ALADDIN KNOWLEDGE SYSTEMS LTD.

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INSIDER TRADING POLICY
and Guidelines with Respect to Certain Transactions in Company Securities

As Adopted by the Board of Directors on January, 2005

1. PURPOSE
   
It is illegal for any employee, officer or director of Aladdin Knowledge Systems Ltd. (the "Company") to trade in the securities of the Company while in the possession of material nonpublic information about the Company. It is also illegal for any employee, officer or director of the Company to give material nonpublic information to others who may trade on the basis of that information.
In order to comply with U.S. and Israeli securities laws governing (i) trading in Company securities while in the possession of material nonpublic information concerning the Company and (ii) tipping or disclosing material nonpublic information to outsiders, and in order to prevent the appearance of improper trading or tipping, the Company has adopted this policy for all of its employees, officers and directors.
2. SCOPE
1. This policy covers all employees, officers and directors of the Company and its subsidiaries. Employees, officers or directors are responsible for ensuring compliance by their immediate families and other members of their households.
2. This policy applies to any and all transactions in the Company's securities, including its Ordinary Shares and options to purchase Ordinary Shares (as described in more detail in Section V.E below), and any other type of securities that the Company may issue, such as preferred shares, convertible debentures, warrants and exchange-traded options or other derivative securities.
3. This policy will be delivered to all employees, officers or directors upon its adoption by the Company, and to all new employees, officers or directors at the start of their employment or relationship with the Company. Upon first receiving a copy of this policy or any revised versions, each employee, officer or director must sign a certification that he or she has received a copy and agrees to comply with the terms of this policy. This certification and agreement will constitute consent for the Company to impose sanctions for violation of this policy and to issue any necessary stop-transfer orders to the Company's transfer agent to enforce compliance with this policy. As discussed in Section VI.B, sanctions for individuals may include demotion or other disciplinary actions, up to and including termination of employment, if the Company has a reasonable basis to conclude that its policy has been violated.
4. This policy allows for trades by employees, officers and directors made in compliance with Rule 10b5-1 ("Rule 10b5-1") promulgated by the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act"), subject to the approval of the Insider Trading Compliance Officer (as defined in Section III below).
5. The Company may change these procedures or adopt such other procedures in the future as the Company considers appropriate in order to carry out the purposes of its policy.
3. INSIDER TRADING COMPLIANCE OFFICER

   The Company has designated Erez Rosen, the Company's Chief Financial Officer (or his successor in that position), as its Insider Trading Compliance Officer (the "Compliance Officer") and in the event of the Chief Financial Officer's unavailability, Orit Kwintner, the Company's General Counsel (or her successor in that position), shall be authorized to serve as Compliance Officer in the interim.

   
   The duties of the Compliance Officer will include the following:
   
   
   1. Administering and interpreting this policy and monitoring and enforcing compliance with all policy provisions and procedures.
   2. Responding to all inquiries relating to this policy and its procedures.
   3. Designating and announcing special trading blackout periods during which no designated employees, officers or directors may trade in Company securities.
   4. Providing copies of this policy and other appropriate materials to all current and new employees, officers and employees, and such other persons who the Compliance Officer determines may have access to material nonpublic information concerning the Company.
   5. Administering, monitoring and enforcing compliance with all US and Israeli insider trading laws and regulations, including without limitation the Exchange Act and the rules and regulations promulgated thereunder, the Securities Act of 1933 (the "Securities Act") and the Israeli Securities Law; and assisting in the preparation and filing of all required SEC reports relating to insider trading in Company securities.
   6. Revising the policy as necessary to reflect changes in insider trading laws and regulations.
   7. Maintaining as Company records originals or copies of all documents required by the provisions of this policy or the procedures set forth herein, and copies of all required SEC reports relating to insider trading.
   
   The Compliance Officer may designate one or more individuals who may perform the Compliance Officer's duties in the event that the Compliance Officer is unable or unavailable to perform such duties.
4. DEFINITION OF "MATERIAL NONPUBLIC INFORMATION"
   
1. "MATERIAL" INFORMATION

   Information about the Company is "material" if it would be expected to affect the investment or voting decisions of a reasonable shareholder or investor, or if the disclosure of the information would be expected to alter significantly the total mix of the information in the marketplace about the Company. In simple terms, material information is any type of information that could reasonably be expected to affect the market price of the Company's securities. Both positive and negative information may be material. While it is not possible to identify all information that would be deemed "material," the following types of information ordinarily would be considered material:
   

• Financial performance, especially quarterly and year-end earnings, and significant changes in financial performance or liquidity.
  
  
• Potential material mergers and acquisitions or material sales of Company assets or subsidiaries.
  
  
• Stock splits, public or private securities/debt offerings, or changes in Company dividend policies or amounts.
  
  
• Significant changes in senior management.
  
  
• New major contracts or customers, or the loss of a major customer.
  
  
• Initiation of a significant lawsuit.
  
  
2. "NONPUBLIC" INFORMATION
   Material information is "nonpublic" if it has not been widely disseminated to the public, for example, through major newswire services, national news services, Web casts or financial news services. For the purposes of this policy, information will be considered public, i.e., no longer "nonpublic," at the opening of trading on the third full trading day following the Company's widespread public release of the information.
3. CONSULT THE COMPLIANCE OFFICER FOR GUIDANCE
   Employees, officers or directors who are unsure whether the information that they possess is material or nonpublic must consult the Compliance Officer for guidance before trading in any Company securities.
5. STATEMENT OF COMPANY POLICY AND PROCEDURES
1. PROHIBITED ACTIVITIES
   
1. No employee, officer or director may trade in Company securities while possessing material nonpublic information concerning the Company (except as permitted by Section V.C). It does not matter that there is an independent, justifiable reason for a purchase or sale, if the employee, officer or director has material nonpublic information, the prohibition still applies.
   
   
2. No employee, officer or director may trade in Company securities outside of the applicable "trading windows" described in Section V.B below and no employee, officer or director may trade in the Company securities during any special trading blackout periods designated by the Compliance Officer that are applicable to such employee, officer or director (except as permitted by Section V.C).
   
   
3. The Compliance Officer may not trade in Company securities unless the trade has been approved by the Company's General Counsel in accordance with the procedures set forth in Section V.D below (except as permitted by Section V.C).
   
   
4. No employee, officer or director may disclose material nonpublic information concerning the Company to any outside person (including family members, analysts, individual investors and members of the investment community and news media), unless required as part of the regular duties of such employee, director or officer for the Company or authorized by the Compliance Officer. In any instance in which such information is disclosed to outsiders, the Company will take such steps as are necessary to preserve the confidentiality of the information, including requiring the outsider to agree in writing to comply with the terms of this policy and/or to sign a confidentiality agreement. All inquiries from outsiders regarding material nonpublic information about the Company must be forwarded to the Compliance Officer.
   
   
5. No employee, officer or director may give trading advice of any kind about the Company to anyone while possessing material nonpublic information about the Company, except that employees, officers or directors should advise others not to trade if doing so might violate the law or this policy. The Company strongly discourages all employees, officers or directors from giving trading advice concerning the Company to third parties even when the directors, officers and employees do not possess material nonpublic information about the Company.
   
   
6. No employee, officer or director may trade in any interest or position relating to the future price of Company securities, such as a put, call or short sale (including a short sale "against the box").
   
   
7. No employee, officer or director may (a) trade in the securities of any other public company while possessing material nonpublic information concerning that company obtained in the course of service as an employee, officer or director, (b) "tip" or disclose such material nonpublic information concerning any other public company to anyone, or (c) give trading advice of any kind to anyone concerning any other public company while possessing such material nonpublic information about that company.
   
   
8. Except as permitted by Section V.C, no employee, officer or director may give or make any other transfer of securities without consideration during a period when that employee, officer or director is not permitted to trade.
   
   
9. No director, officer or employee may participate, in any manner other than passive observation, in any of the investment or stock-related Internet "chat" rooms or message boards relating to the Company.
   
   
2. TRADING WINDOWS AND BLACKOUT PERIODS
1. Trading Windows for Employees. Employees may trade in Company securities only during the period beginning at the opening of trading on the third full trading day following the Company's widespread public release of quarterly or year-end operating results, and ending at the close of trading one month before the end of the then-current quarter, as long as they are not in possession of material nonpublic information or subject to any special trade blackout.
   
   
2. No Trading During Trading Windows While in the Possession of Material Nonpublic Information. No employee, officer or director possessing material nonpublic information concerning the Company may trade in Company securities even during applicable trading windows. Persons possessing such information may trade during a trading window only after the opening of trading on the third full trading day following the Company's widespread public release of the information.
   
   
3. No Trading During Blackout Periods. No director, officer or employee may trade in Company securities outside of the applicable trading windows or during any special blackout periods that the Compliance Officer may designate. No director, officer or employee may disclose to any outside third party that a special blackout period has been designated.
   
   
3. EXCEPTION FOR TRANSFERS PURSUANT TO RULE 10b5-1
   The restrictions outlined in Sections V.A.1, 2, 3, 4 and 9 and V.B shall not prohibit transfers of Company securities made pursuant to a written contract, letter of instruction or plan that (a) complies with the requirements of Rule 10b5-1 (a "Rule 10b5-1 Plan"), (b) has been approved by the Compliance Officer in advance of the first trade thereunder and (c) with respect to which the Company's Compliance Officer has received the certification referred to in Section V.D.3. No such approval by the Compliance Officer shall be considered the Compliance Officer's or the Company's approval that the Rule 10b5-1 Plan satisfies the requirements of Rule 10b5-1. It shall be the sole responsibility of the person establishing the Rule 10b5-1 Plan to ensure that such plan complies with the requirements of Rule 10b5-1.
   
4. PROCEDURES FOR APPROVING TRADES UNDER RULE 10B5-1 PLANS.
   

No trades shall be treated as having been made pursuant to a Rule 10b5-1 Plan under this policy unless:



1. The Rule 10b5-1 Plan complies with the requirements of Rule 10b5-1;
   
2. The Compliance Officer has approved the Rule 10b5-1 Plan, and has certified such approval in writing at least one month in advance of the first trade thereunder; and
   
3. The person establishing the Rule 10b5-1 Plan has certified to the Compliance Officer in writing no earlier than two business days prior to the date that the Rule 10b5-1 Plan is formally established, that:
   
(a) Such person is not in possession of material nonpublic information concerning the Company and all such trades to be made pursuant to Rule 10b5-1 Plan will be made in accordance with the Exchange Act, the Securities Act and the Israeli Securities Law; and
(b) The Rule 10b5-1 Plan complies with the requirements of Rule 10b5-1.

The existence of the foregoing approval procedures does not in any way obligate the Compliance Officer to approve any Rule 10b5-1 Plan. The Compliance Officer may reject any trading requests or Rule 10b5-1 Plans at his or her sole reasonable discretion.

5. STOCK OPTION PLANS
   The trading prohibitions and restrictions of this policy apply to all sales of securities acquired through the exercise of stock options granted by the Company, but not to the acquisition of securities through such exercises.
   
6. PRIORITY OF STATUTORY OR REGULATORY TRADING RESTRICTIONS The trading prohibitions and restrictions set forth in this policy will be superseded by any greater prohibitions or restrictions prescribed by securities laws and regulations. Any employee, officer or director who is uncertain whether other prohibitions or restrictions apply should ask the Compliance Officer.
6. POTENTIAL CIVIL, CRIMINAL AND DISCIPLINARY SANCTIONS
   
1. CIVIL AND CRIMINAL PENALTIES The consequences of prohibited insider trading or tipping can be severe. Under Israeli law, an insider who makes illegal use of inside information can be sentenced to five years imprisonment or fined up to NIS 1,010,000, and a person who makes illegal use of inside information that was provided by an insider can be sentenced to one year of imprisonment or fined up to NIS 404,000. Under U.S. law, persons violating insider trading or tipping rules may be required to pay over to the Company the profit made or the loss avoided by trading, pay the loss suffered by the persons who purchased securities from or sold securities to the insider tippee, pay civil penalties up to three times the profit made or loss avoided, pay a criminal penalty of up to $1 million and serve a jail term of up to 10 years. The Company and/or the supervisors of the person violating the rules may also be required to pay major civil or criminal penalties and could under certain circumstances be subject to private lawsuits by contemporaneous traders for damages suffered as a result of illegal insider trading or tipping by persons under the Company's control.
   
2. COMPANY DISCIPLINE

   Violation of this policy or federal or state insider trading or tipping laws by any employee, officer or director may subject a director to dismissal proceedings and an officer or employee to disciplinary action by the Company up to and including termination for cause. A violation of the Company's policy is not necessarily the same as a violation of law. In fact, for the reasons indicated above, the Company's policy is intended to be broader than the law. The Company reserves the right to determine, in its own discretion and on the basis of the information available to it, whether its policy has been violated. The Company may determine that specific conduct violates its policy, whether or not the conduct also violates the law. It is not necessary for the Company to await the filing or conclusion of a civil or criminal action against the alleged violator before taking disciplinary action.



3. REPORTING OF VIOLATIONS

   Any employee, officer or director who violates this policy or any federal or state laws governing insider trading or tipping, or knows of any such violation by any other employee, officer or director, must report the violation immediately to the Compliance Officer. Upon learning of any such violation, the Compliance Officer, in consultation with the Company's legal counsel, will determine whether the Company should release any material nonpublic information, or whether the Company should report the violation to the SEC or other appropriate governmental authority.

7. INQUIRIES Please direct all inquiries regarding any of the provisions or procedures of this policy to the Compliance Officer.