Aladdin Knowledge Systems Reports Second Quarter 2006 Financial Results

Revenues of $20.9 Million
GAAP Net Income of $3.3 Million or $0.22 Per Diluted Share
Non-GAAP Net Income of $3.9 Million or $0.26 Per Diluted Share

CHICAGO and TEL AVIV, ISRAEL, July 24, 2006 - Aladdin Knowledge Systems (NASDAQ: ALDN), the leader in Software DRM, identity management and content security solutions, today announced financial results for the second quarter of fiscal year 2006 ended June 30, 2006.

Revenues for the second quarter of 2006 were $20.9 million, an increase of 4 percent from $20.1 million for the same period in 2005. Software DRM revenues for the second quarter were $14.6 million, an increase of 4 percent from $14.1 million in the same period in 2005. Enterprise Security revenues for the second quarter of 2006 were $6.2 million, a 4 percent increase from $6.0 million recorded in the same period in 2005. Revenues for the first six months of 2006 were $43.7 million, an increase of 8 percent from the $40.4 million recorded in the first half of 2005.

Net income in accordance with Generally Accepted Accounting Principles (GAAP) for the second quarter of 2006 was $3.3 million or $0.23 per basic share and $0.22 per diluted share as compared with GAAP net income of $3.6 million or $0.25 per basic share and $0.24 per diluted share for the second quarter of 2005. For the first six months of 2006, GAAP net income was $7.1 million or $0.49 per basic share and $0.47 per diluted share, as compared with net income of $4.8 million, or $0.36 per basic share and $0.34 per diluted share for the first six months of 2005.

Non-GAAP net income for the second quarter of 2006, excluding stock-based compensation expense related to the Company’s adoption of Financial Accounting Standards No. 123R of $0.6 million, was $3.9 million, or $0.27 per basic share and $0.26 per diluted share (Refer to the “Use of Non-GAAP Measures” section and accompanying financial table for reconciliation of GAAP financial information to Non-GAAP). For the first six months of 2006, non-GAAP net income was $8.2 million or $0.57 per basic share and $0.54 per diluted share, excluding stock-based compensation expense of $1.1 million.

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems said, “While we believe that the global IT security market drivers for Aladdin’s leading edge security solutions remain solid, we are disappointed with our second quarter revenue performance. Although we are satisfied with the year-over-year sales growth in Europe and in the rest of the world, revenues generated within the U.S. and Japanese markets were lower than originally anticipated. As we take steps to address our sales structure, our overall focus on financial efficiency remains strong. We recorded second quarter 2006 profitability and gross margin results in line with our original range of expectations. In order to increase the effectiveness of our sales and distribution channels we are restructuring our global sales and marketing organization. This effort is being headed by Ms. Elinor Nissensohn, our recently appointed Global Vice President of Sales and Marketing.”

Cash, cash equivalents and marketable securities totaled $82.2 million at June 30, 2006, up approximately $5.0 million from $77.2 million reported at the end of 2005, with no outstanding debt. The increase was primarily attributable to positive cash flow from operations during the first half of 2006 of $4.7 million.

Quarterly Highlights

* Quarterly revenues of $20.9 million

* Non-GAAP net income of $3.9 million, excluding stock-based compensation expense of $0.6 million

* Signed significant deal for distribution of eToken and HASP in China with Wicresoft, a joint venture between Microsoft Corporation and the Shanghai Municipal Government

* Signed a distribution agreement with General Electric’s Access Distribution subsidiary to distribute Aladdin’s enterprise security solutions to authorized value-added resellers in the U.S. and Canada

* Granted a U.S. patent covering “sandbox” technology used by the eSafe content security solution to protect against dangerous Internet-borne threats such as spyware, Trojans and exploits

* Granted a U.S. patent covering proactive protection against malicious code, such as viruses and spyware, through emulation - one of the most powerful methods for identifying malicious activity

* Appointed Mr. Tsion Gonen as Vice President of the eSafe Business Unit and Ms. Elinor Nissensohn as Global Vice President of Sales and Marketing

For further information on product highlights, please refer to the press room on the Company’s Web site which can be found at http://www.Aladdin.com/about/pressroom.asp.

Future Business Outlook

Aladdin continues to provide a business outlook on a quarterly basis. The Company undertakes no obligation to update its estimates. Based on current business activities and general economic conditions, Aladdin’s management believes revenues for the third quarter of fiscal 2006 will be in the range of $20.5 million to $22.7 million. Non-GAAP diluted earnings per share for the third quarter of 2006 are expected to be in the range of $0.22 to $0.27, excluding the impact of stock-based compensation expense which is anticipated to be approximately $0.04 per diluted share. GAAP diluted earnings per share for the third quarter of 2006 are expected to be in the range of $0.18 to $0.23.

Use of Non-GAAP Measures

This press release provides financial measures for net income, basic and diluted earnings per share that exclude stock-based compensation expense and are therefore not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management’s and investors’ ability to evaluate the Company’s net income and earnings per share and to compare it with historical net income and earnings per share prior to the adoption of FAS 123R by the Company effective January 1, 2006.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management uses both GAAP and non-GAAP measures when evaluating the business internally and therefore felt it important to make these non-GAAP adjustments available to investors.

Earnings Teleconference

The Company will hold a teleconference today, July 24th, at 9:00 a.m. EDT to discuss the quarterly results. To participate in the call, please dial (800) 399-0427 in North America, or +1 (706) 643-1624 internationally, approximately five minutes prior to the scheduled call start time. The call is being simultaneously Web cast and can be accessed on the Aladdin Web site at www.Aladdin.com/investor. Please visit the Web site at least 15 minutes prior to the scheduled call time to register for the Web cast and download any necessary audio software.

A replay of the call can also be accessed via telephone from 12:00 p.m. EDT on July 24th through 11:59 p.m. on July 31st by calling (800) 642-1687 in North America, or +1 (706) 645-9291 internationally, and entering the following access code: 2500810. A Web cast replay of the call will also be made and can be accessed on the Aladdin Web site at www.Aladdin.com/investor.

About Aladdin Knowledge Systems

Aladdin (NASDAQ: ALDN) is a global provider of security solutions that reduce software theft, authenticate network users and protect against unwanted Internet and e-mail content, including spam and viruses. Its security products are organized into two segments: Software Digital Rights Management (DRM) and Enterprise Security. Aladdin’s Software DRM products allow software publishers to limit revenue loss from software theft and piracy. Its Enterprise Security solutions enable organizations to secure their information technology assets by controlling who has access to their networks (authentication) and what content their users can utilize (content security). Visit the Aladdin Web site at www.Aladdin.com.

Safe Harbor Statement

Certain information presented herein constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions, the loss of market share, changes in the competitive landscape and other factors over which the company has little or no control.

Contact Information

Matthew Zintel

Zintel Public Relations

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