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Aladdin Knowledge Systems Reports Record Quarterly Earnings

Record net income of $3.7 million, representing 56 percent growth year-over-year

Revenues of $19.6 million, representing 16 percent growth year-over-year

CHICAGO and TEL AVIV, ISRAEL, October 27, 2005 - Aladdin Knowledge Systems Ltd. (NASDAQ: ALDN) the worldwide leader in Software Digital Rights Management (DRM) and USB-based authentication solutions, and a leading innovator in enterprise secure content management (Enterprise Security), today announced financial results for the third quarter of fiscal year 2005 ended September 30, 2005.

Revenues for the third quarter of 2005 increased 16.1 percent to $19.6 million from $16.9 million for the same period in 2004. Aladdin's core operating segments, Software DRM and Enterprise Security, continued to experience double digit year-over-year revenue growth rates. Software DRM revenues for the third quarter increased 16.7 percent to $14.0 million from $12.0 million in the same period in 2004. Enterprise Security revenues for the third quarter of 2005 increased 14.5 percent to $5.6 million from $4.9 million in the same period in 2004. Revenues for the first nine months of 2005 were $60.0 million, an increase of 19.3 percent from the $50.3 million recorded over the same period in 2004.

Net income for the third quarter of 2005 was $3.7 million, or $0.25 per basic share and $0.24 per diluted share. Net income for the third quarter of 2004 was $2.3 million or $0.20 per basic and $0.18 per diluted share. For the first nine months of 2005, net income was $8.5 million or $0.62 per basic share and $0.59 per diluted share, as compared with net income of $6.2 million or $0.52 per basic and $0.48 per diluted share for the first nine months of 2004.

Cash, cash equivalents and marketable securities totaled $73.4 million at September 30, 2005, up $47.5 million from $25.9 million reported at December 31, 2004, with no outstanding debt. The increase includes the receipt of $38.8 million in net proceeds, following the successful completion of the Company's offering of ordinary shares which closed on March 30, 2005.

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems, stated, "Our performance in the third quarter was highlighted by robust operating margins, record quarterly net income and strong cash flow from operations as we to continue to leverage our strategic positioning in the growing end markets for our Software DRM and Enterprise Security solutions. Through our ongoing focus on operating efficiency, Aladdin remains well-positioned to continue delivering solid results for its shareholders."

Financial and Operating Highlights

  • Revenues increase 16.1 percent year-over-year to $19.6 million.
  • Gross profit totals $15.6 million, or 79.4% of revenue.
  • Net income increases 55.9 percent year-over-year to a record $3.7 million.
  • Cash flow from operations totals $4.2 million in third quarter.

Product Highlights

  • Software Security (DRM)
    • Aladdin HASP® HL added support for the protection and licensing of native Windows x64 applications.
    • Aladdin HASP® HL software protection and licensing solution launched as the first anti-piracy offering to support Apple's® move to Intel®-based CPUs.
    • HASP® HL was named the "markedly superior" hardware-based protection solution in a head-to-head comparative analysis conducted by AppLabs, a leader in performance analysis.
    • Vision Numeric, the world's largest Artistic CAD/CAM software supplier selected HASP® HL to protect its vast array of products against piracy.
  • eToken™ User Authentication Solution
    • Aladdin announced a partnership with PGP Corporation, a global leader in enterprise data security and encryption solutions, to minimize the vulnerability of proprietary information stored on laptop computers. Users of PGP Destktop Professional product will be able to store their PGP keys on an Aladdin eToken.
  • eSafe ® Integrated Proactive Content Security System
    • Aladdin eSafe 5 was named "hot pick" information security product by Information Security Magazine.
    • eSafe content security response team survey of the top 2,000 known spyware threats found that 15 percent are specifically designed for identity theft.
    • eSafe received Checkmark Spyware certification through West Coast Labs, a leading independent testing company.

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 fourth quarter of fiscal 2005 will be in the range of $20.7 million to $22.8 million and diluted earnings per share are expected to be in the range of $0.24 to $0.26. By comparison, the Company reported $18.8 million in revenue and basic and diluted earnings per share of $0.21 and $0.20, respectively, in the fourth quarter of 2004.

Earnings Teleconference

The Company will hold a teleconference today, October 27, 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 11:00 a.m. EDT on October 27 through 11:59 p.m. on November 4 by calling (800) 642-1687 in North America, or +1 (706) 645-9291 internationally, and entering the following access code: 1358521. 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. 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, viruses and spyware. 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 protect their intellectual property and increase revenues by reducing losses 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.

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Press Contact:

Matthew Zintel
Zintel Public Relations
310.574.8888
Investor Relations Contact:

Debbie Kaye
Aladdin Investor Relations
investor@aladdin.com
646.468.0481