Aladdin Knowledge Systems Reports Record Revenues, Net Income and Cash Flow, Raises Fiscal 2007 Guidance

Record Third Quarter Revenues of $26.1 Million, Up 24% Year-Over-Year

Record Net Income of $4.3 Million, or $0.30 Per Diluted Share, Up 32% Year-Over-Year

Record Cash Flow from Operations Increases to $6.5 Million, Up 20% Year-Over-Year

Net Income of $3.9 Million, Up 16% Year-Over-Year; or $0.26 Per Diluted Share

TEL AVIV, ISRAEL, October 23, 2007, - Aladdin Knowledge Systems, Ltd. (NASDAQ: ALDN), an information security leader specializing in authentication, software DRM and content security, today announced financial results for the third quarter of fiscal year 2007, ended September 30, 2007. All results are prepared in accordance with generally accepted accounting principles in the United States.

Revenues for the third quarter of 2007 were a record $26.1 million, an increase of 24 percent from the $21.0 million reported for the same period in 2006. Software DRM revenues for the third quarter of 2007 were $15.5 million, an increase of 11 percent from the $14.0 million reported in the same period in 2006. Enterprise Security revenues for the third quarter were a record $10.6 million, a 50 percent increase from the $7.1 million recorded in the same period in 2006. Revenues for the first nine months of 2007 were $76.8 million, an increase of 19 percent from the $64.8 million recorded in the first nine months of 2006.

Net income for the third quarter of 2007 was $4.3 million or $0.31 per basic share and $0.30 per diluted share and compared to net income for the third quarter 2006 of $3.3 million or $0.23 per basic share and $0.22 per diluted share, an increase of 32 percent year-over-year. Net income for the third quarter of 2007 included approximately $120,000 for equity-based compensation expenses compared to $600,000 in the third quarter of 2006. For the first nine months of 2007, net income was $12.1 million, or $0.84 per basic share and $0.82 per diluted share, compared with net income of $10.4 million or $0.71 per basic share and $0.69 per diluted share for the first nine months of 2006. Net income for the first nine months of 2007 included approximately $680,000 for equity-based compensation expenses compared to $1.7 million in the first nine months of 2006.

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems, stated, "Strong year-over-year double digit growth across our portfolio of Software DRM and Enterprise Security solutions powered our fourth consecutive quarter of record revenue as well as our highest quarterly net income and cash flow for operations performance ever. Improvements in operating margins, and a dedicated focus on financial efficiency, allowed Aladdin to expand profitability and cash flow growth at an even faster pace than our healthy top line growth rate. Our year to date results reflect our position as the worldwide leader in the software protection solution market and the exceptional growth of our Enterprise Security solutions in developed as well as emerging markets.

"During the third quarter we completed our second authorized stock repurchase program bringing the value of stock repurchased since May 2007 to approximately $20 million as we leverage the strength of our operating cash flow to benefit all our shareholders. Based on our robust financial performance during the first nine months of 2007 we are raising our revenue and earnings per share guidance ranges to reflect our higher expectations for Aladdin's full year financial results," concluded Margalit.

Cash, cash equivalents and marketable securities totaled $83.4 million at September 30, 2007, down $7.5 million from $90.9 million reported as of year end 2006. The Company generated positive cash flow from operations of $15.0 million during the first nine months of 2007, while using approximately $20 million in cash to purchase shares under the recently completed share repurchase programs.

Financial and Operating Highlights

• Record quarterly revenues and net income of $26.1 million and $4.3 million, respectively.
• Software DRM revenues for the third quarter increased by 11 percent.
• Enterprise Security revenues for the third quarter increased by 50 percent.
• Cash flow from operating activities in the third quarter totaled a record $6.5 million.
• $10 million in stock repurchases completed during the third quarter.
• Approximately 930,000 common shares repurchased since May 2007 at a total cost of approximately $20 million.

Quarterly Product Highlights

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/news/2007/index.aspx.

Future Business Outlook

Based on current business conditions and expectations, Aladdin management has raised its guidance for fiscal year 2007.

Revenues for fiscal year 2007 are now expected to be between $102 million and $107 million, up from the previously stated range of $100 million to $106 million. The Company reported $89 million in revenues in fiscal year 2006.

Fiscal year 2007 diluted earnings per share are now expected to be in the range of $1.06 to $1.15, up from the previously stated guidance range of $1.00 to $1.12. The Company reported diluted earnings per share of $0.93 in fiscal year 2006.

The Company currently anticipates equity-based compensation expenses to be approximately $180,000 for the fourth quarter of 2007. The Company undertakes no obligation to update its estimates.

Earnings Teleconference

The Company will hold a teleconference today, October 23, 2007 at 9:00 a.m. Eastern Time / 3:00 p.m. Israel Time to discuss the quarterly results. To participate in the call, dial +1 (888) 642 5032 in North America, or +972 (3) 918 0692 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. Eastern Time on October 23, 2007 through 11:59 p.m. Eastern Time on October 29, 2007 by calling + 1 (888) 254 7270 in North America, or +972 (3) 925 5948 internationally. 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' Software Rights Management products are the #1 choice of software developers and publishers to protect intellectual property, increase revenues, and reduce losses from software piracy. Aladdin eToken is the world's #1 USB-based authentication solution. The Aladdin eSafe secure Web gateway provides the most advanced protection against the latest Web-based threats and attacks. Aladdin has offices in 12 countries, a worldwide network of channel partners, and has won numerous awards for innovation. For more information, visit the Aladdin Web site at http://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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