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, 2000.

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

                                   ----------

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

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

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

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

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

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

Common Stock, par value $.001 per share

Indicate by mark (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


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      YES |X|    NO |_|

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

Issuer's revenues for its most recent fiscal year: $10,168,755

Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on March 5, 2001:
$1,320,029

Number of shares outstanding of each of the registrant's classes of common stock
as of December 31, 2000:

Common Stock: 9,792,635

DOCUMENTS INCORPORATED BY REFERENCE:

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

None


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                         ALADDIN SYSTEMS HOLDINGS, INC.
                         2000 FORM 10-KSB ANNUAL REPORT
                                Table of Contents

Trademarks/Definitions

PART I
Item 1.  Business                                                        4
Item 2.  Properties                                                     16
Item 3.  Legal Proceedings                                              16
Item 4.  Submission of Matters to a Vote of Security Holders            17

PART II
Item 5.  Market for the Registrant's Common Equity and Related
         Stockholder Matters                                            17
Item 6.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                            17
Item 7.  Financial Statements                                           22
Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure                            34

PART III
Item 9.  Directors and Executive Officers of the Registrant             39
Item 10. Executive Compensation                                         41
Item 11. Security Ownership of Certain Beneficial Owners and
         Management                                                     44
Item 12. Certain Relationships and Related Transactions                 45

PART IV
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K
         Signatures                                                     46

TRADEMARKS/DEFINITIONS

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


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of this Form 10-KSB, (c) the "Web" refer to the World Wide Web, and (d) the
"site" refers to our Web site ("www.aladdinsys.com").

PART I

Item 1: Business

General

      Aladdin Systems is a leader in utility software for business and personal
computing. Aladdin's business strategy is to satisfy customer needs by
developing and marketing products across multiple operating platforms (currently
those of Microsoft Corporation, Apple Computer, Inc. and Palm Computing, Inc.),
that solve the problems of transmitting, accessing, and organizing their data.

      Aladdin Systems, Inc. was formed in January, 1989 to publish software for
the Macintosh computer. In May 1989, Aladdin entered into a publishing agreement
to publish two software products for the Macintosh computer, StuffIt, a data
compression software product and Shortcut, a desktop productivity application.

      Since 1990, Aladdin Systems has refined, expanded and improved the StuffIt
software and today publishes several different products based upon StuffIt for
both the Windows and Macintosh markets. We also publish several other popular
software applications including Spring Cleaning with iClean, a software
uninstaller package for the Macintosh; Aladdin Flashback, a version control
application for both the Macintosh and Windows markets which saves older
versions of documents as newer ones are created; GoBar, a replacement
application launcher for the Palm OS; DragStrip, a quick launch application for
both the Windows and Macintosh markets; AladdinTuner, a global Internet radio
tuner; and PowerTicker, a stock ticker for the Macintosh which accesses stock
quotes and financial data over the Internet without the need for separate Web
browser software. We sell these products to consumers through distributors and
resellers, as well as directly from our Web site (www.aladdinsys.com).

       In addition to products for the consumer market, we also develop and
market products to other software developers and IT professionals. These
products include StuffIt InstallerMaker, which simplifies the installation and
distribution of software for Macintosh computers; the StuffIt Engine SDK for the
Macintosh and Windows markets which provides developers with the ability to
include compression features in their own products; and ShrinkWrap, a disk image
product which is used by software developers.


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The Company

      Aladdin Systems Holdings, Inc. was formed on March 26, 1997 as Foreplay
Golf & Travel Tours, Inc. The Company changed its name to Aladdin Systems
Holdings, Inc. in October, 1999 after acquiring all the common stock of Aladdin
Systems, Inc., a Delaware corporation. The merger was accounted for as a reverse
acquisition. Aladdin Systems Holdings, Inc. exists primarily as a stock holding
company, and accordingly, the operations described in this document, unless
otherwise specified, are those of the subsidiary, Aladdin Systems, Inc.

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

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

Products

      Our products are divided into two different product groups serving two
different markets: consumers and developers. While many of our products are used
by both groups, most of our developer products are licensed directly rather than
sold through the retail software distribution channel. Our products are divided
between these two market segments as follows:

Consumer Products:

StuffIt Products
----------------
StuffIt Deluxe  (Macintosh)
StuffIt for Windows
DropStuff (Windows and Macintosh)
StuffIt Expander (Windows, Macintosh and Linux)
StuffIt Lite (Macintosh)
DropZip (Windows and Macintosh)

Desktop Utilities
-----------------
Spring Cleaning (Macintosh)
Aladdin FlashBack (Windows and Macintosh)
ShrinkWrap (Macintosh)
DragStrip (Windows and Macintosh)
Transporter (Macintosh)


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Internet Products
-----------------
PowerTicker (Macintosh)
Aladdin Tuner (Windows and Macintosh)
IntelliNews (Macintosh)
iClean (Macintosh)

Palm Products
-------------
HotTme (Palm)
GoBar (Palm)

Developer Products:

StuffIt InstallerMaker (Macintosh)
StuffIt Engine (Windows and Macintosh)

StuffIt Compression Product Line

      Our flagship product line is based upon Aladdin's data compression
technology. This product line is sold under the StuffIt brand. The product line
consists of StuffIt Deluxe, StuffIt for Windows, DropStuff, DropZip, Expander,
StuffIt Lite and the StuffIt Engine SDK. StuffIt software is used to compress
and expand data. The software allows users to compress files, directories, hard
drives or other media for faster transmission over computer networks, including
the Internet, and for archival purposes. Because files encoded in a compressed
format are smaller than ordinary files, compressed files can be transmitted
faster than non-compressed files over computer networks including the Internet
regardless of the method of transmission, that is, whether by dial-up modem,
DSL, cable modem, etc.

      Aladdin Systems commenced publishing StuffIt in 1989 when it acquired the
publishing rights to the product in exchange for royalty payments. In 1995, we
purchased all rights to StuffIt from the developer. Since we first published
StuffIt in 1989, Aladdin has continually improved and updated the product.
StuffIt was originally designed to run only on Macintosh computers. In 1995,
Aladdin started to publish versions of some of our StuffIt products for
Microsoft Windows-based computers and in September 2000 ,we released StuffIt for
Windows. The Windows versions of our StuffIt products all operate on the Windows
95, Windows 98, Windows NT, Windows 2000 and Windows ME operating systems.

      A more detailed description of our StuffIt product line is as follows:

      StuffIt has been adopted as a worldwide compression standard for the
Macintosh computer by Apple Computer and America Online. In 1990, America Online
adopted StuffIt as their standard for compressing Macintosh files utilizing
StuffIt to automatically compress files for transmission. StuffIt products have
been shipped to over 13 million users worldwide over the last two years,
including 9 million copies


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distributed by Apple Computer shipped pre-loaded on Apple Computer's products.
While originally Apple Computer paid us for the right to distribute StuffIt
products, currently, Aladdin receives no compensation therefor.

      StuffIt Deluxe (Macintosh) - StuffIt Deluxe is a full featured product
offering a complete compression and expansion solution to users. StuffIt Deluxe
is sold commercially through Aladdin's physical and electronic worldwide
distribution network of distributors, resellers, mail order houses, Internet
retailers, and through our Web site (www.aladdinsys.com). StuffIt Deluxe was
first released for commercial sale in 1990. The software is localized into
kanji, which is distributed by our Japanese distributor and we also have
localized versions in Spanish, German, and French.

      StuffIt for Windows - This release in September 2000 marks the first full
featured compression solution for Aladdin in the Windows market. StuffIt for
Windows is the complete compression and expansion solution for Windows users.
StuffIt for Windows includes the most comprehensive set of compression,
expansion, and decoding formats available for the Windows market.

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

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

      DropZip (Windows and Macintosh) -DropZip allows users to quickly and
easily compress a file into the industry-standard "Zip" format by simply moving
the file's icon


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directly over the DropZip icon on the user's desktop. DropZip is distributed as
shareware.

      StuffIt Lite (Macintosh) - StuffIt Lite is a shareware compression product
designed to provide basic compression and expansion capabilities. The software
is only distributed electronically and is available for download through
multiple sources. StuffIt Lite is distributed as shareware and is primarily
distributed via our Web site (www.aladdinsys.com).

Desktop Products

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

      Aladdin FlashBack (Windows and Macintosh) - Aladdin FlashBack is a version
control product designed to allow users to restore versions of documents
regardless of the application being used, and protect documents or files from
data loss and accidental overwriting. Aladdin Flashback has no competition in
the Macintosh market and several competitors in the Windows market, including
Lost & Found from PowerQuest. None of the competitive products are dominant in
the market for such products. Aladdin Flashback was released in 1997 and is sold
commercially through Aladdin's physical and electronic worldwide distribution
network of distributors, resellers, mail order houses, Internet retailers and
through our Web site (www.aladdinsys.com). Localized kanji, German and French
language versions of the product are available.

      ShrinkWrap (Macintosh) - ShrinkWrap is used by developers and consumers to
create disk image files, allowing the users to create exact copies of their hard
disk, floppies, or CD ROMs. Aladdin acquired ShrinkWrap from the orginal author
and released Aladdin's first version in 1997. ShrinkWrap's only competition is
Disk Copy from Apple Computer. ShrinkWrap is distributed directly from Aladdin
via our Web site and by other Interent based retailers in a time-locked
"trialware" format. ShrinkWrap is localized into kanji and distributed by our
Japanese distributor.

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


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      Transporter (Macintosh) - Transporter is designed to allow customers to
create custom drop box applications that can automate virtually any file
transfer task. The product was launched in January 2001 at MacWorld San
Francisco. Transporter was developed by Aladdin for the Enterprise, Government,
and Educational marketplaces.

Internet Products

      PowerTicker (Macintosh) - PowerTicker, formerly called MacTicker, is a
browser-less Internet client software which displays a moving stock ticker
across a user's computer screen. The stock quote information is continually fed
to the software from a Web site. Currently, we charge for the PowerTicker
software and provide 15 minute delayed stock quotes free of charge. While
several Web sites currently offer stock market tickers, we believe that
PowerTicker will appeal to a portion of the market which would prefer not to
have to access a Web site to receive stock quotes. The company believes that a
market for products like PowerTicker exists, but it competes with the many
financial Web sites, in some cases, that are free of charge for the same
functionality. The company is currently exploring alternative revenue models for
PowerTicker ranging from partnerships to OEM arrangements.

      AladdinTuner (Windows and Macintosh) - AladdinTuner, formerly called
MacTuner, is a stand-alone software product which acts as a search engine and
player for Web sites which stream radio and video broadcasts over the Internet.
AladdinTuner requires an active Internet connection to function, but does not
utilize a Web browser to work. AladdinTuner contains an updated database of over
3,400 Internet radio, TV, sites from all over the planet, which can be listened
to or watched using the software. While several companies offer web sites or
software products that compete with Aladdin Tuner, such as the RealMediaPlayer
from Real Networks Inc., the Company believes that a market exists for Aladdin
Tuner based upon the added functionality provided by the product. The Macintosh
version AladdinTuner is sold primarily through Aladdin's Web site and a
"trialware" version is also available. In December 2000, Aladdin released the
1.6 Windows version of the product. The Windows version is distributed using an
Adware model. In exchange for free use of the software, users are shown
advertisments. If the user decides to not view the advertising they can pay for
the software to turn off this function off. Aladdin Tuner for Windows was one of
CNET's top-5 best downloads of 2000.

      IntelliNews (Macintosh) - IntelliNews is a stand-alone software product
which displays headlines from all the premier Internet news sites and delivers
them directly to your desktop, eliminating the need to use a Web browser to move
from site to site. The IntelliNews software displays up-to-the-minute sport
scores, detailed weather reports from cities across the United States, detailed
stock quotes, and company profiles. While several Web sites and free software
products such as the AOL Instant Messenger provide similar functions, we believe
that a market exists for the software based upon the added functionality
provided by IntelliNews. IntelliNews is primarily sold through Aladdin's Web
site and a "trialware" version is available.


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

Palm Products

      GoBar (Palm) - GoBar was acquired from Digivello in April 2000 and is our
second product for the Palm OS. GoBar is an application launcher for the Palm
OS. It is designed to allow users to organize Palm OS device similar to their
Desktop computer. GoBar has two major competitors Lunch'm and Silverlining.

      HotTime (Palm) - Acquired in December 1999 from Avstor, HotTime was our
first product for the Palm OS. HotTime automatically adjusts the date and time
on the Palm device to that of your desktop computer when you use HotSync.

      The primary method of distribution for Aladdin's Palm products is
Aladdin's Web site and Internet retailers like PalmGear and Handango.

Developer Products

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

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

Royalty Payments

      Pursuant to our publishing agreements with third party developers, we have
made total royalty payments in 2000 and 1999 totaling $60,430 and $241,291,
respectively. The decrease in royalty payments in 2000 was due to the buyout of
all rights to Spring Cleaning which terminated the previous royalty agreement.

Resale of Third Party Products

      In addition to publishing our own products, we utilize our resources and
customer list to act as a reseller of software products published by other
software companies. Historically, we resold limited numbers of third-party
products through "bundling" offers with our products which were distributed via
direct mail efforts. In the last two years, we have been focusing on offering
third party products for sale via


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our Web site, primarily through a download model, where the customer receives
the product downloaded directly to their computer after credit card information
is entered and verified.

      Our resale agreements run for periods from 90 days to one year and all are
non-exclusive. We receive a percentage of the net sales ranging from 3% to 70%.

      Third-party product sales decreased to $661,383 for the year ended
December 31, 2000 from $818,194 for the year ended December 31, 1999.

Product Revenue

      The following table shows our net revenue for the last two years.

                                          2000          1999
                                          ----          ----

Consumer                             $  8,733,887  $  8,619,129
Developer                                 773,485       759,776
Third Party                               661,383       818,194
                                     --------------------------

Total revenues                       $ 10,168,755  $ 10,197,099

Product Support

      We believe that technical support is an important part of the Company's
overall performance and success. On December 31, 2000, we employed 5 full-time
support personnel. These employees provide technical support services to our
customers by electronic mail, 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 60 days
of customers' purchases of products.

Distribution and Marketing

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

      Of the Company's total net revenues for 2000, approximately 26% was as a
result of sales through independent, domestic, nonexclusive distributors. Sales
to one such distributor, Ingram Micro, accounted for nearly 21% of total net
revenues. Domestic


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distributors purchase product at a discount of approximately 20% to 23% from
list prices.

      Of the Company's total net revenues for 2000, approximately 13% was as a
result of sales made through independent, international distributors. Several of
these distributors are limited by contract to distribution within a specified
geographic area. We currently provide translations of certain products in
Japanese, German, Dutch, French and Spanish languages. Sales to two of such
distributors, Act2 (Japan), and Softline (United Kingdom), accounted for
approximately 2%, and 1%, of total net revenues in 2000, respectively.
International distributors generally require somewhat larger discounts in return
for various advertising, customer service, and customer registration duties
performed by them in connection with the software. This discount normally ranges
from 40% to 60% off of the suggested retail price of the products.

      The Company gives its distributors industry-standard rights of return for
stock balancing and for defective products, and replacement rights when products
are upgraded to new versions. A reserve for returns has been recorded and was
$229,094 and $181,659 at December 31, 2000 and 1999, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on our financial results because of the Company's low cost to replace
such returns. Returns from end users have not historically been significant.

      Of the Company's total net revenues for 2000, approximately 8% was a
result of sales of our developer products, compared with 7% in the 1999.

Product Development

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

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

      During the years 2000 and 1999, we spent approximately $2,376,550 and
$1,658,083, respectively, on research and development and enhancement
activities, representing approximately 23%, and 16%, respectively, of net
revenues in each of these periods.

      Our future financial performance will depend in part on the successful
development, completion, and introduction of such new software products, and on
such enhanced versions of existing products, and customer acceptance of those
products. In the future, 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.


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Competition

      The personal computer software market is highly competitive and has been
subject to rapid change, which is expected to continue. Different competitors
exists 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 will face strong competition from the
many Windows-based compression products that use the "Zip" compression standard.
There are several major and numerous minor companies currently publishing "Zip"
products which will directly compete with our StuffIt products in the Windows
market.

      In addition, certain computer manufacturers may devote significant
resources to creating software, directly competitive with products of Aladdin,
for inclusion with their computers and computer systems without additional
charge to consumers, specifically, Apple Computer provides a file encryption
(but not compression) technology in its Mac OS 9 operating system and Microsoft
includes a compression utility in its Windows 98, Windows NT, and Windows Me
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 Apple, Symantec, Microsoft, Network Associates, PowerQuest,
MindVision, WinZip and OnTrack Corporation.

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

      As the Internet and e-commerce become an increasing important channel for
the distribution and sales of software products, the Company has increased its
efforts to sell both our products and the third-party products to consumers via
Aladdin's Web site (www.aladdinsys.com). In order to continue this effort,
Aladdin may need to invest money, effort and other resources into our Web
efforts which may divert attention and


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

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

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

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

      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


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

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.

      Since the Company produces computer software products and is not engaged
in hardware manufacturing, we did not spend any material amounts on compliance
with environmental laws.

Employees

      As of December 31, 2000, the Company employed 59 full-time employees.
Although talented and qualified employees are difficult to find in the current
tight job market, Aladdin has experienced relative success in attracting and
retaining highly motivated and talented employees.

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

Subsidiaries

      The Company has two subsidiaries, Aladdin Systems, Inc., a Delaware
Corporation, wholly-owned by the Company, and Transaction Services, Inc.
("TSI"), a California corporation, which was incorporated in 1996 and is a
wholly owned subsidiary of Aladdin Systems, Inc. TSI was formed in order to
provide technology and services to other software publishers which allows such
companies to make trial versions of their software available. In 2000, Aladdin
discontinued its trialware software technology business.

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


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

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.

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

      The Company faces risks and uncertainties that could render actual events
materially different than those described in our forward-looking statements.
These risks and uncertainties include, but not limited to, the risk new products
and product upgrades may not be effected on a timely basis; the risk such
products may not achieve market acceptance within the Windows or Macintosh
markets; the risk the prevalence and functionality of available free compression
software may erode revenues; the risk the Company would not be able to fund its
working capital needs from cash flows; and the risk associated with domestic and
international general economic conditions. The Company's products are sold in
markets that change rapidly and the Company must continually anticipate and
adapt its products to emerging computer technologies and capabilities. The
Company may not be able to successfully adapt to these changing markets. The
Company may experience material fluctuations in future revenues and operating
results on a quarterly or annual basis resulting from a number of factors,
including but not limited to the risks discussed in the paragraph above.

Item 2: Properties

      In November 2000, the Company moved to a new office facility located at
245 Westridge Drive, Watsonville, California 95076. Our executive offices now
comprise approximately 25,380 square feet. Our subsidiaries, Aladdin Systems,
Inc. and Transactions Services, Inc. are housed in the same location. These
facilities are leased pursuant to a lease expiring October 2010. The monthly
rent is $30,710 and our leased space is now sufficient to cover future growth.
As of May 2000, we also have an Atlanta office located at 4005 Nine McFarland,
Alpharetta, GA 30004. The monthly rent is $1,750, for approximately 1500 square
feet and the expiration date of the lease is May 2002. This leased space is also
sufficient to cover future growth at this location.

Item 3: Legal Proceedings

      None


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

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, 2000, there were 35 stockholders of record. The Company
believes that it has approximately 300 beneficial stockholders.

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

      The following table sets forth the range of high and low bid prices per
share of common stock as provided by Commodity Systems, Inc. The quotations
shown below reflect inter-dealer prices, without mark-up, mark-down or
commissions and may not present actual transactions. There was no significant
trading of the common stock prior to October 26, 1999.

                                           Common Stock

                                           Low   High
                                         --------------
Quarter ended:
October 26, 1999 to December 31,
1999                                     $3.00    $5.60
March 31, 2000                           $4.00    $5.13
June 30, 2000                            $3.13    $5.00
September 30, 2000                       $2.19    $4.31
December 31, 2000                        $0.50    $2.31

      The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its 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


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

percentage relationships are not necessarily indicative of the operating results
for any future period. Within this discussion and analysis, all dollar amounts
(except for per share amounts) have been rounded to the nearest thousand.

The following table sets forth certain data derived from the consolidated
statements of operations, expressed as a percentage of net revenues for each of
the years in the two-year period ended December 31, 2000.

                                                    Years ended December 31,

                                                         2000      1999
                                                         ----      ----

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

Sales, marketing and support                              50%       39%
Research and development                                  23%       16%
General and administrative                                16%       12%
                                                       ----------------

Total operating expenses                                  89%       67%

Income (loss) from operations                            (5%)       13%

Other (expense) income, net                                0%        0%

Earnings (loss) before income taxes                      (5%)       13%

Income tax (benefit) expense                             (1%)        5%

Net earnings (loss)                                      (4%)        8%
                                                       ================

NET REVENUES

      Overall revenues decreased slightly from $10,197,099 in 1999 to
$10,168,755 in 2000 due to a decrease in sales of third party products as
compared with 1999.

      Revenues from the Company's Developer products, InstallerMaker and StuffIt
Engine accounted for approximately 8% of the Company's total net revenues, the
same percentage as in 1999.

      Revenues from sales over our Web site accounted for 41% of revenue in 2000
as compared with 35% of revenue in 1999. The Company believes that sales over
its Web site will represent an increasingly important component of the Company's
sales strategy


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

and will allow the Company to reach a large number of potential consumers at
lower costs than sales through distributors.

COST OF REVENUES AND GROSS MARGIN

      The Company's cost of revenues is composed primarily of: (1) the costs of
product materials such as CD-ROMS and packaging; (2) amortization of capitalized
purchased software; (3) royalties paid to outside developers on certain software
products; (4) amortization of capitalized manufacturing expenses; and (5)
shipping expenses.

      Cost of revenues, as a percentage of net revenues decreased to 16% in 2000
from 20% in 1999. This decrease in costs was a shift in sales from retail sales
to sales over our Web site. Web-based sales have a lower cost of sales since
they do not require any physical goods, such as a CD-ROM or documentation to be
manufactured.

      As a result of the decrease in the cost of revenues, as a percentage of
net revenues, our gross margins increased from 80% to 84%.

SALES AND MARKETING

      Sales and marketing expenses increased to $5,048,095 in 2000 from
$3,928,720 during 1999. This 28% increase in sales and marketing expenses was
due to increased product advertising, increased localization costs and
additional use of marketing consultants in 2000.

GENERAL AND ADMINISTRATIVE

      General and administrative expenses are composed principally of salaries
of administrative personnel, fees for professional services and facilities.
These expenses increased to $1,577,814 in 2000 from $1,211,139 during 1999. This
30% increase was mostly related to investor relations expenses and professional
accounting services incurred to meet our reporting requirements as a public
company.

RESEARCH AND DEVELOPMENT

      Research and development expenses were $2,376,550 and $1,658,083 in 2000
and 1999, respectively. These expenses were 23% and 16% of net revenues,
respectively. Salaries, benefits and overhead combined increased by $692,952 in
2000 compared with 1999. This was due to the increased number of employees that
were working on the 5 new products that were in development throughout the year.
Due to the current high demand for software engineers and other technical
specialists, the Company anticipates having to both increase wages of existing
research and development personnel as well


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

as having to pay higher salaries to new employees. Such additional expense for
payroll and benefits may have the effect of increasing our research and
development expenses in upcoming fiscal quarters.

INCOME TAXES

      The Company's effective income tax rate for fiscal 2000 was 26%.

LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by operating activities during 2000 was $128,078, a
decrease of $574,490 compared with net cash provided by operating activities of
$702,568 in 1999. The decrease is due primarily to the loss for 2000.

      Net cash used in investing activities in 2000 was $569,820, an increase of
$265,934 compared with net cash used in investing activities of $303,886 in
1999, reflecting an increase in cash used for the acquisition of software rights
and cost incurred for software development.

      Net cash used in financing activities in 2000 was $400,713 mostly for
payments on capital leases and payments for Stuffit software, as compared with
$646,054 provided in 1999. The cash provided in 1999 was mostly from the
issuance of common stock.

      Our capital requirements are dependent on several factors, including
market acceptance of our software and services, timely updating of the Company's
existing software products, developing new software products or acquiring the
rights to existing software products from third parties, the resources devoted
to marketing and selling the Company's services and brand promotions and other
factors. At December 31, 2000, the Company had cash and cash equivalents
totaling $265,890.

      During 1997, certain Stockholders, the Company's former President, a key
employee, and a relative of a stockholder lent the Company a total of $225,062,
in the form of demand notes with interest payable monthly at 8.92%. These notes
contain a conversion feature where they can be converted into common stock in
part or whole at any time for $1.10 per share. The notes are payable upon thirty
(30) days notice by the holder. As of December 31, 2000, the remaining balance
on these notes was $160,062.

      We believe that our current cash and cash equivalents along with cash to
be generated by operations in 2001 will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next fiscal
year. If cash generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a larger credit facility. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders. The
incurrence of indebtedness would result in an increase in our fixed


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

obligations and could result in borrowing covenants that would restrict our
operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. If financing is not available
when required or is not available on acceptable terms, we may be unable to
develop or enhance our products or services. In addition, we may be unable to
take advantage of business opportunities or respond to competitive pressures.
Any of these events could have a material and adverse effect on our business,
results of operations and financial condition.

RISKS AND UNCERTAINTY

      Since our business is selling software to computer owners, we are
dependent on PC hardware sales (running Microsoft Windows and Apple Computer's
Macintosh operating systems). According to a report from Gartner Dataquest, a
research firm, the downturn in the US economy, coupled with the saturated PC
market, lead to lackluster growth for the PC industry during 2000. PC sales in
the US grew at 10.3% versus 21.7% in 1999. Apple reported that unit sales fell
52% for the October to December period in 2000 compared with the same period in
1999. Aladdin is more dependent on Apple Computer's Macintosh computer sales and
this downward trend had a greater impact on the company than the slowing Windows
computer sales. While Aladdin recently expanded into the Windows marketplace,
management is very cautious about the United States' economy and the impact it
has on the consumer and business purchases of computers over the next 12 months.

      In January 2001, at MacWorld Expo, San Francisco, Apple's CEO Steve Jobs,
announced that on March 21, 2001, Apple Computer, Inc. will release their new
operating system called Mac OS X. Mac OS X is a completely new operating system
for the Macintosh computer platform and is based upon UNIX. As such, Mac OS X
brings uncertainty to the marketplace and new potential competitors to Aladdin's
product lines. Aladdin has been working with Apple on preparing the release of
Mac OS X. In fact, StuffIt Deluxe 6.0, the current shipping version, is already
Mac OS X compatible. We expect to have all of our major Macintosh products
compatible with the new operating system by year end but since Mac OS X is a new
operating system for the platform, we are not sure how users will react to it.
Also, since it is based upon UNIX, an established operating system, we
anticipate existing UNIX developers to enter the marketplace.

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


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

Item 7: Financial Statements

Index to Item 7: Financial Statements                       Page
Report of Independent Certified Public Accountants           23
Consolidated Balance Sheet                                   24
Consolidated Statements of Operations                        25
Consolidated Statement of Stockholders' Equity               26
Consolidated Statements of Cash Flows                        27
Notes to Consolidated Financial Statements                   28


--------------------------------------------------------------------------------
                                                                         Page 22
<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, 2000, 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, 2000, and the consolidated results of its operations and its
consolidated cash flows for each of the two years then ended, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP
San Jose, California
February 20, 2001


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

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2000

      ASSETS

Current assets:
Cash and cash equivalents                                             $  265,890
Accounts receivable, net of allowance of $229,094                      1,590,800
Inventories                                                              313,192
Prepaid expenses and other current assets                                268,414
                                                                      ----------
           Total current assets                                        2,438,296

Capitalized software, net                                                660,205
Property and equipment, net                                              530,094
Deferred income taxes                                                    111,253
                                                                      ----------

                                                                      $3,739,848
                                                                      ==========

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt                                  $  427,616
Accounts payable                                                         709,465
Accrued expenses and other liabilities                                   303,745
                                                                      ----------
   Total current liabilities                                           1,440,826

Long-term debt                                                           146,835

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued and outstanding                                                   --
Common stock, $.001 par value; 50,000,000 shares
authorized; 9,792,635 issued and outstanding                               9,793
Paid-in capital                                                        1,575,151
Retained earnings                                                        567,243
                                                                      ----------
Total stockholders' equity                                             2,152,187

                                                                      $3,739,848
                                                                      ==========

          See accompanying notes to consolidated financial statements.


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

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                      Year ended December 31,
                                                         2000         1999
                                                         ----         ----

Sales                                               $10,168,755     $10,197,099
Cost of sales                                         1,655,059       2,023,979
                                                    ---------------------------
Gross profit                                          8,513,696       8,173,120

Operating expenses:
     Marketing, sales and support                     5,048,095       3,928,720
     Research and development                         2,376,550       1,658,083
     General and administrative                       1,577,814       1,211,139
                                                    ---------------------------
          Total operating expenses                    9,002,459       6,797,942

Income (loss) from operations                          (488,763)      1,375,178

Other income (expense):
Interest expense                                        (40,743)        (58,950)
Other                                                    39,424          15,604
                                                    ---------------------------

Net income (loss) before income taxes                  (490,082)      1,331,832

Income tax expense (benefit)                           (127,339)        483,317

Net income (loss)                                     ($362,743)       $848,515
                                                    ===========================

Earnings per share - basic                               ($0.04)          $0.09
Earnings per share - diluted                             ($0.04)          $0.09

Shares used in computing basic earnings per
share                                                 9,787,366       8,946,867
Shares used in computing diluted earnings per
share                                                 9,787,366       9,266,583

          See accompanying notes to consolidated financial statements.


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

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             Common Stock
                                            ---------------  Paid-in   Retained
                                            Shares   Amount  Capital   Earnings       Total
                                            ------   ------  -------   --------       -----
<S>                                      <C>         <C>      <C>        <C>       <C>
Balance at January 1, 1999               8,728,117   $8,729   $374,321   $81,471   $464,521
Issuance of common stock in
   private placement (net issuance
   costs of $68,950)                     1,050,000    1,050    930,000              931,050

Net income                                                               848,515    848,515
                                         ---------------------------------------------------

Balance at December 31, 1999             9,778,117    9,779  1,304,321   929,986  2,244,086

Issuance of common stock pursuant to
    employee stock option plan               4,215        4      7,295                7,299
Issuance of common stock for products       10,303       10     42,490               42,500
Compensation expense on issuance of
stock options to third parties                                 221,045              221,045

Net loss                                                                (362,743)  (362,743)
                                         ---------------------------------------------------

Balance at December 31, 2000             9,972,635   $9,793 $1,575,151  $567,243 $2,152,187
                                         ===================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


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

                  Aladdin Systems Holdings, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                  Year ended December 31,
                                                  -----------------------
                                                     2000         1999
                                                     ----         ----
Cash flows from operating activities:
   Net income (loss)                              ($362,743)       $848,515
   Adjustments to reconcile net income
     (loss) to net cash provided by
     operating activities:
      Depreciation and amortization                 605,820         366,338
      Compensation expense on stock options
     granted to third parties                       221,045              --
      Deferred income taxes                        (104,466)        169,190
      Changes in operating assets and
      liabilities:
          Accounts receivable                      (238,313)       (622,545)
           Inventories                             (209,290)        (33,412)
           Prepaid expenses and other
           current assets                            92,586          71,891
           Accounts payable                         155,121        (237,936)
           Accrued expenses and other
           liabilities                               37,594          72,851
           Income tax payable                       (69,276)         67,676
                                                  -------------------------
Net cash provided by operating activities           128,078         702,568

Cash flows from investing activities:
     Acquisition of property and equipment         (133,211)       (123,487)
     Acquisition of software rights                (436,609)       (180,399)
                                                  -------------------------
Net cash used in investing activities              (569,820)       (303,886)

Cash flows from financing activities:
     Net proceeds from issuance of common
      stock                                           7,299       1,141,551
     Repayment of bank borrowings                        --        (160,888)
     Repayment of long-term debt                   (408,012)       (334,609)
                                                  -------------------------
Net cash provided by (used in) financing
    activities                                     (400,713)        646,054

Net increase (decrease) in cash and cash
    equivalents                                    (842,455)      1,044,736

Cash and cash equivalents at beginning of
    period                                        1,108,345          63,609
                                                  -------------------------
Cash and cash equivalents at end of period         $265,890      $1,108,345
                                                  =========================

Cash paid during the period for:
   Interest                                         $40,743         $68,185
                                                  =========================

   Income taxes                                     $69,276        $247,500
                                                  =========================

Noncash Transactions:

During 2000 and 1999, the Company acquired assets under capital leases in the
amount of $123,641 and $106,000, respectively.

During 2000, the Company issued 10,303 shares of common stock as partial payment
on the purchase of Spring Cleaning software rights.


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

During 1999, the Company issued 50,000 shares of common stock as a commission in
connection with the issuance of 1,000,000 shares of common stock.

          See accompanying notes to consolidated financial statements.


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

                 Aladdin Systems Holdings, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2000

NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Aladdin Systems Holding, Inc. ("Holdings") and its wholly owned subsidiaries
(collectively the "Company"), develop, publish, and distribute computer software
for the Macintosh, Windows and Palm software market. In addition, the Company
develops and markets products to other software developers. 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.

Reverse Acquisition

In October 1999, Holdings, (formerly Foreplay Golf and Travel Tours, Inc.)
acquired Aladdin Systems, Inc. ("Systems") through an exchange of common stock.
Each share of Systems common stock was converted to 1.61997 shares of Holdings
common stock. The acquisition was accounted for as a reverse acquisition whereby
Systems was deemed to be the "accounting acquirer" using the guidance in Staff
Accounting Bulletin No. 97. The historical financial statements prior to the
acquisition are that of Systems.

Principles of Consolidation

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

Business Combination

On March 21, 2000, the Company completed a merger with Trexar Technologies, Inc.
("Trexar"), a leading Windows and Macintosh software developer of Internet
information utilities, by exchanging 449,539 shares of its common stock for all
of the common stock of Trexar. The merger has been accounted for as a pooling of
interests and accordingly all prior period consolidated financial statements
have been restated to include the combined results of operations, financial
position and cash flows of Trexar.


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

The following information presents certain income statement data of the separate
companies for 1999:

Sales
Aladdin                        $10,097,661
Trexar                              99,438
                               -----------
                               $10,197,099

Net income (loss)
Aladdin                           $975,625
Trexar                            (127,110)
                               -----------
                                  $848,515

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.

Inventories

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

Property and Equipment

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

Revenue recognition

Revenues and accounts receivable are principally derived from sales to
distributors and resellers of the Company's products. These revenues are
recognized net of reserves for returns and rebates. Return reserves are based on
management's estimate of inventory at distributors or resellers that is in
excess of levels appropriate for that channel and is likely to be returned. 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. Certain of the Company's sales are made to customers
under agreements permitting rights of return for stock balancing.


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

Research and Development

Research and development costs are charged to operations when incurred.

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,
2000 were $1,959,960 less accumulated amortization of $1,299,755.

The Company amortizes capitalized software development costs on a
product-by-product basis. The amortization charged to operations in each period
for each product is the greater of the amount computed using (a) the ratio of
current gross revenues to the total of current and anticipated future gross
revenues for the product or (b) 60 months. In addition, the Company evaluates
the net realizable value of each software product at each balance sheet date and
records write-downs to net realizable value for any products for which the
carrying value is in excess of the estimated net realizable value. Total
amortization expense for capitalized software, all of which was charged to cost
of sales, was $397,629 and $196,101 in fiscal years 2000 and 1999, respectively.

Advertising

The Company expenses advertising costs as they are incurred. Advertising and
related promotion expenses for fiscal years 2000 and 1999 were $1,510,159 and
$1,256,562 respectively.

Income Taxes

Income taxes are computed using the asset and liability method under Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB
No. 25, compensation cost is recognized over the vesting period based on the
difference, if any,


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                                                                         Page 31
<PAGE>

on the date of grant between the quoted market price of the Company's stock and
the amount an employee must pay to acquire the stock.

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, the Consumer
business which includes Aladdin products as well as third party products, and
the Developer business which includes licensing technology.

The consumer products include the StuffIt products, Desktop utilities, Internet
products, Palm products, and third party software for the consumer market sold
through retail. The developer products include the StuffIt InstallerMaker and
the StuffIt Engine for software developers.

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
operations, for purposes of making operating decisions and assessing
performance.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluated performance
based on income or loss from operations before income taxes. The Company does
not allocate assets to its individual operating segments.

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

Fiscal year 2000:                                  Consumer      Developer
                                                   --------      ---------

Sales                                            $9,395,270       $773,485
Income (loss) from operations                      (695,147)       205,065

Fiscal year 1999:
Sales                                             9,437,323        759,776
Income from operations                            1,049,829        325,349

Earnings Per Share


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                                                                         Page 32
<PAGE>

Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares and potentially dilutive
securities 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 and warrants (using the treasury stock method). A total of
approximately 1,225,000 shares issuable upon the exercise of outstanding stock
options as of December 31, 2000 and 1,746,349 shares issuable upon the exercise
of outstanding stock options as of December 31, 1999 have been excluded from the
diluted earnings per share calculation, as the inclusion would be anti-dilutive.

The following table reconciles the amounts used in the per share computation:

                                                             2000       1999
                                                             ----       ----
Numerator:
Net income (loss) used in computing basic earnings
per share                                               ($362,743)   $848,515
Interest expense on convertible debt                       14,716      16,878
                                                       ----------------------
Net income (loss) used in computing diluted earnings
per share
(1)                                                    ($348,027)    $865,393

Denominator:
Weighted average common shares outstanding during the
period used in computing basic earnings per share       9,787,366   8,946,867
Dilutive effect of convertible debt                       134,990     319,716
                                                       ----------------------
Shares used in computing diluted earnings (loss) per    9,922,356   9,266,583
share (1)

(1) Not presented in 2000 due to loss for the period.

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, 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.


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                                                                         Page 33
<PAGE>

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2000 consist of:

                             Useful lives (years)
                             --------------------
Computer equipment                    5              $875,052
Office equipment                      5               166,349
Furniture and fixtures                5               371,746
Displays                             5-7              121,306
                                                    ---------
                                                    1,534,453
Less accumulated
depreciation                                        1,004,359
                                                    ---------
                                                     $530,094
                                                    =========

NOTE 3 - CREDIT LINE

In September 2000, the Company was approved for a $300,000 line of credit with
Merrill Lynch. Interest is variable at a per annum rate equal to the sum of
3.15% plus the 30-Day Commercial Paper Rate with an annual line of credit fee of
 .5%. The initial expiration date of the line is September 30, 2001 subject to
renewal annually thereafter with the bank's consent. The credit line contains
two covenants: (1) the line of credit may not be used to purchase or carry
securities, and (2) the Company will continue and maintain its business,
existences, ownership and good standing. The Company had an outstanding balance
of $5,542 at December 31, 2000.

NOTE 4 - LONG-TERM DEBT

Long-term debt at December 31, 2000 consists of:

Capital lease obligations                 $223,139
Notes payable to related parties           160,062
Notes payable for software                 191,250
                                          --------
                                           574,451
Less current portion                       427,616
                                          --------
                                          $146,835
                                          ========

Notes Payable to Related Parties

Notes payable to related parties are payable on demand. Interest is compounded
daily at 8.92% and is payable monthly. The notes are convertible into common
stock at the lesser of $1.74 per share or at the lowest price shares of common
stock are sold or options are granted after the date the notes were issued.

Notes Payable for Software


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

In May 2000, the Company purchased the rights to Spring Cleaning for $425,000.
The Company paid $191,250 in cash and issued common stock valued at $42,500. At
December 31, 2000, a note payable of $191,250 remained. This amount was paid in
full in January 2001.

Installments due on debt principal are as follows:

      Year ending December 31,

                 2001           $427,616
                 2002             76,145
                 2003             63,970
                 2004             14,150
                                --------
                                $581,881
                                ========

NOTE 5 - INCOME TAXES

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

                                                2000           1999
                                                ----           ----
Current
   Federal                                  ($25,273)      $222,527
   State                                       2,400         91,600
                                          -------------------------
Total current                                (22,873)      $314,127

Deferred
    Federal                                  (72,729)       157,411
    State                                    (31,737)        11,779
                                          -------------------------
Total deferred                              (104,466)       169,190

                                           ($127,339)      $483,317
                                          =========================

The tax effect of temporary differences that give rise to significant portions
of net deferred tax assets at December 31, 2000 is presented below:

Deferred tax assets (liabilities)
Allowance for bad debt                               $ 98,144
Depreciation                                          111,253
Other                                                 (10,562)
                                                     --------
Net deferred tax asset                               $198,835
                                                     ========


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                                                                         Page 35
<PAGE>

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

                                                         2000          1999
                                                         ----          ----
Statutory federal income tax (benefit) rate              (34%)            34%
Increase (decrease) resulting from:
Expenses not deductible for taxes                       15.8              --
State income taxes, net of federal tax benefit          (4.0)            5.8
Utilization of net operating loss carryforwards           --            (0.7)
Reduction of valuation allowance                          --            (6.0)
Other                                                   (3.8)             --
                                                       ---------------------
Effective tax (benefit) rate                           (26.0%)          33.1%
                                                       =====================

NOTE 6 - MAJOR CUSTOMERS

The Company has one major customer that accounted for $2,176,551 or 21% and
$1,453,119 or 14% of revenues in 2000 and 1999, respectively.

NOTE 7 - STOCKHOLDERS' EQUITY

Stock Options

The Aladdin Systems Holdings, Inc. 1999 Stock Option Plan (the "Plan") allows
for the issuance of incentive stock options and non-qualified stock options to
purchase shares of the Company's common stock. The Plan has authorized 3,000,000
million shares of which 951,165 remain available for granting at December 31,
2000. Under the 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 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 Plan generally vest within 4 years.


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

Stock option activity is summarized as follows:

                                                    Shares      Weighted Average
                                                                  Exercise Price
Balance at January 1, 1999                         1,616,990           $1.12
Granted                                              292,503            2.45
Cancelled                                           (255,683)           1.12
                                                   -------------------------
Balance at December 31, 1999                       1,653,810            1.35
Granted                                              521,397            2.86
Cancelled                                           (122,157)           1.62
Exercised                                             (4,215)           1.07
                                                   -------------------------
Balance at December 31, 2000                       2,048,835           $1.72
                                                   =========================

The following table summarizes information about stock options outstanding as of
December 31, 2000:

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

$1.05 - $1.07      718,095      $1.06         6.67      628,563     $1.05
$1.15 - $1.85      886,729      $1.37         8.52      556,739     $1.29
$1.91 - $4.87      444,011      $3.51         7.45      273,260     $3.31
                 ---------                           ----------
                 2,048,835                            1,458,562
                 =========                           ==========

The fair value of option grants has been determined using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life of 10 years; interest rate of 6.0%, volatility of 96% in 2000 and 75% in
1999 and no dividend yield. The weighted average fair value of options granted
to employees was $0.63 and $0.08 for 2000 and 1999, respectively.

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

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

                                           2000          1999
                                           ----          ----
Net income (loss)
   As reported                       ($362,743)      $848,515
   Pro forma                         ($576,042)      $536,915
Basic net income (loss) per share
   As reported                          ($0.04)         $0.09
   Pro forma                            ($0.06)         $0.06
Diluted net income (loss) per
share
   As reported                          ($0.04)         $0.09
   Pro forma                            ($0.06)         $0.06


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                                                                         Page 37
<PAGE>

NOTE 8 - RETIREMENT PLAN

The Company has established a 401(k) retirement plan for all employees.
Employees may elect to contribute up to 15% of their gross salary not to exceed
federal tax law limitations. The Company may elect to match a portion of the
employee contributions. No matching contributions were made for the years ended
December 31, 2000 and 1999.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Leases

The Company conducts its operations from facilities that are leased under
operating leases expiring July, 2010 and May 2002. Rent expense was $187,290 and
$144,457 in 2000 and 1999, respectively.

The Company also has certain equipment under capital leases. The cost of assets
acquired under capital leases was $123,641 and $106,000 in 2000 and 1999,
respectively. Accumulated amortization on these assets at December 31, 2000 and
1999 was $241,684 and $165,932, respectively. Amortization expense recorded on
capital leases during 2000 and 1999 was $2,061 and $10,600 respectively.

Future minimum commitments under capital leases and non-cancelable operating
leases as of December 31, 2000 are as follows:

                                                Capital          Operating
Year ending December 31,                         Leases            Leases
                                                 ------            ------
                 2001                          $ 92,219         $  389,520
                 2002                            88,051            375,520
                 2003                            74,485            368,520
                 2004                            12,141            368,520
                 2005                                --            368,520
              Thereafter                             --          1,842,600
                                               ---------------------------
Total minimum lease payment                     266,896          3,713,200
Less amount representing interest                43,757                 --
                                               ---------------------------
                                               $223,139         $3,713,200
                                               ===========================


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                                                                         Page 38
<PAGE>

Consulting Agreement

The Company has a consulting agreement with a software developer whereby the
Company will pay $20,000 per month for services. The agreement was terminated as
of December 31, 2000 and payments will continue through June 2001 per the
termination clause in the agreement.

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

      None

PART III

Item 9: Directors and Executive Officers of the Registrant

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

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

Jonathan Kahn         43    Chairman, Chief Executive Officer, Treasurer and
                            Director
Darryl Lovato (1)     34    President, Chief Technology Officer and Director
Brad Peppard (2)(3)   44    Director
Paul Goodman (2)(3)   41    Director
David Schargel (2)(3) 35    Director
Benna Lovato (1)      35    Secretary, Director

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

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

      JONATHAN KAHN is currently Chairman and CEO of Aladdin. Mr. Kahn is one of
the original founders of Aladdin Systems and has served as a Director since
1988.


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                                                                         Page 39
<PAGE>

Prior to becoming CEO in 1998, he served as President, and Vice President of
Sales. Mr. Kahn has extensive expertise in software industry sales, marketing,
business development and licensing arrangements. Mr. Kahn is a graduate of the
University of Rhode Island with a B.A. in Economics.

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

      BRAD PEPPARD has been President of Lime Tree Productions, Inc., a boutique
consulting firm providing marketing and research consulting services to high
tech companies. 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. Prior to 1993, he was also Vice
President of Marketing at Software Publishing Corporation, a pioneer in both
high-tech direct marketing and Internet electronic marketing, Mr. Peppard was
President and founder of SoftMail Corporation, one of the leading direct
marketing agencies in the country, as well as president of Monogram Software.
Mr. Peppard has an MBA from Stanford University and a B.A. from Amherst College.

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

      PAUL GOODMAN is a partner in the New York City law firm of Ellenoff,
Grossman, Schole & Cyruli, LLP where he concentrates on representing software
and Web companies in a wide range of business and financing transactions. He has
represented Aladdin since its inception. In addition to a Juris Doctor degree,
Mr. Goodman hold a BA and MA degree in Computer Science, was a former member of
the Computer Science faculty of Queens College, is the author of five books on
microcomputer programming and is the editor and publisher of WebLegalGuide.com,
a legal resource for companies involved in the Web industry.


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                                                                         Page 40
<PAGE>

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

Item 10: Executive Compensation

COMPENSATION SUMMARY

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

SUMMARY COMPENSATION TABLE (1)(2)

                                                 Long term compensation
                                                  Number of securites
Name and position       Year           Salary    Underlying options (3)
-----------------       ----           ------    ----------------------

Jonathan Kahn, CEO      1999         $150,000            20,000
                        2000          150,000              0
Darryl Lovato
President and CTO       1999          150,000            20,000
                        2000          150,000              0

      (1) Information set forth herein includes services rendered by the named
      executives while employed by Aladdin Systems prior to the reorganization
      and by Aladdin following the Reorganization.

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

      (3) Represents options granted to such executives.

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


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                                                                         Page 41
<PAGE>

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999 and DECEMBER 31, 2000 (1)

                        Number of     % of Total     Exercise
                        Securities     Options       Price Per
                        Underlying    Granted to      Share      Expiration
Name            Year    Options (2)  Employees (3)    ($/SH)       Date (4)
----            ----    -----------  -------------    ------       --------
Jonathan Kahn   1999      20,000          6.8          $4.00    December, 2005
                2000          --           --             --                --
Darryl Lovato   1999      20,000          6.8          $4.00    December, 2005
                2000          --           --             --                --

      (1) No SARs were granted to the Named Executives during 2000.

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

      (3) We granted officers, employees and consultants options to purchase an
      aggregate of 292,503 shares of common stock in 1999 and an aggregate of
      521,397 shares of our common stock in 2000.

      (4) 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, 2000. None of these executive officers exercised options
to purchase common stock in 2000.

AGGREGATE OPTION EXERCISES IN  1999 AND 2000 AND YEAR END OPTION VALUES (1)

                     Number of Unexercised Options  Value of Unexercised In-the-
                            At year End (1)        Money Options at Year End (2)
                            ---------------        -----------------------------

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

Jonathan Kahn   1999      139,762       131,643         $559,048       $526,572
                2000      208,142        63,263          116,560         35,427
Darryl Lovato   1999      145,174       131,643          580,696        526,572
                2000      213,554        63,263         $119,590       $ 35,427


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

      (1)   No SARs were owned or exercised by any of the Named Executives
            during 2000.

      (2)   Based on a per share fair market value of our common stock equal to
            $4.00 per share, the trading price market value of our common stock
            on December 31, 1999, and $0.56 per share, the trading price market
            value of our common stock on December 31, 2000.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

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

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

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


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

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

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

Item 11: Security Ownership of Certain Beneficial Owners and Management

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

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

EXECUTIVE OFFICERS AND DIRECTORS

Jonathan Kahn (2)                                        1,943,489        16.56%
David Schargel                                           1,641,789        14.36%
Darryl Lovato (3)                                        1,895,909        16.22%
Brad Peppard                                                32,400         0.33%
Benna Lovato                                             1,674,333        14.60%
Paul Goodman                                                    --           --
                                                         -----------------------
All directors and executive officers
As a group (6 persons)                                   7,187,920        62.07%

OTHER 5% STOCKHOLDERS

Marco Gonzalez                                             697,791         6.65%
                                                         -----------------------

All directors, excutive officers and 5%
stockholders as a group                                  7,885,711        68.72%


--------------------------------------------------------------------------------
                                                                         Page 44
<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 6,713 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.

      (3) Includes 8,022 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.

Item 12: Certain Relationships and Related Transactions

      In 1998, Jonathan Kahn, CEO and Darryl Lovato, President each received
options to purchase up to 91,529 shares of Common Stock, respectively, with
exercise prices of $1.18 per share. These options vest in 48 monthly
installments.

      In 1999, Brad Peppard, Director received options to purchase up to 32,400
shares of Common Stock, with exercise prices of $1.54 per share. Jonathan Kahn,
CEO and Darryl Lovato, President also each received options to purchase up to
20,000 shares of Common Stock, respectively, with exercise prices of $1.18 per
share. These options vest in 48 monthly installments.

      In 2000, there were no options granted to any executive directors or
officers.

      In July, 1999, Aladdin Systems, Inc. entered into an agreement with
Baytree Capital Associates, LLC which was continued after the Reorganization.
Under the agreement, Baytree provided financial consulting and assistance to
Aladdin Systems, Inc. which included the identification of a merger candidate
and assistance with the Reorganization. For their services, Baytree received
50,000 shares of our Common Stock and was paid $20,000 plus $10,000 in
non-accountable expense reimbursement. In addition, Baytree has been granted an
18 month right of first refusal with respect to any subsequent financings.

PART IV

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

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

1. Financial Statements


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<PAGE>

The following consolidated financial statements of Aladdin Systems Holdings,
Inc., and subsidiaries, and the Independent Auditors' Reports 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:

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

3.          Reports on Form 8-K.

      Form 8-K filed May 26, 2000 reporting Termination and Assignment
Agreement with The Excelsior Group.

Legend

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

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


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                                                                         Page 46
<PAGE>

SIGNATURES

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

ALADDIN SYSTEMS HOLDINGS, INC.
(Registrant)

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

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

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 and Director      3/22/01
  (Jonathan Kahn)

 /s/ Darryl Lovato
-------------------------  President and Director                    3/22/01
  (Darryl Lovato)

/s/ Brad Peppard
-------------------------  Director                                  3/22/01
  (Brad Peppard)

/s/ David Schargel
-------------------------  Director                                  3/22/01
  (David Schargel)

/s/ Benna Lovato
-------------------------  Director                                  3/22/01
  (Benna Lovato

/s/ Paul Goodman
-------------------------  Director                                  3/22/01
  (Paul Goodman)


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                                                                         Page 47
<PAGE>

EXHIBIT INDEX

Exhibit Reference (*)
Number or Page #

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

Legend

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

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


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