Aladdin Knowledge Systems Reports Fourth Quarter and Fiscal Year 2006 Financial Results

Record Q4 and Fiscal 2006 Revenues of $24.3 Million and $89.0 Million, Respectively

Record Fiscal 2006 GAAP Net Income of $14.0 Million or $0.93 Per Diluted Share

Net Income of $16.3 Million or $1.08 Per Diluted Share Excluding FAS 123R Charges


CHICAGO and TEL AVIV, ISRAEL, January 22, 2007 - Aladdin Knowledge Systems Ltd. (NASDAQ: ALDN), the leader in Software DRM, identity management and content security solutions, today announced financial results for the fourth quarter and fiscal year ended December 31, 2006.

Revenues for the fourth quarter of 2006 increased 12 percent to a record $24.3 million from $21.8 million for the same period in 2005. Software DRM revenues for the fourth quarter increased 13 percent to $15.9 million from $14.1 million in the same period in 2005. Enterprise Security revenues for the fourth quarter of 2006 increased 10 percent to $8.4 million from $7.7 million in the same period in 2005.

Revenues for fiscal year 2006 were a record $89.0 million, an increase of 9 percent from the $81.8 million recorded for fiscal year 2005. Software DRM revenues for fiscal year 2006 were $60.6 million, an increase of 7 percent from the $56.6 million recorded in 2005. Enterprise Security revenues for fiscal year 2006 increased 13 percent to $28.5 million from $25.2 million in 2005.

Net income in accordance with Generally Accepted Accounting Principles (GAAP) for the fourth quarter of 2006 was $3.6 million, or $0.25 per basic share and $0.24 per diluted share, compared with GAAP net income of $3.9 million or $0.27 per basic share and $0.26 per diluted share in the fourth quarter of 2005. For the fiscal year 2006, GAAP net income was $14.0 million, or $0.96 per basic share and $0.93 per diluted share, as compared with net income of $12.4 million, or $0.89 per basic share and $0.85 per diluted share for fiscal year 2005.

Non-GAAP net income for the fourth quarter of 2006, excluding $0.5 million of stock-based compensation expense related to the Company’s adoption of Financial Accounting Standards No. 123R, was $4.2 million, or $0.28 per basic and 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 fiscal year 2006, non-GAAP net income was $16.3 million or $1.12 per basic share and $1.08 per diluted share, excluding stock-based compensation expense of $2.3 million.

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems, stated, “Aladdin finished 2006 strongly, delivering record revenues, EPS at the top end of our guidance range and strong operating cash flow. With changing but undiminished threats from piracy, malicious content and spam, overall demand for our leading-edge security solutions remained strong. To further strengthen our strategic and competitive positioning we are continuing to invest in research and development, expanding our global presence in new markets, such as India, and launching new products such as HASP SRM, announced today. Our ability to deliver innovative security solutions that protect digital assets and enable secure business positions us well for continued growth in 2007.”

Cash, cash equivalents and marketable securities totaled $90.9 million at December 31, 2006, up $13.7 million from $77.2 million reported at December 31, 2005, with no outstanding debt. The increase was driven by positive cash flow from operations of $14.5 million during 2006.

Financial and Operating Highlights

* Record quarterly and annual revenues
* Record annual GAAP net income
* Cash flow from operating activities totaled $6.3 million in the fourth quarter and $14.5 million for the fiscal year 2006
* Aladdin expanded its global presence by establishing a subsidiary in Mumbai, India to support its ongoing growth in the country
* Awarded a European patent that significantly strengthens the intellectual property portfolio surrounding the Aladdin eSafe™ content security solution and its unique NitroInspection™ technology

Quarterly Product Highlights

* Aladdin announced HASP Software DRM solutions to fully support applications designed for Microsoft Windows Vista™ operating system
* Launched general availability of Aladdin eToken NG-OTP 2.0, the latest version of the Company’s award winning hybrid USB and OTP strong authentication solution. The new device significantly extends battery life and allows replacement of batteries in the tokens
* (n)Code Solutions, one of India’s leading licensed certifying authorities, announced it had deployed tens of thousands of USB-based Aladdin eTokens to its customers, providing them with cost effective and secure identity management solutions
* Virginia Tech selected USB-based Aladdin eTokens to begin its Secure Enterprise Technology Initiative aimed at providing the university with powerful security and easy implementation for fast–expanding use of Public Key Infrastructure throughout its campus. eToken’s multi platform support was an important factor in Virginia Tech’s selection process
* Aladdin successfully deployed HASP and eToken solutions to police forces in numerous countries, including Benelux, Canada, Germany, Japan, United Kingdom and United States
* Announced deployments of Aladdin’s eSafe SecureSurfing™ solution by several ISPs including:
o BCSnet, one of South Africa’s largest ISPs, which is using the solution to provide its business and consumer customers with “clean pipe” Internet access
o Grand County Internet Services (GCIS), the local ISP for Grand County, Colorado, which is using the solution to reduce spyware infections among GCIS customers and cut the number of support calls
o Smile-Internet Gold, one of Israel’s largest ISPs, which was already deploying Aladdin’s eSafe SecureSurfing™ solution to provide “clean pipe” Internet access to consumers, expanded its deployment by also offering to its business customers
o Transbeam, one of New York City’s leading ISPs for hotels and schools, began using the solution to offer its customers a first-of-its-kind security service that filters Web traffic prior to reaching end users
* eSafe content security solution received three Checkmark certifications for Anti-Trojan, Gateway Anti-Spyware and Anti-Virus Protection from West Coast Labs, an independent organization which tests and validates the functionality and performance of information security products

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

Based on a belief that Aladdin’s long-term financial performance is the better indicator of the success of the Company’s strategy and fundamental business model, rather than the variability of short-term results, Aladdin will be providing financial guidance going forward for a full fiscal year basis.

Based on current business activities and general economic conditions, Aladdin’s management believes revenues for fiscal year 2007 will be in the range of $95 million to $102 million. The Company reported $89 million in revenue in fiscal year 2006.

Fiscal year 2007 GAAP diluted earnings per share are expected to be in the range of $0.90 to $1.09, including a quarterly stock-based compensation expense of approximately $0.6 million. The Company reported GAAP diluted earnings per share of $0.93 in fiscal year 2006.

The Company undertakes no obligation to update its estimates.

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, January 22nd, at 9:00 a.m. EDT to discuss the quarterly and annual results. To participate in the call, please dial (800) 399-0427 in North America, or +1 (706) 643-1624 internationally, approximately ten 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 through 11:59 p.m. on January 29th by calling (800) 642-1687 in North America, or +1 (706) 645-9291 internationally, and entering the following access code: 5422731. 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 Knowledge Systems Ltd. (NASDAQ: ALDN), founded in 1985, is a global provider of security solutions. Its security products are organized into two segments: Software Digital Rights Management (DRM) and Enterprise Security. Aladdin’s Software DRM products allow software developers and publishers to protect their intellectual property, increase revenues through licensing, and reduce losses from software piracy. Aladdin’s Enterprise Security solutions enable organizations to secure their information technology assets by controlling who has access to their networks (identity and password management) and what content their users can utilize (proactive content security). Aladdin has offices in 10 countries, a worldwide network of channel partners and holds numerous industry awards for innovation and reliability. For more information, please 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. For more information, please refer to the Company’s filings with the Securities and Exchange Commission, which are available on the Commission’s website at www.sec.gov.

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Contact Information

Matthew Zintel

Press Contact

Zintel Public Relations

Contact via E-mail