Aladdin Knowledge Systems Reports Record Third Quarter Revenues; Raises 2008 Annual Guidance

TEL AVIV, ISRAEL, October 16, 2008 - 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 2008, ended September 30, 2008.

Non-GAAP Financial Highlights for the Third Quarter:

• Record revenues of $31.7 million, up 22 percent year-over-year
• Net income of $2.9 million, or $0.20 per share
• Strong demand from organic business
• Recent acquisitions position Aladdin as the leading software DRM and strong authentication provider

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems, stated, "Our strong third quarter results demonstrate that the continued execution of our strategy creates long-term growth for the company and increased shareholder value. These record results, combined with the ongoing performance of our core business and our pipeline, raises our confidence and we have revised our annual guidance accordingly. During the third quarter we completed two significant acquisitions, SafeWord and Eutronsec, which had an immediate positive impact on our non-GAAP earnings, and have enhanced value for our customers and shareholders. Our Board and management team are committed to continuing to further strengthen our IT security offerings, contribute to our market share and sales and increase our global brand recognition."

Non-GAAP revenues for the third quarter of 2008 were a record $31.7 million, an increase of 22 percent from the $26.1 million reported for the same period in 2007. Software DRM revenues for the third quarter of 2008 were $15.7 million, slightly above the same period in 2007. Non-GAAP Enterprise Security revenues for the third quarter were a record $16.0 million, a 51 percent increase from the $10.6 million recorded in the same period in 2007. For the first time, revenues in the third quarter included the consolidation of the SafeWord business line and EutronSec, beginning September 2008. Total non-GAAP revenues included approximately $0.4 million of Non-GAAP adjusted revenues, from the Enterprise Security business unit. Non-GAAP revenues for the first nine months of 2008 were $88.1 million, an increase of 15 percent from the $76.8 million recorded in the first nine months of 2007. Software DRM revenues for the first nine months of 2008 were $51.2 million, an increase of 4 percent from the $49.0 million reported in the same period in 2007. Non-GAAP Enterprise Security revenues for the first nine months of 2008 were $37.0 million, a 33 percent increase from the $27.8 million recorded in the same period in 2007.

Non-GAAP net income for the third quarter of 2008 was $2.9 million, or $0.21 per basic and $0.20 per diluted share, compared to third quarter of 2007 non-GAAP net income of $4.5 million, or $0.32 per basic and $0.31 per diluted share. Non-GAAP earnings per share excludes the impact of stock-based compensation expenses of approximately $0.7 million, fair value adjustment to acquired deferred revenues of approximately $0.4 million, amortization of intangibles related to the Company's acquisitions of approximately $0.6 million and approximately $1.9 million of non-recurring legal and other expenses related to the unsolicited acquisition proposal and request for a shareholders' meeting received by the Company during the third quarter.

For the first nine months of 2008, non-GAAP net income was $7.7 million, or $0.56 per basic and $0.54 per diluted share, compared with non-GAAP net income of $12.9 million, or $0.89 per basic share and $0.87 per diluted share for the first nine months of 2007. Non-GAAP net income for the first nine months of 2008 excludes the impact of stock-based compensation expenses of approximately $1.5 million, fair value adjustment to acquired deferred revenues of approximately $0.4 million, amortization of intangibles related to the Company's acquisitions of approximately $0.9 million and approximately $1.9 million of non-recurring legal and other expenses related to the unsolicited acquisition proposal and request for a shareholders' meeting.

Refer to the "Use of Non-GAAP Measures" section and accompanying financial table for a reconciliation of GAAP financial information to non-GAAP.

On a GAAP basis, third quarter revenues totaled $31.4 million. Software DRM revenues for the third quarter of 2008 were $15.7 million. Enterprise Security revenues for the third quarter were a record $15.6 million. Revenues for the first nine months of 2008 were $87.8 million. Software DRM revenues for the first nine months of 2008 were $51.2 million. Enterprise Security revenues for the first nine months of 2008 were $36.6 million.

On a GAAP basis, net loss for the third quarter of 2008 was $0.3 million, or $0.02 per basic and diluted share, compared to third quarter of 2007 GAAP net income of $4.3 million, or $0.31 per basic share and $0.30 per diluted share. GAAP net income for the third quarter of 2008 included $0.7 million for stock-based compensation expenses, compared to $0.1 million reported in the third quarter of 2007.

For the first nine months of 2008, GAAP net income was $3.5 million, or $0.25 per basic share and $0.24 per diluted share, compared with GAAP net income of $12.1 million, or $0.84 per basic and $0.82 per diluted share for the first nine months of 2007. Net income for the first nine months of 2008 included approximately $1.5 million for equity-based compensation expenses compared to $0.7 million in the first nine months of 2007.

Cash, cash equivalents and marketable securities totaled $8.8 million at September 30, 2008.

Quarterly Highlights

• Completed the acquisition of the Secure SafeWord product line from Secure Computing Corporation for approximately $65 million in cash, including acquisition costs
• Completed the acquisition of EutronSec, a provider of software protection and authentication products, for approximately €10.0 million in cash, including acquisition related expenses
• Signed a license agreement with Giesecke & Devrient (G&D), a technology leader in the field of smart cards and IT-security solutions. The agreement recognizes Aladdin's USB smartcard patents used in G&D's authentication products and grants G&D the rights to use the protected technology for its well-established StarSign e-Identity token solutions.
• Durham Regional Police (DRP) in Ontario, Canada chose the Aladdin eToken two-factor authentication device to comply with Canadian Police Information Centre (CPIC) regulations. DRP's deployment follows numerous other Canadian police forces that also chose Aladdin eToken.
• Dingli Communications, Inc., one of China's largest network engineering service providers, selected Aladdin HASP SRM to protect its software and increase licensing flexibility and enforcement.
• China Finance Online Co. Limited, a leading Chinese online financial information and corporate data provider, will deploy Aladdin eToken PRO USB smartcard devices, thereby enabling secure customer access to its "StockStar" investment analysis tools and services.
• Aladdin's eSafe was positioned in the visionaries' quadrant in Gartner's Magic Quadrant for Secure Web Gateway by Peter Firstbrook and Lawrence Orens, published September 11, 2008.

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/2008/index.aspx.

Future Business Outlook

Based on current business conditions and expectations, Aladdin management is again raising its Fiscal Year 2008 guidance, which was previously updated on September 4, 2008.

Aladdin now expects its 2008 non-GAAP revenues to be between $124 million and $134 million, compared to the previously projected non-GAAP range of $124 million to $132 million and as compared to the $105.9 million in revenues reported for fiscal year 2007. Non-GAAP revenues include any deferred revenue valuation adjustments. Aladdin expects GAAP revenues to be between $122 million and $132 million in fiscal year 2008.

Fiscal year 2008 non-GAAP diluted earnings per share are expected to increase to between $0.74 and $0.84 from between $0.67 and $0.77, as previously projected. The Company reported non-GAAP earnings per diluted share of $1.21 for fiscal year 2007, which excluded stock-based compensation expense, amortization of intangibles related to and the impact of the $2.0 million non-recurring up-front cost associated with production of video-based training.

Fiscal year 2008 GAAP diluted earnings per share is expected to increase to between $0.04 and $0.10 from a range of $0.00 to $0.05, as previously projected. The Company reported GAAP diluted earnings per share of $1.02 for fiscal year 2007.

The Company undertakes no obligation to update its estimates.

Earnings Teleconference

The Company will hold a teleconference today, October 16, 2008 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 (866) 345 5855 in North America, or +972 (3) 918 0609 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.

About Aladdin

Aladdin Knowledge Systems (NASDAQ: ALDN) is an information security leader with offices in 12 countries, a worldwide network of channel partners, and numerous awards for innovation. Aladdin eToken is the world's #1 USB-based authentication solution, offering identity and access management tools that protect sensitive data. Aladdin SafeWord two-factor authentication technology protects companies' important information assets and applications. Aladdin HASP SRM boosts growth for software developers and publishers through strong anti-piracy protection, IP protection, and secure licensing and product activation. Aladdin eSafe delivers real-time intelligent Web gateway security that helps protect data and networks, improves productivity, and enables compliance. Visit 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, risks relating to our recent acquisition of Athena Smartcards, SafeWord and Eutronsec, including the failure to realize expected synergies, failure to effectively integrate these businesses into our business and increasing unexpected liabilities, the loss of market share, changes in the level of business or anticipated business from a large customer or customers, failure to achieve anticipated customer orders, changes in the competitive landscape, unexpected costs associated with one time corporate events 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.

©2008 Aladdin Knowledge Systems, Ltd. All rights reserved. HASP, eToken, eSafe, SafeWord, Eutronsec, Aladdin Knowledge Systems and the Aladdin logos are trademarks or registered trademarks of Aladdin Knowledge Systems, Ltd. All other product and brand names mentioned in this document are trademarks or registered trademarks of their respective owners.

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