Aladdin Knowledge Systems Reports Record 2003 Fourth Quarter / Full-Year Results and Provides 2004 Q1 Guidance

For the year, revenues were $54.72 million, an increase of 11% compared with revenues of $49.52 million for 2002. Net income for the year was $2.73 million, or $0.24 per basic and $0.23 per diluted share, as compared with a net loss of $(0.59) per basic and diluted share for 2002.

Yanki Margalit, Chairman and CEO of Aladdin Knowledge Systems said, “The fourth quarter of 2003 ended the year with record-setting sales and increased profitability, resulting from worldwide growth across all product lines. Q4 2003 Software Digital Rights Management (DRM) sales were $11.63 million, an increase of 8% over Q4 2002.  Enterprise Security Sales reached $3.45 million, an increase of 31% over Q4 2002.”

 “We are extremely pleased to continue an upward trend of profitability, revenue growth, and increased cash flow while also expanding operations deeper into the Asia Pacific region and enlarging our worldwide network of resellers and distributors. Positive growth trends in the Software DRM market and Internet security support our optimism for growth and profitability in 2004.”

Q4 Financial Highlights

• Operating Results: Aladdin posted its second consecutive quarter of sequential revenue growth and represents its fourth consecutive year of revenue growth.
• Cash Flow: As of December 31, 2003, Aladdin had $19.5 million in cash and marketable securities. Cash flow from Operating activities in Q4 2003 was approximately $2.5 million and totaled $5.7 million for all of 2003.
• Profitability: Q4 2003 was the fourth sequential quarter with increased profitability.

2003 Product Highlights

Software Security (DRM)

• HASP® DocSeal released, a new digital document protection system that allows individuals to access confidential information or other intellectual property (IP).
• Privilege™ 6.0 released, allowing software developers and retailers to distribute secure software via CD, Electronic Software Distribution (ESD) or peer-to-peer networks with highly flexible licensing/marketing options.
• Approximately 2000 new software vendors chose HASP as their software protection system.

eSafe® Integrated Proactive Content Security Solution

• PC Magazine named eSafe Appliance one of the “Best Products of 2002” in its January 2003 cover story.
• eSafe experienced substantial increase in sales throughout all regions, more than doubling the number of customers with 2000 seats or more.
• New advanced anti-spam service launched within eSafe to provide state-of-the-art protection featuring text classification, hash signature data and heuristic text analysis. Over 1 Million users are protected with the new Advanced anti-spam service.
• More than 50 global banks and financial institutions are protected with eSafe today.

eToken™ User Authentication Solution

• Aladdin eToken received “Best Encryption Solution” Award at SC Magazine’
  s annual award ceremony in London.
• The Token Management System (TMS) released, simplifying deployment and maintenance of multiple authentication devices while significantly streamlining the implementation process of multiple, non-integrated solutions.
• The eToken PRO USB authentication device earned FIPS (Federal Information Processing Standards) 140-1 Level 2 and 3 physical protection certification from the National Institute of Standards and Technology (NIST).

Future Business Outlook
As of Q1 2004, Aladdin management will provide a business outlook on a quarterly basis. Aladdin undertakes no obligation to update its estimates.

Based on current business activities and general economic conditions, Aladdin management believes sales for Q1 2004 will be in the area of $14.4 million to $14.9 million and Earnings Per Share are expected to be in the range of $0.08 to $0.10. For comparison, the Company reported $13.1 million in revenue and $0.03 per share in Q1, 2003.

Earnings Teleconference
The Company will hold a teleconference today, January 22nd, at 9:00 a.m. EST to discuss the quarterly and year end results. To participate in the call, please dial (800) 683-1565, in the U.S., or (973) 409-9257 internationally, approximately five minutes prior to the scheduled call start time.  A replay of the call can also be accessed via telephone from 11:00 a.m. EST on January 22nd through 11:59 p.m. on January 29th by calling (877) 519-4471 in the United States, or (973) 341-3080 internationally, and entering the following access code: 4438520.

About Aladdin Knowledge Systems
Aladdin (Nasdaq: ALDN) is a leader in digital security, providing solutions for software commerce and Internet security since 1985, serving more than 30,000 customers worldwide.  Aladdin products include:  the USB-based eToken™ device for user authentication and e-commerce security; the eSafe® line of content security solutions that protect PCs and networks against malicious, inappropriate and nonproductive Internet-borne content; HASP® and Hardlock®, hardware-based software security systems that protect the revenues of developers; and Privilege™, a software licensing and distribution platform. Visit the Aladdin Web site at www.eAladdin.com.

For complete financial tables, visit
http://www.eAladdin.com/news/2004/corp/quart4.asp

Safe Harbor Statement
Except for the statements of historical fact, the information presented herein constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve 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 consumer buying habits and other factors over which Aladdin Knowledge Systems Ltd. has little or no control.