETING

Aladdin Systems

      Aladdin Systems' products are marketed through independent distributors in
the United States and Canada, through numerous resellers and mail order
companies, through distributors in other countries, directly to corporate and
educational accounts under site licensing agreements, under volume purchasing
agreements and directly to end-users through direct marketing campaigns and our
websites, www.aladdinsys.com and www.stuffit.com.

      Of Aladdin Systems' total net revenues for 2003, approximately 27% was as
a result of sales through independent, domestic, nonexclusive distributors.
Sales to one such distributor, Ingram Micro, accounted for nearly 26% of total
net revenues. Domestic distributors purchase product at a discount of
approximately 20% to 30% from list prices.

      Of Aladdin Systems' total net revenues for 2003, approximately 9% 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 and French languages. Sales to two of these distributors, Koch
Media (United Kingdom) and Act2 (Japan), accounted for approximately 2%, and 1%,
of total net revenues in 2003, 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 35% to 45% off
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
$181,648 and $125,267 at December 31, 2003 and 2002, respectively. Returns


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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.


Aladdin Enterprise Solutions

      Aladdin Enterprise currently uses a direct sales model. The Aladdin
Enterprise sales force works directly with customers offering Aladdin
Enterprise's NMX (TM) software.

PRODUCT DEVELOPMENT

Aladdin Systems

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

      Aladdin Systems regularly upgrades its existing products to add new
features in response to customer requests for additional features and to match
or exceed features contained in competing products.

      During the years 2003 and 2002, Aladdin Systems spent $2,132,267 and
$1,858,893, respectively, on research and development and enhancement
activities, representing approximately 25% of net revenues in each of these
periods.

Aladdin Enterprise Solutions

      Aladdin Enterprise utilizes internal resources as well as contractors for
the development of our products. The NMX product line will be enhanced to make
ActionPoint an even more robust solution designed to solve the problems of our
customers.

      Our future financial performance will depend in part on the successful
development, completion, and introduction of new software products, and on
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

Aladdin Systems


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      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 that directly compete with our StuffIt products in the Windows market.
In addition, in 2003 with the release of Apple Computer's Panther version of Mac
OS X, Apple has added Zip compression to its operating system.

      Certain computer manufacturers may also 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. and WinZip Computing, Inc. For the
Security and Internet product line, in particular Internet Cleanup, iClean and
Spring Cleaning, we have two significant competitors, Symantec Corporation and
Network Associates Technology, Inc., in addition to many smaller developers.
Currently, there is no direct competitor for the Ten for X offerings in the
retail channel though the individual authors of the programs continue to sell
their individual products but the Big Mix faces competition from Apple's iLife
software and other individual software publishers.

      Aladdin Systems' software products are marketed through multiple
distribution channels. All of these products face competing products offering
many similar features. Aladdin Systems 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 has become an increasingly important
channel for the distribution and sales of software products, Aladdin Systems has
increased its efforts to sell both our products and third-party products to
consumers via our websites. In order to continue this effort, we may need to
invest money, effort and other resources into our 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 Systems'. In the event that
we are not able to successfully compete against such companies, this could have
a material adverse effect upon our business, results of operations and financial
condition.


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Aladdin Enterprise Solutions

      Aladdin Enterprise currently has no direct competitor. Though there are
other product offerings that have related functionality, it is our belief that
as the market starts to mature, we will see competition. It is anticipated that
some of these direct and indirect competitors will include IBM, Sun
Microsystems, and HP as well as companies unknown to us at this time.

INTELLECTUAL PROPERTY

      We regard 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 U.S Copyright Act, international copyright treaties, 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.

      The Company 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 to 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 our
products lack necessary copyright or trademark protection. We license our
software products to customers rather than transferring title. Despite these
restrictions, it may be possible for competitors or users to copy aspects of the
Company's products or to obtain information that we regard 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.

      Aladdin Systems' consumer 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 our industry, we believe that such protections
are less significant than factors such as frequent product enhancements, and the
timeliness and quality of our 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.

      We intend to enter into license agreements for Aladdin Enterprise's
products directly with customers. We expect that each such agreement will be


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separately negotiated with customers but each such agreement will protect our
intellectual property rights in the software being licensed.

      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, 2003, we employed 43 full-time employees in the
following departments: 18 in research and development, 15 in marketing, sales
and support, seven in general and administrative and three in shipping and
production.

      Our future success 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, we also employ independent contractors to support our
research and development, marketing, sales, support and administrative
organizations. We have 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

      We currently have two wholly-owned subsidiaries, Aladdin Systems, Inc.,
and Aladdin Enterprise Solutions, Inc. both Delaware corporations.

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 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.


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      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 are described in the Risks and Uncertainties section of the Management's
Discussion and Analysis.

ITEM 2: PROPERTIES

      Our executive offices consist of approximately 17,230 square feet of
office space in Watsonville, CA. This facility is leased pursuant to a lease
expiring October 2010. The monthly rent is currently $23,804 and our leased
space is still sufficient to cover future growth.

ITEM 3: LEGAL PROCEEDINGS

      In December 2003, Aladdin Knowledge Systems, Inc. ("AKS"), filed a suit
against the Company in the Federal District Court for the Northern District of
Illinois, alleging, among other things, that the Company's use of the "Aladdin"
trademark infringed the rights of AKS and they are seeking a preliminary
injunction to prevent the Company from using the "Aladdin" name in connection
with our SpamCatcher product. Both the Company and AKS have been aware of each
other's use of the "Aladdin" trademark since at least 1993. The complaint seeks
only equitable relief and does not seek monetary damages from the Company. The
Company is vigorously defending this action and has filed an answer denying all
of AKS's claims. To date, limited discovery has been conducted and there is
currently a hearing scheduled in April 2004 to hear AKS's motion for a
preliminary injunction.

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, 2003, there were 40 stockholders of record. The Company
believes that it has approximately 300 beneficial stockholders.

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

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<PAGE>

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

                                          Common Stock

                                          Low     High
                                    --------------------
Quarter ended:
March 31, 2002                           $0.30    $0.65
June 30, 2002                            $0.18    $0.55
September 30, 2002                       $0.13    $0.40
December 31, 2002                        $0.20    $0.35
March 31, 2003                           $0.15    $0.43
June 30, 2003                            $0.26    $0.51
September 30, 2003                       $0.20    $0.36
December 31, 2003                        $0.21    $0.40


      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.

      Due to the acquisition of Aladdin Enterprise, overall results for 2003
include additional expenses with minimal additional revenue compared to previous
years.

      The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues.


                                                    Years ended December 31,

                                                         2003      2002
                                                         ----      ----

Percentage of sales:
Sales                                                    100%      100%
Cost of sales                                             13%       10%
                                                     -------------------
Gross profit                                              87%       90%

                                       16
<PAGE>

Marketing, sales and support                              48%       42%
Research and development                                  29%       26%
General and administrative                                20%       14%
                                                     -------------------

Total operating expenses                                  97%       82%

Net income (loss) from operations                       (10%)        8%

Other (expense) income, net                                0%        0%
                                                     -------------------

Net income (loss) before income taxes                   (10%)        8%

Income tax benefit                                         0%        0%
                                                     -------------------

Net income (loss)                                       (10%)        8%
                                                     ===================


NET REVENUES

      Our overall revenues increased from $7,457,245 in 2002 to $8,535,515 in
2003. In 2003, $109,600 of our overall revenue came from our Aladdin Enterprise
subsidiary. The increase in revenue is due to shipping four new products in 2003
- SpamCatcher, Internet Cleanup Mac, Ten for X Games, and Ten for X Utilities
Volume 2 - which was partially offset by a decrease in revenue mostly as a
result of shipping new releases of some of our current products later in the
year.

      Revenues from sales over Aladdin Systems' websites accounted for 51% of
revenue in both 2003 and in 2002. We believe that sales over our websites will
represent an increasingly important component of the Aladdin Systems' sales
strategy and will allow Aladdin Systems to reach a larger number of potential
consumers at lower costs than sales through distributors.

      Third-party product sales by Aladdin Systems were $285,409 in 2003 and
$295,137 in 2002. For third party products, we recognize as revenue only the net
fee we collect for facilitating the sale.

COST OF REVENUES AND GROSS MARGIN

      Aladdin Systems' cost of revenues is composed primarily of:
      o     the cost of product materials such as CD-ROMs and packaging
      o     amortization of capitalized software costs
      o     royalties paid to outside developers
      o     shipping expenses
      Cost of revenues, as a percentage of net revenues increased to 13% in 2003
from 10% in 2002. This increase was mostly due to an increase in royalties from
our additional compilation products, Ten for OSX Games and Ten for OSX Utilities
Volume 2, and from royalties related to SpamCatcher sales. Costs of products


                                       17
<PAGE>

also increased due to shipping more physical goods related to the Ten for X
product lines.

OPERATING EXPENSES

Marketing, sales and support          2003              2002        Change
----------------------------          ----              ----        ------

Aladdin Systems                 $3,448,853        $3,044,918           13%

Aladdin Enterprise                 628,365            94,419          566%

Total                           $4,077,218        $3,139,337           30%

      Marketing, sales and support expenses for Aladdin Systems increased to
$3,448,853 in 2003 from $3,044,918 in 2002. This increase was due to advertising
and promoting our new products and consulting fees. Marketing, sales and support
expenses for Aladdin Enterprise in 2003 included a full year of payroll and
benefits for four employees compared to two months of expenses in 2002. For the
first half of 2003, we also had a marketing consulting firm working on AES
products.

Research and development              2003              2002        Change
------------------------              ----              ----        ------

Aladdin Systems                 $2,132,267        $1,858,893           15%

Aladdin Enterprise                 305,609            57,760          429%

Total                           $2,437,876        $1,916,653           27%

      Research and development expenses for Aladdin Systems increased $273,374
in 2003 from 2002. This increase was mostly due to salary restorations and we
also ramped up our India development center to work on Aladdin products.
Research and development expenses for Aladdin Enterprise in 2003 include
contract development fees and an amortization expense of $183,055 for
capitalized software.

General and administrative            2003              2002        Change
--------------------------            ----              ----        ------

Aladdin Systems                 $1,398,595          $935,913           49%

Aladdin Enterprise                 345,591           101,656          241%

Total                           $1,740,986        $1,037,569           68%

      General and administrative expenses are composed principally of salaries
of administrative personnel, fees for professional services and facilities.
Total Aladdin Systems' expenses increased $461,906 in 2003 from 2002. This
increase was mostly due to legal fees associated with our current legal
proceedings with Aladdin Knowledge Systems. General and administrative expenses


                                       18
<PAGE>

for Aladdin Enterprise in 2003 are mostly for payroll and benefits for one
employee, professional services, and for depreciation on fixed assets.


INCOME TAXES

The Company's effective tax rate was 0.4% for fiscal 2003 and 4.0% for fiscal
2002. The Company has a valuation allowance of $1,396,629, covering all of its
deferred tax assets as of December 31, 2003 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 2003 was $257,572, a
decrease of $732,666 compared with net cash provided by operating activities of
$990,237 in 2002. This decrease was mostly due to the loss in 2003.

      Net cash used in investing activities in 2003 was $268,254, a decrease of
$141,169 compared with net cash used in investing activities of $409,423 in
2002. In 2003, we acquired more equipment but also received $162,000 from the
sale of some equipment.

      Net cash used in financing activities in 2003 was $111,391 as compared
with $94,135 used in 2002. In 2003, we paid $390,000 related to notes payable
from a product acquisition in 2002 of Easy Uninstall, Internet Cleanup Windows
and ZipMagic, and we made $63,551 of payments on capital leases. Per a
promissory note from Linsang International LP, we received $342,160 in 2003, to
fund a portion of the operations of Aladdin Enterprise.

      Our capital requirements are dependent on several factors, including
market acceptance of our software and services, timely updating of our 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, 2003, the Company had cash and cash equivalents
totaling $461,580 compared to $583,653 at December 31, 2002.

      We believe that our current cash and cash equivalents along with cash to
be generated by operations in 2004 will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next fiscal
year. If our revenues decrease, if our products are not accepted by the
marketplace, 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. The Company currently does not have
a line of credit so if any of these situations occur, we may need to reduce
operating expenses or raise additional capital through debt or equity financing.

      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 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

                                       19
<PAGE>

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.



                                       20
<PAGE>


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, and IT
spending. Our operating results have been and continue to be affected by global
economic conditions. If these economic conditions do not continue to improve,
and we experience a weakening in the economic outlook, we may experience
material adverse impacts on our business operating results and financial
condition. Positive market growth as predicted by many market research firms for
2004 can result in positive growth for the Company. The Company is still
concerned with financial pressure on our distribution and retail partners for
software products worldwide, due to a trend of consolidation in the marketplace.
This could result in potential financial risk to us by affecting our ability to
collect our receivables.

      Other risks and uncertainties for the Company include, but are not limited
to:
      o Adverse changes in general economic conditions in any of the countries
      in which we do business, including the U.S., Europe, Japan and other
      geographic areas
      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 Prevalence and functionality of available free compression software may
      erode revenues
      o We might not be able to fund our working capital needs from cash flows
      o Reductions in marketing expenditures that may result in lower demand
      o Corporate reductions in information technology spending
      o Problems or delays associated with the integration of acquisitions
      o Difficulties in transitions to new markets
      o Difficulties in implementing strategic alliances
      o Introduction of products by competitors
      o Weakness in demand for application software
      o Lack of growth in worldwide personal computer sales and downward sales
      pricing pressures
      o Litigation
      o Weakness in demand for Aladdin software
      o Integration of features and functions of Aladdin products into Windows
      and Macintosh operating systems
      o Industry transitions to new business and information delivery models
      o Changes to our distribution channel
      o Lack of employment agreements for key personnel
      o We rely on a significant amount of sales to one major customer

      Our products are sold in markets that change rapidly and we must
continually anticipate and adapt our products to emerging computer technologies
and capabilities. We may not be able to successfully adapt to these changing
markets. We 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.

                                       21
<PAGE>

      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 we would not be able to
fund its working capital needs from cash flow.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION AND RETURNS

      Aladdin Systems' revenues from our distribution channels and through our
websites 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 recorded net of estimated
returns and rebates, and 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 our 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. Based on our historical collection experience,
we currently do not maintain an allowance for doubtful accounts.

      Costs related to Aladdin Systems' post-contract customer support ("PCS")
are accrued at the date the related revenues are recognized. PCS obligations
relate to telephone support. As no separate charge is made for the PCS, we do
not ascribe any value to the PCS or defer any portion of revenue for it. If PCS
services become a more significant portion of our costs, we may be required to
assign a portion of our revenues to PCS and recognize those revenues over the
period of the PCS services. Capitalized Software

      Our capitalized software costs include the acquisition of software rights
as well as costs incurred once the point of technological feasibility is
reached, primarily for external contracting fees paid to developers. 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.


                                       22
<PAGE>

Item 7: Financial Statements

Index to Item 7: Financial                                   Page
Statements
Report of Independent Certified Public Accountants           19
Consolidated Balance Sheet                                   20
Consolidated Statements of Operations                        21
Consolidated Statement of Stockholders' Equity               22
Consolidated Statements of Cash Flows                        23
Notes to Consolidated Financial Statements                   24



                                       23
<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, 2003, 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, 2003, 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.

Grant Thornton LLP
San Francisco, California
February 27, 2004




                                       24
<PAGE>


                 Aladdin Systems Holdings, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2003


                         ASSETS

Current assets:
Cash                                              $461,580
Accounts receivable, net of allowance of         1,032,187
$181,648
Inventories                                        125,816
Prepaid expenses and other current assets          228,248
                                               ------------
           Total current assets                  1,847,831

Capitalized software, net                        1,453,352
Property and equipment, net                        292,957
                                               ------------

Total assets                                    $3,594,140
                                               ============

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt              $336,204
Related party notes                                452,222
Accounts payable                                   964,685
Accrued expenses and other liabilities             511,557
                                               ------------
          Total current liabilities              2,264,668

Long-term debt                                       7,500
                                               ------------

Total liabilities                                2,272,168

Commitments and contingencies (Note 8)

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; 12,230,272 issued and            12,230
outstanding
Paid-in capital                                  2,153,481
Accumulated deficit                              (843,739)
                                               ------------
           Total stockholders' equity            1,321,972
                                               ------------

Total liabilities and stockholders' equity      $3,594,140
                                               ============


          See accompanying notes to consolidated financial statements.



                                       25
<PAGE>


                 Aladdin Systems Holdings, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                   Year ended December 31,
                                                        2003         2002
                                                        ----         ----

Sales                                             $8,535,515   $7,457,245
Cost of sales                                      1,107,575      745,519
                                               ---------------------------
Gross profit                                       7,427,940    6,711,726

Operating expenses:
     Marketing, sales and support                  4,077,218    3,139,337
     Research and development                      2,437,876    1,916,653
     General and administrative                    1,740,986    1,037,569
                                               ---------------------------
          Total operating expenses                 8,256,080    6,093,559

Income (loss) from operations                      (828,140)      618,167

Other income (expense):
      Interest expense                              (18,366)     (25,442)
      Other                                         (31,430)        2,216
                                               ---------------------------

Income (loss) before income taxes                  (877,936)      594,941

Income tax expense (benefit)                           3,200     (23,534)
                                               ---------------------------

Net income (loss)                                 ($881,136)     $618,475
                                               ===========================

Earnings (loss) per share - basic and diluted        ($0.07)        $0.06

Shares used in computing earnings (loss) per
share - basic and diluted                         12,230,272   10,293,519



          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>


                 Aladdin Systems Holdings, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY



                                                         Retained
                         Common Stock        Paid -in    Earnings/
                       Shares    Amount      Capital     (Deficit)       Total
                       ------    ------      -------     ---------       -----

Balance at January    9,792,635    $9,793   $1,581,751  ($581,078)  $1,010,466
1, 2002

Expense on issuance
of stock options to
third parties                 -         -       18,000            -     18,000
Issuance of common
stock                 2,437,637     2,437      545,090            -    547,527
Net income                    -         -            -      618,475    618,475
                     ----------------------------------------------------------

Balance at December
31, 2002             12,230,272    12,230    2,144,841       37,397  2,194,468

Expense on issuance
of stock options to
third parties                 -         -        8,640            -      8,640
Net loss                      -         -            -    (881,136)  (881,136)
                     ----------------------------------------------------------

Balance at December
31, 2003             12,230,272   $12,230   $2,153,481   ($843,739) $1,321,972
                     ==========================================================



         See accompanying notes to consolidated financial statements.


                                       28
<PAGE>


                  Aladdin Systems Holdings, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Year ended December 31,

                                                                        2003               2002

Cash flows from operating activities:
<S>                                                               <C>                  <C>
   Net income (loss)                                              ($881,136)           $618,475
   Adjustments to reconcile net income (loss) to net
        cash provided by operating activities:
      Depreciation and amortization                                  530,910            342,303
      Compensation expense on stock options granted
           to third parties                                            8,640             18,000
      Loss on disposal of property and equipment                      61,216              3,633
      Changes in operating assets and liabilities:
          Accounts receivable                                       (59,276)           (56,613)
           Inventories                                              (37,015)           (31,356)
           Prepaid expenses and other current assets                  85,676           (91,547)
            Income tax receivable                                          -            195,499
           Accounts payable                                          356,383           (79,884)
           Accrued expenses and other liabilities                    189,174             71,728
                                                          ------------------- ------------------
Cash provided by operating activities                                257,572            990,237

Cash flows from investing activities:
     Acquisition of property and equipment                         (109,590)           (32,207)
     Proceeds from sales of property and equipment                   162,000                350
     Software development costs                                    (270,000)          (135,000)
     Acquisition of software rights                                 (50,664)          (242,566)
                                                          ------------------- ------------------
Cash used in investing activities                                  (268,254)          (409,423)

Cash flows from financing activities:
     Net payment on line of credit                                         -               (19)
     Repayment of long-term debt                                   (453,551)           (94,116)
     Related party note proceeds                                     342,160                  -
                                                          ------------------- ------------------
 Cash used in financing activities                                 (111,391)           (94,135)

Net (decrease) increase in cash                                    (122,073)            486,680

Cash at beginning of period                                          583,653             96,973
                                                          ------------------- ------------------
Cash at end of period                                               $461,580           $583,653
                                                          =================== ==================

Cash paid during the period for:
   Interest                                                          $18,365            $25,442
                                                          =================== ==================

Noncash Transactions:
</TABLE>


                                       29
<PAGE>

During 2002, the Company acquired $233,257 of equipment and $543,413 of
capitalized software by issuing 2,437,637 shares of common stock and assuming
$206,425 of accounts payable.

          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>

               Aladdin Systems Holdings, Inc. and Subsidiaries

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2003


NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Aladdin Systems Holding, Inc. is a technology holding company that operates
through its two wholly-owned subsidiaries, Aladdin Systems, Inc. and Aladdin
Enterprise Solutions, Inc.

Aladdin Systems, Inc.

      Aladdin Systems develops, publishes, and distributes computer software for
the Macintosh, Windows, Solaris, and Linux software markets. 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.

Aladdin Enterprise Solutions, Inc.

      Aladdin Enterprise develops software designed to reduce large
organizations' cost of managing and maintaining networks. Aladdin Enterprise is
focused on selling to Fortune 1000 companies, government, and educational
institutions worldwide.

Principles of Consolidation

      The consolidated financial statements include the accounts of Aladdin
Systems Holdings, Inc. and its wholly owned subsidiaries, Aladdin Systems,
Inc. and Aladdin Enterprise Solutions, Inc. (collectively, the "Company") 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     The Company's websites
            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


                                       31
<PAGE>

that channel and is likely to be returned. Based on estimated release dates for
the next versions, the Company monitors 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
delivery of the product, when no significant obligations remain and
collectability is probable. Revenues from internet sales are recognized when the
software is downloaded or shipped to the customer. Revenues from third party
products make up a portion of internet sales and the Company recognizes as
revenue the net fee the Company collects for facilitating the sale. Licensing
fees are recognized upon delivery of the software or when the customer has
committed to renew their annual fee, as the Company is not obligated to provide
any other deliverables in connection with these licenses. Maintenance revenues
are recognized when the customer has committed to pay for the software
maintenance, as the Company is not obligated to provide any other deliverables
in connection with these agreements.

Accounts receivable

      The majority of the Aladdin Systems' accounts receivable are due from
domestic and international distributors and from Digital River, the Company's
back end Website partner. Credit is extended based on evaluation of the
customers' financial condition and collateral is not required. The Company
maintains allowances for estimated product returns resulting from new version
releases. Management regularly evaluates the allowance for returns account.
Based on historical write-off experience, the Company does not currently
maintain an allowance for doubtful accounts. Therefore, the allowance listed on
the balance sheet is only for expected returns of software. If the financial
condition of customers were to deteriorate, resulting in an impairment of their
ability to make payments, an additional allowance for doubtful accounts would be
required.

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, 2003 were $3,898,286 less accumulated amortization of
$2,444,934.

      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 by
reviewing, amongst other things, projected cash flows, new products, changes in
the market place, and changing customer needs. The Company 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 was $460,718 and $212,367 in fiscal years 2003 and 2002,
respectively.

                                       32
<PAGE>

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.

Segment Reporting

      The Company's business is conducted in two operating segments based on
each of the subsidiaries, Aladdin Systems and Aladdin Enterprise.

      The Company's chief operating decision maker is the Chief Executive
Officer who reviews one set of financial data that is broken down into the
Company's two segments, for purposes of making operating decisions and assessing
performance. The Company evaluates performance based on income or loss from
operations before income taxes. The Company does allocate assets to its
individual operating segments.

      The accounting policies of Aladdin Systems and Aladdin Enterprise are the
same as those described in the summary of significant accounting policies,
except for revenue recognition in Aladdin Enterprise. Revenue of software
licenses and services for Aladdin Enterprise Solutions is recognized when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred, there is a reasonable assurance of
collection on the resulting receivable and vendor specific objective evidence of
fair value exists to allocate the total fee among delivered and undelivered
elements in the arrangement.

      The following table details segment information for the last two years:

                                  Aladdin         Aladdin
Fiscal year 2003                   Systems      Enterprise          Total
----------------                   -------      ----------          -----

Sales                           $8,425,915        $109,600     $8,535,515
Income (loss) from                 349,000     (1,177,140)      (828,140)
operations
Depreciation and                   364,375         165,737        530,112
amortization
Segment assets                   2,779,530         814,610      3,594,140

Fiscal year 2002:
Sales                            7,457,245               -      7,457,245
Income (loss) from                 872,002       (253,835)        618,167
operations
Depreciation and                   280,821          61,482        342,303
amortization
Segment assets                  $3,075,857        $953,614     $4,029,471

Inventories

                                       33
<PAGE>

      Aladdin Systems' 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.

Property and Equipment

      The Company's 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

      The Company's research and development costs are charged to operations
when incurred.




                                       34
<PAGE>

Advertising

      Aladdin Systems Holdings expenses advertising costs as they are incurred.
Advertising and related promotion expenses for fiscal years 2003 and 2002 were
$783,254 and $563,890 respectively.

Income Taxes

      Income taxes are computed using the asset and liability method. 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 awards to employees using the
intrinsic value method described in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in the
accompanying consolidated financial statements for stock-based awards to
employees when the exercise price of the award is equal to or greater than the
quoted market price of the stock on the date of the grant.

      SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" require disclosures as if the Company had
applied the fair value method to employee awards rather than the intrinsic value
method. The fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's fair value calculations for awards from stock
option plans were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected term, ten years from the date
of grants in 2003 and 2002; stock price volatility, 72% in 2003 and 112% in
2002; risk free interest rate, 4.02% in 2003, and 4.0% in 2002; and no dividends
during the expected term.

      If the computed fair values of the stock-based awards had been amortized
to expense over the vesting period of the awards, net income (loss) and net
income (loss) per share, basic and diluted, would have been as follows:



                                       35
<PAGE>

                                             Year Ended December 31,
                                                 2003         2002
                                                 ----         ----

Net income (loss), as reported                ($881,136)     $618,475
Stock based compensation, net of taxes,
     determined under the intrinsic value              -            -
method
Stock-based compensation, net of taxes,
     determined under the fair value method      264,004      349,575
                                            --------------------------
Pro forma net income (loss)                 ($1,145,140)     $268,900

Basic and diluted net earnings (loss) per
share
   As reported                                   ($0.07)        $0.06
   Pro forma                                     ($0.09)        $0.03

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 the incremental common shares issuable upon
conversion of convertible debt (using the if-converted method) and shares
issuable upon the exercise of stock options (using the treasury stock method). A
total of 2,832,031 shares issuable upon the exercise of outstanding stock
options as of December 31, 2003 and 2,884,222 shares issuable upon the exercise
of outstanding stock options as of December 31, 2002 have been excluded from the
diluted earnings per share calculation in each year, respectively, as the
inclusion would be anti-dilutive. In addition, shares issuable upon the
conversion of convertible debt totaling 110,062 shares as of December 31, 2003
and as of December 31, 2002 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.

Recent Accounting Pronouncements

      In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of this statement did not have a material impact on its results of
operations or financial position.

                                       36
<PAGE>

      In March 2003, the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any significant impact on the Company's financial
statements.

      In April 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The adoption of this statement did not have a material impact on
its results of operations or financial position.

      In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
statement requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as liabilities.
This statement is effective for all financial instruments entered into or
modified after May 31, 2003, except for mandatorily redeemable financial
instruments, which is subject to provisions for the first fiscal period
beginning after December 15, 2003. The adoption of this statement did not have a
material impact on its results or financial position.

NOTE 2 - PROPERTY AND EQUIPMENT

  Property and equipment at December 31, 2003 consist of:

                            Useful lives(years)
                            -------------------
Computer equipment                    5            $1,113,761
Office equipment                      5               183,336
Furniture and fixtures                5               306,250
Displays                             5-7              126,166
                                                 -------------
                                                    1,729,513
Less accumulated                                    1,436,556
depreciation
                                                 -------------
                                                     $292,957
                                                 =============

NOTE 3 - LONG-TERM DEBT AND RELATED PARTY NOTES

  Long-term debt at December 31, 2003 consists of:


Capital lease obligations                  $13,704
Software related payable                   330,000
                                     --------------
                                     --------------
                                           343,704
Less current portion                       336,204
                                     --------------
                                            $7,500
                                     ==============


                                       37
<PAGE>

      Software related payable is the amount to be paid to Vcommunications, Inc.
for the acquisition of Easy Uninstall, Internet Cleanup and ZipMagic products.
The total purchase price was $800,000 of which $155,000 was paid in 2002 and
$315,000 in 2003. The balance of $330,000 is due in quarterly installments to be
completed by October 2004. Per the agreement, Vcommunications has been assigned
a continued interest in all of the Company's rights and title to the products to
secure the Company's obligation to pay the full amount due.

Fixed installments due on debt principal are as follows:

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

                     2004    $336,204
                     2005       7,500
                          ------------
                             $343,704
                          ============


                                       38
<PAGE>

Notes Payable to Related Parties

      Notes payable to related parties include three notes totaling $110,062 and
one note in the amount of $342,160. The three notes for $110,062 are payable on
demand. Interest for these notes is compounded daily and is payable monthly at
an annual rate of 8.92% for two notes and 7% for one note. The related parties
have the option to convert these notes 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, 2003, these three notes are convertible at $1.00 per share.

      Interest for the note in the amount of $342,160 is compounded daily at an
annual rate equal to 3-month LIBOR plus 1.00% and is payable upon full repayment
of the note.

NOTE 4 - INCOME TAXES

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

                                                2003        2002
                                                ----        ----
Current
   Federal                                        $0   ($26,734)
   State                                       3,200       3,200
                                      ---------------------------
Total current                                 $3,200   ($23,534)

Deferred
    Federal                                        -           -
    State                                          -           -
                                      ---------------------------
Total deferred                                     -           -
                                      ---------------------------

                                              $3,200   ($23,534)
                                      ===========================

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

                                                2003        2002
                                                ----        ----

Net operating loss carry forwards           $533,609    $352,643
Tax credit carry forwards                    940,536     719,642
Depreciation and amortization              (216,934)   (136,247)
Other                                        139,418     114,966
                                      ---------------------------
Net deferred tax asset                     1,396,629   1,051,004
Less valuation allowance                 (1,396,629) (1,051,004)
                                      ---------------------------
                                                $  -        $  -
                                      ===========================

      At the end of 2003, the Company had federal and state net operating loss
carry forwards of approximately $1,076,000 and $1,898,000 available to offset
future federal and state taxable income, respectively. The available net
operating loss carry forwards can be used to reduce future federal and state
taxable income through 2023 and 2013, respectively.

                                       39
<PAGE>

      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. For the year
ended December 31, 2003, the valuation allowance increased by $345,625.

      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:


                                                            2003      2002
                                                            ----      ----
Statutory federal income tax (benefit) rate                (34%)       34%
Increase (decrease) resulting from:
Expenses not deductible for taxes                           0.7%    (1.5%)
State income taxes, net of federal tax benefit            (5.8%)      5.8%
Increase in valuation allowance                            39.5%   (42.3%)
                                                   ------------------------
                                                   ------------------------
Effective tax (benefit) rate                                0.4%    (4.0%)
                                                   ========================

NOTE 5 - MAJOR CUSTOMERS

      Aladdin Systems has one major customer that accounted for $2,170,803 or
26% and $1,736,101 or 23% of revenues in 2003 and 2002, respectively.

NOTE 6 - 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 167,969 remain available for granting at December 31, 2003.
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.

Stock option activity is summarized as follows:


                                       40
<PAGE>

                                                         Weighted Average
                                                 Shares   Exercise Price
                                                 ------   --------------

Balance at January 1, 2002                    2,473,528              $1.48
Granted                                         868,444                .73
Cancelled                                     (457,750)               1.12
                                           --------------------------------
Balance at December 31, 2002                  2,884,222              $1.31
Granted                                         274,260                .29
Cancelled                                     (326,451)               1.22
                                           --------------------------------
Balance at December 31, 2003                  2,832,031              $1.22
                                           ================================



                                       41
<PAGE>


The following table summarizes information about stock options outstanding as of
December 31, 2003:


                             Weighted    Average                 Weighted
  Range of                   Average    Remaining                 Average
  Exercise        Number     Exercise  Contractual    Number     Exercise
    Price      Outstanding    Price    Term (Years) Exercisable    Price
----------------------------------------------------------------------------

$0.20 - $0.63        857,302    $0.43          7.59     521,185       $0.46
$0.65 - $1.07        956,532    $0.90          4.26     875,282       $0.93
$1.15 - $1.85        616,468    $1.38          5.27     591,267       $1.37
$3.00 - $4.87        401,729    $3.44          2.80     393,911       $3.44
              -------------------------             ------------------------
                   2,832,031    $1.22                 2,381,645       $1.35
              =========================             ========================

The weighted average fair value of options granted to employees was $0.19 and
$0.13 for 2003 and 2002, respectively.

NOTE 7 - RETIREMENT PLAN

      The Company has established a 401(k) retirement plan for all employees.
Employees may elect to contribute a portion 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, 2003 and 2002.

NOTE 8 - 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 $282,624 and $277,735
in 2003 and 2002, 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, 2003 was $440,014.

      Future minimum commitments under capital leases and non-cancelable
operating leases as of December 31, 2003 are as follows:

                                               Capital            Operating
Year ending December 31,                        Leases              Leases
                                                ------              ------
                 2004                           $13,704           $289,363
                 2005                                 -            293,124
                 2006                                 -            296,935
                 2007                                 -            300,795
                 2008                                 -            304,705
              Thereafter                              -            609,411
                                       ------------------------------------
Total minimum lease payment                      13,704          2,094,333
Less amount representing interest                   980                  -
                                       ------------------------------------
                                                $12,724         $2,094,333
                                       ====================================

                                       42
<PAGE>

NOTE 9 - ACQUISITION OF EREVU, INCORPORATED

      On October 18, 2002, the Company acquired Erevu, Incorporated ("Erevu"), a
Delaware corporation via a merger of Erevu with a newly formed, wholly-owned
subsidiary of the Company. Upon closing the transaction, the Company changed the
name of Erevu to Aladdin Enterprise Solutions, Inc.

      The acquisition was not a business combination since Erevu was a
development stage company at the time of the acquisition. The assets acquired
and liabilities assumed in the transaction are recorded at their fair value and
included cash, accounts payable, fixed assets and capitalized software. At the
time of the acquisition, Erevu had a working model of its software being tested
by a potential customer and therefore technological feasibility had been
established.

      The purchase price for Erevu was allocated as follows:

      Current assets                                  $9,247
      Current liabilities                          (206,424)
      Fixed assets                                   233,257
      Capitalized software                           543,413
                                                 ------------
                                                 ------------

      Net value of acquired assets and              $579,593
      liabilities

      Consideration calculated as follows:
      Purchase consideration (1)                    $460,000
      Direct expenses (2)                             32,066
      Investment banking  (3)                         87,527
                                                 ------------
                                                 ------------
      Consideration                                 $579,593
                                                 ------------

      (1)   2,000,000 shares issued to the former Erevu shareholders valued at
            $0.23 per share.
      (2)   Legal, accounting and other costs incurred in completing the
            acquisition.
      (3)   437,637 shares at $0.20 issued to Baytree Capital as a payment for
            services rendered in connection with the acquisition.

      The consideration for the acquisition was paid in the form of newly issued
shares of the Company's common stock with the actual amount of the consideration
to be based upon the sales of Erevu's products over a set period following the
closing. At the closing, the Company issued 2,000,000 shares of newly issued
shares of the Company's common stock as a non-refundable advance against the
total consideration to be paid. The consideration to be paid is to be calculated
as (x) an amount equal to forty percent (40%) of Erevu's total revenue during
the 12 month period which commences upon the earlier of (i) the first day in
which Erevu revenue is recognized or (ii) that date which is the fifth month


                                       43
<PAGE>

anniversary of the Closing (the "First Period"), to be paid in newly issued
shares of the Company's common stock valued at twenty-five cents ($0.25) per
share, plus (y) an amount equal to sixty percent (60%) of Erevu's total revenue
during the 16 month period following the First Period to be paid in newly issued
shares of the Company's common stock valued at the average daily closing price
of the Company's common stock for the twenty (20) trading days immediately prior
to the end of the First Period. The Company will treat the value of any such
payments in excess of the value of the 2 million shares advanced as royalty
expense since the occurrence of these payments is directly attributable to
future sales.

      The merger agreement provides that in the event the Company is sold or
merged with another entity, the Company may terminate future contingent payments
in exchange for a one-time cash payment to the former Erevu stockholders. The
payment is based on the relative fair value of the Erevu business in relation to
the Company's other businesses to the total purchase consideration being
received.

NOTE 10 - RELATED PARTY TRANSACTIONS

      Paul Goodman, a director of the Company, has provided legal services to
the Company since its inception and is currently the Company's corporate
attorney. The fees paid to Mr. Goodman were $47,000 and $65,000 for 2003 and
2002, respectively.

      In 2003, Brad Peppard, a director of the Company, received options to
purchase up to 36,000 shares of Common Stock with an exercise price of $0.24, in
exchange for marketing work. These options were immediately vested.

NOTE 11 - LITIGATION

      In December 2003, Aladdin Knowledge Systems, Inc. ("AKS"), filed a suit
against the Company in the Federal District Court for the Northern District of
Illinois, alleging, among other things, that the Company's use of the "Aladdin"
trademark infringed the rights of AKS and they are seeking a preliminary
injunction to prevent the Company from using the "Aladdin" name in connection
with our SpamCatcher product. Both the Company and AKS have been aware of each
other's use of the "Aladdin" trademark since at least 1993. The complaint seeks
only equitable relief and does not seek monetary damages from the Company. The
Company is vigorously defending this action and has filed an answer denying all
of AKS's claims. To date, limited discovery has been conducted and there is
currently a hearing scheduled in April 2004 to hear AKS's motion for a
preliminary injunction Legal expenses relating to this litigation are expensed
as incurred.

NOTE 12 - SUBSEQUENT EVENTS

      On January 21, 2004, the Company and International Microcomputer Software,
Inc. ("IMSI") entered into Stock Purchase Agreement for the Company's
wholly-owned Aladdin Systems, Inc. subsidiary to International Microcomputer
Software, Inc. The consideration for the transaction is $8,000,000 to be paid in
a combination of cash, promissory notes and newly issued shares of IMSI common
stock plus an additional amount of up to $2,000,000 in cash to be earned based


                                       44
<PAGE>

upon the revenues of Aladdin Systems during the three year period following the
closing of the transaction.

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

None

ITEM 8A. CONTROLS AND PROCEDURES

   Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our principal executive officer and principal
accounting officer concluded that the Company's disclosure controls and
procedures are effective.

   There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the above paragraph.

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
----                  ---  --------

Kwok Li               46   Director
Jonathan Kahn         46   Chairman, Chief Executive Officer, President,
                             Treasurer and Director
Darryl Lovato         37   Chief Technology Officer and Director
Alexandra Gonzalez    37   Chief Financial Officer and Secretary
Brad Peppard (1)(2)   48   Director
Paul Goodman (1)(2)   44   Director
David Schargel (1)(2) 39   Director

(1) Member of the Compensation Committee
(2) Member of the Audit Committee

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


                                       45
<PAGE>

      JONATHAN KAHN is currently Chairman, President and Chief Executive Officer
of Aladdin Systems Holdings, and was Chairman of the Company from 1998 to
November 2002. 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 also serves on the board of directors of NextDay Network,
Inc. a privately held corporation that sells computers and computer equipment.
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 Systems 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 Systems' 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.

      ALEXANDRA GONZALEZ became Secretary of Aladdin Systems Holdings in
February 2002 and has been the Chief Financial Officer of the Company since
2002. Prior to becoming CFO, she served as Vice President of Finance, Controller
and in other financial positions at the Company since 1991. She has over 12
years of financial experience in the software industry. Ms. Gonzalez received a
BA in Mathematical Economics from Colgate University.

      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 Portland Walking Tours, a
leading sightseeing tour company, which he founded in 2001. Mr. Schargel was the
founder of Aportis Technologies Corp., an award-winning Palm and Pocket PC
handheld software company, which sold its product line in 2002. He 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. Prior to co-founding Aladdin, he
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, customer
service, and marketing.

      PAUL GOODMAN has been a partner in the New York City law firm of Cyruli,
Shanks & Zizmor, LLP, and its predecessor firms 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


                                       46
<PAGE>

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.

      KWOK LI is the founder, Chairman and managing partner of Linsang Partners,
LLC, which was founded in 1997. An engineer and entrepreneur, Mr. Li has founded
several high tech companies, including Yurie Systems, which was sold to Lucent
Technologies in 1988, and Splitrock Services, which was sold to McLeod USA in
2000. Mr. Li is a Trustee of John Hopkins University in Baltimore, Maryland and
has been active in other not-for-profit educational, cultural and charitable
organizations. Mr. Li received his BSE in Electrical Engineering from John
Hopkins University

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    Bonus       Underlying options (2)
-----------------    ----     ------    -----       ----------------------

Jonathan Kahn, CEO
and President of
Aladdin Systems      2001    137,866      -              48,407
                     2002    135,000      -              311,997
                     2003    180,000   20,000            10,530
Darryl Lovato, CTO
of Aladdin Systems   2001    137,866      -              48,407
                     2002    136,442      -              236,997
                     2003    150,000    1,000            10,530
Alexandra
Gonzalez, CFO of
Aladdin Systems      2003    125,000    1,000               -
Thomas Saleh, CEO
of Aladdin
Enterprise           2003    225,000      -                 -


(1)   The columns for "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.


                                       47
<PAGE>

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2003

                        Number of    % of Total    Exercise
                        Securities     Options      Price
                        Underlying    Granted to  Per Share
Name            Year    Options (1)   Employees     ($/SH)    Expiration Date
                                         (2)                        (3)
Jonathan Kahn   2003      10,530          4%        $0.28    October 2008
Darryl Lovato   2003      10,530          4%        $0.28    October 2008


      (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 274,260 shares of our common stock in 2003.
      (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, 2003. None of these officers exercised options to
purchase common stock in 2003.



                                       48
<PAGE>


AGGREGATE OPTION EXERCISES AND YEAR END OPTION VALUES (1)

                        Number of Unexercised     Value of Unexercised In-the-
                         Options At year End       Money Options at Year End
                         -------------------       -------------------------

Name            Year  Exercisable Unexercisable   Exercisable  Unexercisable
----            ----  ----------- -------------   -----------  -------------

Jonathan Kahn   2003      332,682        58,252          $0.00         $0.00
Darryl Lovato   2003      282,765        33,169          $0.00         $0.00

(1)   Based on a per share fair market value of our common stock equal to $0.21
      per share, the trading price market value of our common stock on December
      31, 2003.

COMPENSATION OF DIRECTORS

      None

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, 2003.


                                           Amount and Nature of     Percent
Name of Beneficial Owner                  Beneficial Ownership(1)  of Class
------------------------                  -----------------------  --------

EXECUTIVE OFFICERS AND DIRECTORS

Jonathan Kahn (2)                                      2,096,149    17.14%
Darryl Lovato (3)                                      1,964,421    16.06%
David Schargel (4)                                     1,571,789    12.85%
Kwok Li (5)                                            1,207,835     9.88%
Brad Peppard (6)                                         138,400     1.13%
Paul Goodman (7)                                         101,000     0.83%
                                          ---------------------------------
All directors and executive officers
As a group (6 persons)                                 7,079,594    57.89%

OTHER 5% STOCKHOLDERS

Benna Lovato (8)                                       1,726,633    14.12%
Michael Gardner                                          915,000     7.48%
Marco Gonzalez                                           697,812     5.71%
                                          ---------------------------------
                                                       3,339,445    27.30%

All directors, executive officers and 5%
stockholders as a group (8 persons)                   10,419,039    85.19%


                                       49
<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 332,682 shares of Common Stock subject to options that are
exercisable at December 31, 2003 and 9,147 shares of Common Stock subject to
options that are exercisable within 60 days of the date hereof.

      (3) Includes 282,765 shares of Common Stock subject to options that are
exercisable at December 31, 2003 and 5,023 shares of Common Stock subject to
options that are exercisable within 60 days of the date hereof.

      (4) Includes 50,000 shares of Common Stock subject to options that are
exercisable at December 31, 2003.

      (5) Includes 921,167 shares of Common Stock owned by Linsang Partners,
LLC, 143,334 shares of Common Stock owned by Hyla Holdings, LLC, and 143,334
shares of Common Stock owned by Linsang International.

      (6) Includes 138,400 shares of Common Stock subject to options that are
exercisable at December 31, 2003.

      (7) Includes 100,000 shares of Common Stock subject to options that are
exercisable at December 31, 2003.

      (8) Includes 50,000 shares of Common Stock subject to options that are
exercisable at December 31, 2003.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In 2002, Paul Goodman received options to purchase up to 50,000 shares of
Common Stock with an exercise price of $0.36, in exchange for legal work. These
options were immediately vested.

      In 2003, Brad Peppard received options to purchase up to 36,000 shares of
Common Stock with an exercise price of $0.24, in exchange for marketing work.
These options were immediately vested.

ITEM 13: EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K

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


                                       50
<PAGE>

1.    Financial Statements

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

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.*
21.1  Subsidiaries of Registrant
23.1  Consent of Grant Thornton LLP
31.1  Certification of Chief Executive Officer, as required by Rule 13a-14(a) of
      the Securities Exchange Act of 1934
31.2  Certification of Chief Financial Officer, as required by Rule 13a-14(a) of
      the Securities Exchange Act of 1934
32.1  Certification of Chief Executive Officer, as required by Rule 13a-14(b) of
      the Securities Exchange Act of 1934
32.2  Certification of Chief Financial Officer, as required by Rule 13a-14(b) of
      the Securities Exchange Act of 1934

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


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, Chief Executive Officer, President and Director)


                                       51
<PAGE>

By /s/ Alexandra Gonzalez
   ------------------------------
 (Alexandra Gonzalez, Chief Financial 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           Chief Executive Officer,   4/14/04
-------------------------   President and Director
(Jonathan Kahn)

--------------------------------------------------------------------------------

/s/ Darryl Lovato           Chief Technology Officer   4/14/04
-------------------------   and Director
(Darryl Lovato)

--------------------------------------------------------------------------------

/s/ Brad Peppard            Director                   4/14/04
-------------------------
(Brad Peppard)

--------------------------------------------------------------------------------

/s/ David Schargel          Director                   4/14/04
-------------------------
David Schargel

--------------------------------------------------------------------------------

/s/ Paul Goodman            Director                   4/14/04
-------------------------
Paul Goodman

--------------------------------------------------------------------------------

/s/ Kwok Li                 Director                   4/14/04
------------------------
Kwok Li
--------------------------------------------------------------------------------


EXHIBIT INDEX

   Exhibit No    Description of Exhibit
                 -----------------------------------------------

      21.1       Subsidiaries of Registrant
                 -----------------------------------------------

      23.1       Consent of Grant Thornton LLP
                 -----------------------------------------------

      31.1       Certification of Chief Executive Officer, as
                 required by Rule 13a-14(a) of the Securities
                 Exchange Act of 1934
                 -----------------------------------------------

      31.2       Certification of Chief Financial Officer, as
                 required by Rule 13a-14(a) of the Securities
                 Exchange Act of 1934
                 -----------------------------------------------

      32.1       Certification of Chief Executive Officer, as
                 required by Rule 13a-14(b) of the Securities
                 Exchange Act of 1934
                 -----------------------------------------------

      32.2       Certification of Chief Financial Officer, as
                 required by Rule 13a-14(b) of the Securities
                 Exchange Act of 1934