Corporate Governance

The Articles of Association, as amended in 2003, provide for a board of directors of not less than two, and not more than eight members. This can be modified by shareholders.

Each director, with the exception of outside directors who are elected to serve for set periods of time, is elected to serve until the next annual general meeting of shareholders and until his successor has been elected. A vacancy in our board, including a vacancy resulting from an enlargement of the board by resolution of the board of directors, may be filled by a vote of a majority of the directors then in office, even if less than a quorum. A director elected by the board as a result of such vacancy shall be elected to hold office until the next annual meeting of our shareholders. Our officers serve at the discretion of the board of directors.

The board of directors is composed of:

• Yanki Margalit - Chairman of the Board and Chief Executive Officer
• David Assia - Director
• Menahem Gutterman - Director
• Orna Berry - Director
• Dany Margalit - Director

Yanki Margalit

Mr. Margalit developed HASP, a system offering software security without inconveniencing legitimate users. In 1993, Mr. Margalit took Aladdin public on the NASDAQ stock exchange, and in 1996 he brought about the merger of Aladdin with FAST Software Security in Germany. Aladdin acquired eSafe Technologies in 1998, and Preview Systems in 2001.

Today, Aladdin is a global leader in Software Digital Rights Management with technology-leading solutions in Internet & Enterprise Security.

Organizational Structure

We have three wholly-owned subsidiaries: Aladdin Knowledge Systems, Inc., a United States subsidiary incorporated in the state of New York; Aladdin Japan & Co. Inc., a Japanese subsidiary; and Aladdin Western Europe Ltd. (formerly known as Aladdin Knowledge Systems UK Ltd.), a United Kingdom subsidiary incorporated in England and Wales. These subsidiaries are all involved in distribution, support and management for our products.

In addition we have a wholly-owned holding company, Hafalad BV, which is incorporated in Holland. Through Hafalad we wholly own Aladdin Western Europe BV (formerly known as Aladdin Knowledge Systems BV), Aladdin Western Europe (Aladdin France S.A.R.L.) (formerly known as Aladdin France S.A) and Aladdin Knowledge Systems Deutschland GmbH incorporated in Germany. Aladdin Western Europe BV is incorporated in Holland and Aladdin Western Europe (Aladdin France S.A.R.L.) is incorporated in France.

We have finalized the process of reorganizing the management of activities in France, the Netherlands and the United Kingdom, under the single management of Aladdin Western Europe Ltd. In addition to engaging in distribution, support and management, our German subsidiary provides research and development services. In addition, we have recently established Aladdin Asia Limited, a Hong Kong based subsidiary which we own, together, with Hafalad BV.

Board Practices

The Effect of the Company's New Articles of Association on Board Practices
On December 16, 2003, Aladdin shareholders replaced our Articles of Association with a new set of Articles of Association which reflect many changes implemented in order to conform to the Israeli C ompanies Law – 1999. The changes to our Articles of Association include the following, which affect the practices of our board of directors and management:

We are authorized to exempt in advance an "Office Holder" (as defined in the Companies Law) from all or any of his or her liability for damages in consequence of a breach of his or her duty of care to us. We may enter into a contract for the insurance of our Office Holder against (i) a breach of the duty of care owed to us or a third party, (ii) a breach of the fiduciary duty owed to us, provided that the Office Holder acted in good faith and had reasonable grounds to believe that his or her action would not harm our interests; and (iii) a monetary liability imposed on him or her in favor of a third party, for an act that he or she performed by virtue of being an Office Holder of us. We are authorized to undertake to give an undertaking in advance to indemnify an Office Holder for an obligation or expense, imposed on him or her in consequence of an act done in his or her capacity as an Office Holder.

To the extent permitted by the Companies Law, our board of directors will have the ability to declare dividends (in cash or in kind) to shareholders, without shareholder approval.

Substitute (Alternate) Directors
Our new Articles of Association provide that any director may, by written notice to us, appoint another person to serve as a substitute director, for all purposes and may cancel such appointment. A person may not serve as a substitute director for more than one director and may not serve as both director and as a substitute director. The term of appointment of a substitute director may be for one meeting of the board of directors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.

Outside Directors
The Israeli Companies Law -1999 requires Israeli companies with shares that have been offered to the public inside or outside of Israel to appoint two outside directors. No person may be appointed as an outside director if the person or the person's relative, partner, employer or any entity under the person's control, has or had, on or within the two years preceding the date of the person's appointment to serve as outside director, any affiliation with the company or any entity controlling, controlled by or under common control with the company.

The term "affiliation" includes:

• An employment relationship;
• A business or professional relationship maintained on a regular basis;
• Control of the company; and
• Service as an office holder.

No person may serve as an outside director if the person's position or other business activities create, or may create, a conflict of interest with the person's responsibilities as an outside director or may otherwise interfere with the person's ability to serve as an outside director.

The initial term of an outside director is three years and may be extended for an additional three-year period. Outside directors may be removed only by the same percentage of shareholders as is required for their election, or by a decision of the court, and then only if the outside directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. Each committee of a company's board of directors must include at least one outside director and both outside directors must be members of a company's audit committee. An outside director is entitled to compensation as provided in regulations promulgated under the Israeli Companies Law - 1999 and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an outside director.

Audit Committee
The Israeli Companies Law - 1999 requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company's business and approving related party transactions as required by law. An audit committee must consist of at least three directors, including the outside directors of the company. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee. We are also required by the NASDAQ National Market to establish an audit committee, at least a majority of whose members is independent of management.

Internal Auditor
Under the Israeli Companies Law - 1999, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company's actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he may not be the company's independent accountant or its representative.

Subsidiary List
We have three wholly-owned subsidiaries: Aladdin Knowledge Systems, Inc., a United States subsidiary incorporated in the state of New York; Aladdin Japan & Co. Inc., a Japanese subsidiary; and Aladdin Western Europe Ltd. (formerly known as Aladdin Knowledge Systems UK Ltd.), a United Kingdom subsidiary incorporated in England and Wales. These subsidiaries are all involved in distribution, support and management for our products.