Edgar Filing: COMMTOUCH SOFTWARE LTD

< Cover to Come >

Rule 424b.3
File # 333-109837

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PROSPECTUS

Commtouch Software Ltd.

13,947,992 Ordinary Shares
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As we describe further below under "Offer Statistics and Expected
Timetable and Plan of Distribution," the Selling Securityholders identified in
this prospectus are selling up to 13,947,992 of our ordinary shares, 5,700,955
of which underlie warrants. The warrants themselves are not being offered by
this prospectus. Some of the Selling Securityholders acquired the ordinary
shares from the Company in a private placement in April 2002 after approval by
the Company's shareholders at a meeting held on April 8, 2002. Also, some of the
Selling Securityholders acquired the ordinary shares from the Company in two
private placements in July 2003 after approval by the Company's board of
directors on July 15, 2003 and July 28, 2003. The ordinary shares offered hereby
have been registered pursuant to registration rights granted to the Selling
Securityholders by the Company. These securities may be offered from time to
time by the Selling Securityholders through public or private transactions, on
or off the Nasdaq SmallCap Market, at prevailing market prices or at privately
negotiated prices. The Selling Securityholders will receive all of the proceeds
from this offering and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the securities. We will pay the
expenses of registration of this offering.

The Company has agreed to indemnify the Selling Securityholders against
certain liabilities, including liabilities under the Securities Act.

The ordinary shares are being offered by the Selling Securityholders
subject to prior sale, subject to their right to reject offers in whole or in
part and subject to certain other conditions.

The Selling Securityholders may be deemed to be "underwriters" within the
meaning of the Securities Act and any profits realized by them may be deemed to
be underwriting commissions. Any broker-dealers that participate in the
distribution of ordinary shares also may be deemed to be "underwriters," as
defined in the Securities Act, and any commissions or discounts paid to them, or
any profits realized by them upon the resale of any securities purchased by them
as principals, may be deemed to be underwriting commissions or discounts under
the Securities Act. The sale of the ordinary shares is subject to the prospectus
delivery requirements of the Securities Act.

Our ordinary shares are currently traded on the Nasdaq SmallCap Market
under the symbol "CTCH." On November 19, 2003 the last reported sales price of
an ordinary share on the Nasdaq SmallCap Market was $1.21 per share.

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This investment involves risk. See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this Prospectus is November 20, 2003

TABLE OF CONTENTS

Page
------

Special Note Regarding Forward-Looking Information..................... 1
Summary ............................................................... 2
Operating and Financial Review and Prospects .......................... 3
Risk Factors .......................................................... 7
Capitalization and Indebtedness ....................................... 16
The Offer and Listing.................................................. 17
Reasons for the Offer and Use of Proceeds ............................. 18
Selling Securityholders ............................................... 18
Shares Eligible for Future Sale ....................................... 22
Offer Statistics and Expected Timetable and Plan of Distribution....... 23
Legal Matters ......................................................... 25
Experts ............................................................... 25
Where You Can Find More Information ................................... 25
Information Incorporated by Reference ................................. 26
Enforceability of Civil Liabilities ................................... 26

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This document contains forward-looking statements, including projections about
our business, within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934. For example, statements in
the future tense, and statements including words such as "expect," "plan,"
"intend," "seek," "estimate," anticipate," and "believe" and similar expressions
are forward-looking statements. These statements are based on information
available to us at the time of the preparation of this document; we assume no
obligation to update any of them, to the extent that we are not so required
under applicable law. The statements in this document are not guarantees of
future performance and actual results could differ materially from our current
expectations as a result of numerous factors, including business conditions and
growth or deterioration in our market, commerce and the general economy both
domestic as well as international; fewer than expected new-partner
relationships; competitive factors including pricing pressures; technological
developments, and products offered by competitors; availability of qualified
staff for expansion; and technological difficulties and resource constraints
encountered in developing new products as well as those risks described below
and in the Company's Annual Reports on Form 20-F and reports on Form 6-K, which
are available through www.sec.gov.

SUMMARY

We are a provider of anti-spam solutions to enterprise customers. The Company
offers its anti-spam solutions to small, medium and large enterprises through a
variety of distribution channels, namely various reseller channels. The
solutions are also available for integration with security, content filtering,
anti-virus and other filtering solutions through alliances and strategic
partnerships. A combination of proprietary and patent-pending technologies makes
it possible for Commtouch to detect, alert and block most spam attacks as they
are distributed over the Internet.

Our anti-spam solution consists of both a software element (the "Enterprise
Gateway") and a service component (the "Service Center"). At the Enterprise
Gateway, messages are filtered at the customer organization's entry point,
before being distributed to recipients, with added user-level controls and a top
level of secure spam detection services from the Service Center, all allowing
for real-time reaction to worldwide spam attacks. At the heart of the solution,
however, is the Service Center, which detects new spam attacks as soon as they
are launched and distributed over the Internet. The Service Center provides
real-time spam detection services to enterprise customers by maintaining
constant communication with Enterprise Gateways that are locally installed at
customer premises in different locations worldwide. The Service Center collects
information from multiple sources about new spam attacks, analyzes the input
using Commtouch patent-pending technology, identifies and detects spam,
classifies the data, matches its stored information against outstanding queries
for spam detection from Enterprise Gateways and replies in real-time back to the
Enterprise Gateways with a prioritized and accurate resolution. The whole
process takes no more than 300ms. Enterprise privacy is kept at a maximum
because the content of incoming email messages is not seen by the Service
Center.

In particular, the Commtouch anti-spam solution operates to help eliminate spam
as follows:

Inbound email enters the Enterprise Gateway, a software add-on to the
enterprise SMTP server.

The Enterprise Gateway matches key characteristics of the message with
predefined spam policies created by IT managers or end-users.

If the solution does not match the message to a known source, either spam
or non-spam, it compares characteristics of the incoming message against
the Enterprise Gateway database of recently identified spam.

If the message remains suspicious, but cannot be confirmed as spam, the
Enterprise Gateway queries the Service Center for remote spam detection
and classification services.

The outgoing query consists of encrypted digital signatures taken from
e-mail header information to ensure enterprise security and
confidentiality.

The Service Center weighs the values of the outstanding query against its
vast database of real-time information about known spam messages and
sources of spam, and replies to the Enterprise Gateway with a unique and
up-to-date classification.

The Enterprise Gateway applies a locally predefined action to the message
and may store the information internally to match against new incoming
messages bearing similar characteristics.

We also offer a Software Development Kit ("SDK"). The SDK enables third-party
vendors to integrate the Commtouch anti-spam solution advantages into their
existing offerings, providing them with full spam identification and spam
classification services from the Service Center. These vendors benefit from
Commtouch expertise in blocking spam and other unwanted email traffic without
the need to develop and dedicate a service department in-house. The SDK
communicates fully with the remote Service Center, receiving results to queries
about suspicious messages and acting according to set policies on the customer
side. Each such vendor has the flexibility to determine how best to integrate
the SDK results into their solution. For example, if the Service Center
classifies a specific message as spam, the vendor's application may respond by
either quarantining the message, rejecting it completely or sending a
bounce-back message to its sender or any other option provided by the vendor's
specific application.

The SDK consists of a set of APIs, which receive characteristics of incoming
messages as input from the vendor's application, returning the status of the
message as output from the Service Center. The vendor has the option of
installing an API, which returns a deterministic result classifying messages as
either spam or non-spam, or using an API that classifies

messages based on the level of suspicion that the message is spam. Each vendor
can implement its solution differently, making the unique advantages of SDK
flexible to match particular needs.

Products that may benefit from integration of the SDK solution include:

o Anti-virus applications

o Content filtering solutions

o Firewall systems

o Security servers

o Other network appliances

Office Location

Our principal executive offices are located at 1A Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and our wholly owned subsidiary, Commtouch Inc., is located
at 1300 Crittenden Lane, Suite 103, Mountain View, California 94043, with a
telephone number of (650) 864-2000. Our website address is www.commtouch.com.

Operating and Financial Review and Prospects

The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
This discussion contains forward-looking statements based upon current
expectations that involve risks and uncertainties. Any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "expects," "anticipates,"
"believes," "intends," "plans," "seeks" and "estimates" and similar expressions
are intended to identify forward-looking statements. Commtouch's actual results
and the timing of certain events may differ significantly from those projected
in the forward-looking statements. Factors that might cause future results to
differ materially from those projected in the forward-looking statements
include, but are not limited to, those set forth elsewhere in this report.

Overview

During 2002, our main business was providing outsourced integrated Web-based
email and messaging solutions to a few businesses that remained as customers
following the transfer of our consumer outsource web-based email business and
sale of our Hosted Exchange email business during late 2001 and early 2002 in
transactions with MailCentro Inc. and Telecomputing, Inc. respectively. During
early 2002, concurrent with the divestiture of the Company's above-stated
businesses, the Company began marketing to service providers its messaging
software platform ("CMP"), which had been in development by the Company prior to
that time. Following a concerted effort to penetrate the email server market and
a determination that the continuing unfavorable economic conditions would hamper
potential sales of CMP, and given the Company's inherent knowledge of anti-spam
solutions based on its many years as an ASP in the outsourced email market and
the growing worldwide attention that has been directed to the problem of spam,
the Company transitioned its focus to the anti-spam market in mid-2002. While no
uniform definition of spam exists, the Company generally defines "spam" as the
sending of unsolicited bulk email for commercial and non-commercial purposes.

In February 2002, the Company sold off its migration service business, Wingra,
to Wingra's senior management. The operations of Wingra have been eliminated
from the operations of the entity as a result of the disposal transaction. The
Company has no intent to continue its activity in the migration service.

The results of operations including revenue, operating expenses and other income
and expense of Wingra for the six months ended 2002 have been reclassified in
the accompanying statements of operations as discontinued operations.

Critical Accounting Policies and Estimates

Operating and Financial Review and Prospects are based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. Management
believes the critical

accounting policies and areas that require the most significant judgments and
estimates to be used in the preparation of the consolidated financial statements
are revenue recognition and commitments and contingencies.

Revenue recognition

Revenue is recognized when the earnings process is complete, as evidenced by an
agreement between the customer and the company, when delivery has occurred or
services have been rendered, when the fee is fixed or determinable and when
collection is probable. The recognition of revenue in conformity with accounting
principles generally accepted in the United States requires the company to make
estimates and assumptions that affect the reported amounts of revenue. Estimates
related to the recognition of revenue include the accumulated provision for
revenues subject to refund and other. As additional information becomes
available, or actual amounts are determinable, the recorded estimates are
revised. Consequently, current operating results can be affected by revisions to
prior accounting estimates.

Allowance for Doubtful Accounts and promissory notes

We maintain allowances for doubtful accounts for estimated losses from our
customers' inability to make payments they owe us and for estimated losses from
our former employees inability to pay amounts guaranteed by promissory notes. In
order to estimate the appropriate level of this allowance, we analyze historical
bad debts, customer concentrations, current customer credit-worthiness, current
economic trends and changes in our customer payment patterns. If the financial
condition of our customers/employees were to deteriorate and to impair their
ability to make payments to us, additional allowances might be required in
future periods.

Impairment of long-lived assets

We assess the fair value and recoverability of our long-lived assets whenever
events and circumstances indicate the carrying value of an asset may not be
recoverable from estimated future cash flows expected to result from its use and
eventual disposition. In doing so, we make assumptions and estimates regarding
future cash flows and other factors to make our determination. The fair value of
our long-lived assets is dependent upon the forecasted performance of our
business, changes in our industry and the overall economic environment. When we
determine that the carrying value of our long-lived assets and goodwill may not
be recoverable, we measure any impairment based upon a forecasted discounted
cash flow method. If these forecasts are not met, we may have to record
additional impairment charges not previously recognized.

During 2002, we performed an assessment of the our property and equipment,
pursuant to SFAS No. No.144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No.144"). Pursuant to SFAS No. No.144, whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of by sale are reported at the lower of the carrying amount or
fair value less costs to sell. For the year ended December 31, 2002 the Company
recognized impairment losses totaling $ 0.8 million, which were recorded as
operating expenses.

Contingencies

Commtouch periodically records the estimated impacts of various conditions,
situations or circumstances involving uncertain outcomes. These events are
called "contingencies", and Commtouch's accounting for such events is prescribed
by Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies" ("SFAS No. 5")

SFAS No. 5 defines a contingency as "an existing condition, situation, or set of
circumstances involving uncertainty as to possible gain or loss to an enterprise
that will ultimately be resolved when one or more future events occur or fail to
occur."

SFAS No. 5 does not permit the accrual of gain contingencies under any
circumstances. For loss contingencies, the loss must be accrued if (1)
information is available that indicates it is probable that the loss has been
incurred, given the likelihood of the uncertain future events; and (2) that the
amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of
management. Commtouch uses its internal expertise, and outside experts (such as
lawyers, tax specialists and engineers), as necessary, to help estimate the
probability that a loss has been incurred and the amount (or range) of the loss.
The Company has recorded contingencies in situations where management determined
it was probable a loss had been incurred and the amount could be reasonably
estimated.

Revenue Sources

Service Fees. During 2000 - 2002, most of our email service revenues resulted
from contracts that required our customers to pay us a monthly per emailbox
price subject to a minimum commitment fee and fees for direct marketing and
communications services. In addition, the Company recognized revenue from sales
of software licenses to end users. During that time, we recognized no revenues
from our new anti-spam offering.

Results of Operations

Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2002
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Revenues:
Email services ........................................... $ 176 $ 2,076
Software licenses ........................................ -- 200
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Total revenues ........................................... $ 176 $ 2,276
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Cost of revenues:
Email services ........................................... 317 1,339
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Gross profit (loss) .......................................... (141) 937
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Operating expenses:
Research and development, net ............................ 708 1,103
Sales and marketing ...................................... 528 765
General and administrative ............................... 774 1,187
Amortization of stock-based employee deferred compensation 126 276
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Total operating expenses ................................. 2,136 3,331
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Operating loss ............................................... (2,277) (2,394)
Interest and other income (expense), net ................. (141) 24
Equity in Income of Imetrix .............................. 237 18
Minority interest ........................................ -- 74
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Loss from continuing operations .......................... (2,181) (2,278)
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Gain on disposal of Wingra ............................... -- 1,014
Discontinued operations - Wingra ......................... -- (335)
------- -------
Gain from sale of discontinued operations .................... -- 679
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Net loss ..................................................... $(2,181) $(1,599)
======= =======

Comparison of the Six Months Ended June 30, 2003 and 2002 --
(U.S. dollars in thousands, except share and per share data)

Revenues. Email service revenues decreased 92% from $2,076 for the six-months
ended June 30, 2002 to $176 for the same period in 2003. We recognized revenue
of $200 from the sale of licenses for the six-months ended June 30, 2002 and
none for the same period in 2003. For the six-months ended June 30, 2003, 100%
of the revenues were derived from four customers (39% from customer A, 38% from
customer B, 12% from customer C and 11% from customer D). For the six-months
ended June 30, 2002, 51% of the revenues were derived from two customers (34%
from customer A and 17% from customer B).

Cost of Revenues. Cost of revenues decreased 76% from $1,339 for the six-months
ended June 30, 2002 to $317 for the same period in 2003.We have decreased our
hosting infrastructure costs due to the agreement with MailCentro and sale of
the Hosted Exchange business.

Research and Development, Net. Research and development expenses decreased 36%
from $1,103 for the six-months ended June 30, 2002 to $708 for the same period
in 2003 due to the decrease in personnel and other related costs. For the
six-months ended June 30, 2002 and 2003, we received royalty-bearing grants
totaling $145 and zero, respectively, from the Israeli government, which were
recorded as a reduction of research and development costs. The Israeli
government requires beneficiaries of such grants to pay royalties to the Israeli
government based on the revenues derived from the sale of products, technologies
and services developed with such grants.

Sales and Marketing. Sales and marketing expenses decreased 31% from $765 for
the six-months ended June 30, 2002 to $528 for the same period in 2003, due to
the agreement with MailCentro and sale of the Hosted Exchange business, as well
as the change in business strategy.

General and Administrative. General and administrative expenses decreased 35%
from $1,187 for the six-months ended June 30, 2002 to $774 for the same period
in 2003, due primarily to curtailment of costs.

Amortization of Stock-Based Employee Deferred Compensation. Our stock-based
employee deferred compensation expenses decreased 54% from $276 for the
six-months ended June 30, 2002 to $126 for the same period in 2003. The deferred
compensation is being amortized using the sum-of-digits method over the vesting
schedule, generally four years. Amortization of these amounts will conclude
during the third quarter of 2003. Deferred compensation expenses also included
$117 for the six-months ended June 30, 2002 and 2003, respectively, relating to
the repricing of stock options during 2001. The total amortization charge of
$1.0 million related to the repricing will be amortized using the straight-line
method over a three year vesting schedule.

Interest and Other Income, Net. Our interest and other income, net, decreased
from a net income of $24 for the six-months ended 2002 to a net loss of $141 for
the six-months ended June 30, 2003, due primarily to decreased interest income
earned from cash equivalents, as the funds depleted in 2002.

Minority Interest. At June 30, 2002 and 2003, respectively, the Company owned
32% of the equity and voting rights of Commtouch, K.K. (Japan).

Liquidity and Capital Resources

We have financed our operations from the issuance of equity securities and, to a
lesser extent from private loans, bank loans and research and development grants
from the Israeli government.

As of June 30, 2003, we had approximately $1,034 of cash to fund operations for
at least the next twelve months. For the six-months ended June 30, 2003 and
2002, we utilized $1,641 and $2,032, respectively of cash to fund operating
losses. Net cash provided by financing activities were approximately $1,287,
mainly due to proceeds from issuance of convertible loan.

RISK FACTORS

You should carefully consider the following risk factors before you decide to
buy our ordinary shares. You should also consider the other information in this
prospectus. If any of the following risks actually occur, our business,
financial condition, operating results or cash flows could be materially
adversely affected. This could cause the trading price of our ordinary shares to
decline, and you could lose part or all of your investment. The risks described
below are not the only ones facing us. Additional risks not presently known to
us, or that we currently deem immaterial, may also impair our business
operations.

Business Risks

If the market does not respond favorably to our new anti-spam solutions, we will
fail to generate revenues.

Our success will depend on the acceptance and use of our anti-spam solutions by
enterprise customers. We cannot estimate the size or growth rate of the
potential market for our anti-spam offerings. If the market for anti-spam
solutions fails to grow or grows more slowly than we currently anticipate, our
business will suffer dramatically. Even if that market grows, our solutions may
not achieve broad market acceptance. Since we have only recently released our
new anti-spam solution for general distribution, we do not have experience to
evaluate whether it will achieve broad market acceptance. Also, because a
preponderance of our future revenue will be derived directly or indirectly from
our anti-spam solutions, if that market does not grow, our business will likely
fail.

Dependence upon resellers and product concentration

The Company expects that it will continue to be dependent upon resellers for a
significant portion of its revenues. If anticipated orders from these resellers
fail to materialize, the Company's business, operating results and financial
condition will be materially adversely affected. The Company expects to derive
the vast majority of its revenues in the foreseeable future from sales of its
anti-spam solutions.

Our future revenues are difficult to predict and our quarterly operating results
may fluctuate which could adversely affect the value of your investment.

Because we have a limited history with our new anti-spam solutions and because
of the emerging nature of the markets in which we compete, our revenue is
difficult to predict. Our current and future expense levels are to a large
extent fixed. We may be unable to adjust spending quickly to compensate for any
revenue shortfall, and any significant revenue shortfall would have an immediate
negative effect on our results of operations and share price.

A number of factors, many of which are enumerated in this "Risk Factors"
section, are likely to cause fluctuations in our operating results and/or cause
our share price to decline. Other factors which may cause such fluctuations
include:

o Our ability to successfully develop and market our anti-spam
solutions to new markets;

o The market acceptance of our new anti-spam solutions;

o The size, timing and fulfillment of orders for our new anti-spam
solutions;

o Our ability to expand our workforce with qualified personnel, as may
be needed;

o Unanticipated bugs or other problems arising in providing our new
anti-spam solutions to enterprise customers;

o The success of our resellers sales efforts to potential enterprise
customers;

o The solvency of our resellers and their ability to allocate
sufficient resources towards the marketing of our new anti-spam
solutions to their potential enterprise customers;

o The rate of adoption of anti-spam solutions by enterprise customers
in the current economic environment;

o The threat of de-listing by the NASDAQ;

o The receipt or payment of irregular or nonrecurring revenues or
expenses;

o Our ability to successfully develop and market new, modified and/or
upgraded solutions, as may be needed;

o The substantial decrease in information technology spending in
general;

o Pricing of our solutions;

o Our ability to timely collect fees owed by resellers/customers; and

o Effectiveness of our customer support, whether provided by our
resellers or directly by Commtouch.

Because of differing operational factors and the material changes to our
business model, period-to-period comparisons of our operating results are not a
good indication of our future performance. It is likely that our operating
results in some quarters will be below market expectations. Because we are going
to market with new solutions and have not had anti-spam solution sales during
2002, it is difficult to evaluate our business and prospects.

We commenced operations in 1991, but we are only beginning to try to sell our
new anti-spam solutions after having ceased our efforts to sell our software
messaging solution during 2002 and, prior to that time, having provided
outsourced Web-based email services from 1998 through 2001 (which itself was a
change from our initial focus on the sale, maintenance and servicing of
stand-alone email client software products for mainframe and personal
computers). In mid-2002, we began focusing exclusively on completing development
of and selling our new anti-spam solutions. This change required us to once
again adjust our business processes and to readjust the workforce at Commtouch
(predominantly, the sales force). Therefore, we have no operating history as a
provider of our new anti-spam solutions upon which you may be able to evaluate
our business and prospects. It is too early to judge whether this business will
succeed.

We have many established competitors who are offering a multitude of solutions
to the spam problem

The market for anti-spam solutions is intensely competitive and we expect it to
be increasingly competitive. Increased competition could result in pricing
pressures, low operating margins and the realization of little or no market
share, any of which could cause our business to suffer.

In the market for anti-spam solutions, there are a large number of providers
offering "content filtering" solutions (solutions focusing solely on the content
of potential spam email). Other providers that offer forms of software (gateway)
and/or service based solutions and which may be viewed as direct competitors to
Commtouch include Brightmail(R) and Postini(R). There is a great likelihood
that, as the market for anti-spam solutions further develops and given the
difficult technological hurdles in attempting to create an effective solution,
established Internet security players will enter the market, who may be able to
leverage their market position and resources to capture a portion of the
anti-spam market.

As this market continues to develop, a number of companies with greater
resources than ours could attempt to increase their presence in this market by
acquiring or forming strategic alliances with our competitors or business
partners. Competitors could introduce products with superior features,
scalability and functionality at lower prices than our products and could also
bundle existing or new products with other more established products that
discourage users from purchasing our products. In addition, because there are
relatively low barriers to entry for the software market, we expect additional
competition from other established and emerging companies. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.

Also, there are companies that develop and maintain in-house anti-spam
solutions, such as Microsoft(R)and Yahoo(R). These and other companies could
potentially leverage their existing capabilities and relationships to enter the
anti-spam industry.(R)Brightmail, Postini, Microsoft and Yahoo are trademarks of
Brightmail, Inc., Postini, Inc., Microsoft Corporation and Yahoo! Inc.
respectively.

Our market's level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our offerings, we may encounter increased
competition in the development and distribution of these solutions. Many of our
current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and greater financial, technical,
sales, marketing and other resources than we do and may enter into strategic or
commercial relationships on more favorable terms. Some of these competitors have
research and development capabilities that may allow them to develop new or
improved products that may compete with product lines we market and distribute.
New technologies and the expansion of existing technologies may increase
competitive pressures on us. We may not be able to compete successfully against
current and future competitors.

Our ability to increase our revenues will depend on our ability to successfully
execute our sales and marketing plan.

The complexity of the underlying technological base of our anti-spam solutions
and the current landscape of the anti-spam market require highly trained sales
and marketing personnel to educate prospective resellers and customers regarding
the use and benefits of our solutions. We have limited experience in selling
anti-spam solutions to enterprise customers. It will take time for our current
and future employees and resellers to learn how to market our solutions.
Additionally, we are unable to predict the possibility of success selling newly
introduced solutions for which we have no marketing experience and are relying
on these solutions to produce a substantial portion of our revenues in the
future. As a result of these factors, our sales and marketing organization may
not be able to compete successfully against bigger and more experienced sales
and marketing organizations of our competitors.

We have a history of losses and may never achieve profitability.

We incurred net losses of approximately $54.2 million in 2000, $61.0 million in
2001, $4.9 million in 2002 and a net loss of $2.18 million for the six months of
2003. As of December 31, 2002 and June 30, 2003, we had an accumulated deficit
of approximately $151.7 million and approximately $153.8, respectively. We have
not achieved profitability in any period, and we might continue to incur net
losses in the future. If we do not achieve profitability, our share price may
decline further.

Possible need for additional funds

The Company remains very thinly capitalized. As such, we might become dependent
upon raising additional funds to finance our business. Our cash balance at
December 31, 2002 and June 30, 2003 was approximately $1.4 million and
approximately $1.0 million, respectively. In connection with the two private
placements that occurred in July 2003, we raised an additional $3,040,000. See
"Risk Factors--Investment Risks--We may need additional capital" below. If we
are unable to raise additional funds, the Company could fail. There can be no
assurance that we will be able to raise necessary funds or that we will be able
to do so on terms acceptable to us. If needed, our inability to obtain adequate
capital would limit our ability to continue our operations. Any such additional
funding may result in significant dilution to existing stockholders.

In the past we have received funds for the development of our business from the
State of Israel ("OCS") through the Office of the Chief Scientist, or the OCS.
However, under our Convertible Loan Agreement, we have agreed to limit our total
funding received or receivable from the OCS to a maximum in the aggregate of
$1,500,000 during the term of the loan. Grants received from the OCS through
2002 that the Company potentially will be obligated to repay totaled
approximately $800,000.

Risk of Litigation

Legal proceedings can be expensive, lengthy and disruptive to normal business
operations, regardless of their merit. Moreover, the results of complex legal
proceedings are difficult to predict and an unfavorable resolution of a lawsuit
or proceeding could have a material adverse effect on the Company's business,
results of operations or financial condition.

Indemnification of Directors and Officers

The Company has agreements with its directors, subject to Israeli law, that
provide for the Company to indemnify these directors for any of the following
obligations or expenses incurred as a result of an act or omission of such
persons in their capacity as directors: (a) any monetary obligation imposed upon
them for the benefit of a third party by a judgment, including a settlement or
an arbitration decision, confirmed by the court, and (b) reasonable litigation
expenses, including legal fees, actually incurred by such a director or imposed
upon the director by a court order, in a proceeding brought against him/her by
or on behalf of the Company or by others, or in connection with a criminal
proceeding in which he/she was acquitted, or in connection with a criminal
action which does not require criminal intent in which he/she was convicted.

Risk due to economic conditions

Should economic conditions fail to improve, our ability to sell our new
anti-spam solutions could be negatively impacted. Furthermore, even if we are
successful in selling our solutions, our ability to collect outstanding
receivables may be significantly impacted by liquidity issues of our resellers'
customers and/or our resellers themselves, which may negatively affect our
ability to recognize future revenue based on sales. As a result, we may
experience shortfalls in our future revenues.

The loss of our key employees would adversely affect our ability to manage our
business, therefore causing our operating results to suffer and the value of
your investment to further decline.

Our success depends on the skills, experience and performance of our senior
management and other key personnel. The loss of the services of any of our
senior management or other key personnel, including Gideon Mantel, our Chief
Executive Officer and Amir Lev, our President and Chief Technical Officer, could
materially and adversely affect our business. The loss of our software
developers may also adversely affect our anti-spam solutions, therefore causing
our operating results to suffer and the value of your investment to decline. We
do not have employment agreements inclusive of set periods of employment with
any of these key personnel. We cannot prevent them from leaving at any time. We
do not maintain key-person life insurance policies on any of our employees.

Our business and operating results could suffer if we do not successfully
address the risks inherent in doing business overseas.

At December 31, 2002, we had sales offices in Israel and the United States.
Depending on the success of our marketing efforts in North America, we may
pursue the marketing of our anti-spam solutions in international markets by
utilizing appropriate distributorship channels. However, we may not be able to
compete effectively in international markets due to various risks inherent in
conducting business internationally, such as:

o differing technology standards;

o inability of distribution channels to successfully market our
anti-spam solutions;

o export restrictions, including export controls relating to encryption
technologies;

o difficulties in collecting accounts receivable and longer collection
periods;

o unexpected changes in regulatory requirements;

o political and economic instability;

o potentially adverse tax consequences; and

o potentially reduced protection for intellectual property rights.

Any of these factors could adversely affect the Company's prospective
international sales and, consequently, business and operating results.

Terrorist attacks such as the attacks that occurred in New York and Washington,
D.C. on September 11, 2001 and other attacks or acts of war may adversely affect
the markets on which our ordinary shares trade, our financial condition and our
results of operations.

On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. These attacks caused major instability in the U.S. and
other financial markets. There could be further acts of terrorism in the United
States or elsewhere that could have a similar impact. Leaders of the U.S.
government have announced their intention to actively pursue and take military
and other action against those behind the September 11, 2001 attacks and to
initiate broader action against national and global terrorism. In this regard,
the U.S. recently led a coalition of forces in attacks on Afghanistan and Iraq.
The worldwide ramifications of such attacks are unknown at this time. Armed
hostilities or further acts of terrorism would cause further instability in
financial markets and could directly impact our financial condition and our
results of operations.

Technology Risks

We might not have the resources or skills required to adapt to the changing
technological requirements and shifting preferences of our customers and their
users.

The spam and anti-spam industry is characterized by difficult technological
challenges, sophisticated "spammers" and constantly evolving spam practices and
targets that could render our anti-spam solutions and proprietary technology
ineffective. Our success depends, in part, on our ability to continually enhance
our existing anti-spam solutions and to develop new solutions, functions and
technology that address the potential needs of prospective customers and their
users. The development of proprietary technology and necessary enhancements
entails significant technical and business risks and requires substantial
expenditures and lead-time. We may not be able to keep pace with the latest
technological developments. We may not be able to use new technologies
effectively or adapt to customer or end user requirements or emerging industry
standards. Also, we must be able to act more quickly than our competition, and
may not be able to do so.

Our software may be adversely affected by defects, which could cause our
customers or end users to stop using our solutions.

Our anti-spam solutions are based in part upon new and complex software. Complex
software often contains defects, particularly when first introduced or when new
versions are released. Although we conduct extensive testing, we may not
discover software defects that affect our new or current solutions or
enhancements until after they are delivered. Although we have not experienced
any material software defects to date in our anti-spam solutions offering, it is
possible that, despite

testing by us, defects may exist in the software we license. These defects could
cause interruptions in our anti-spam solutions for customers that could damage
our reputation, create legal risks, cause us to lose revenue, delay market
acceptance or divert our development resources, any of which could cause our
business to suffer.

Investment Risks

We may need additional capital.

We have invested heavily in technology development. We expect to continue to
spend financial and other resources on developing and introducing new offerings
and maintaining our corporate organizations and strategic relationships. We also
expect to invest resources in research and development projects to develop
enhanced anti-spam solutions for enterprises and, possibly, other target
markets.

Based on the cash balance at September 30, 2003, current projections of
revenues, related expenses, the ability to further curtail certain discretionary
expenses and completion of the two equity financings announced on July 16, 2003
and August 4, 2003, the Company believes it has sufficient cash to continue
operations for at least the next twelve months.

We were previously subject to a class action lawsuit.

Following our restatement of revenues for the first three quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the Northern District of California against the Company and certain of our
officers and a director, alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
These lawsuits were consolidated into one action in late 2001. Thereafter, the
Company filed a Motion to Dismiss, which was granted. The plaintiffs then filed
a second amended and consolidated complaint, and our second motion to dismiss
was only partially accepted, with the end result being that the plaintiffs filed
a third amended and consolidated complaint. We (including the individual
defendants) filed an answer to that complaint, and the case then moved into the
discovery stage, with the case being set for trial in January 2004. In May 2003,
a settlement agreement was signed between the plaintiffs and defendants and the
court thereafter issued a preliminary order approving the settlement. The
settlement calls for the payment of $15 million to the plaintiffs, with this
amount to be fully funded by the Company's Directors and Officers policy. The
payment to plaintiffs under this settlement should not cause the Company any
financial hardship. On September 24, 2003, the court entered a final order
approving the settlement and, as of such date, no class member had chosen to opt
out of the settlement. The settlement does not contain any admissions or
findings of wrongdoing on the part of the defendants, and we continue to
maintain that the Company and individual defendants acted properly at all times.

If we cannot satisfy Nasdaq's maintenance requirements, it may delist our
ordinary shares from its Smallcap Market and we may not have an active public
market for our ordinary shares. The absence of an active trading market would
likely make our ordinary shares an illiquid investment.

Our ordinary shares are quoted on the Nasdaq SmallCap Market. To continue to be
listed, we are required to maintain shareholders' equity of at least $2,500,000,
or market value of our outstanding shares (excluding shares held by company
insiders and principal shareholders) of at least $35,000,000, or we must have
realized at least $500,000 in net income from continuing operations in our last
fiscal year or in two of our last three fiscal years. Until recently, we did not
comply with any of these listing requirements. However, as a result of the
proceeds we received from our recent private placement offerings, we currently
are in compliance with the $2,500,000 shareholders' equity requirement. However,
if we continue to incur operating losses our shareholders' equity will decrease
to reflect those losses. Accordingly, there can be no assurance that we will
continue to comply with this requirement.

If we will not be in compliance with any of these tests in the future, Nasdaq
may delist our ordinary shares. If this occurs, trading in our shares may be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
available, the "OTC Bulletin Board Service." As a result, an investor would
likely find it significantly more difficult to dispose of, or to obtain accurate
quotations as to the value of, our shares.

Also, Nasdaq may delist our ordinary shares if it deems it necessary to protect
investors and the public interest.

If our shares are delisted, they may become subject to the SEC's "penny stock"
rules and be more difficult to sell.

SEC rules require brokers to provide information to purchasers of securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the Nasdaq Stock Market. If our shares become "penny stock" that is
not exempt from these SEC rules, these disclosure requirements may have the
effect of reducing trading activity in our shares and making it more difficult
for investors to sell. The rules require a broker-dealer to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker must also give bid and offer quotations and broker and
salesperson compensation information to the customer orally or in writing before
or with the confirmation. The SEC rules also require a broker to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction
before a transaction in a penny stock.

Our directors, executive officers and principal shareholders will be able to
exert significant influence over matters requiring shareholder approval and
could delay or prevent a change of control.

Our directors and affiliates of our directors, our executive officers and our
shareholders who currently individually beneficially own over five percent of
our ordinary shares, beneficially own, in the aggregate, approximately 40.09% of
our outstanding ordinary shares as of August 12, 2003 plus warrants and options
exercisable within 60 days thereof. If they vote together (especially if they
were to convert all beneficial holdings into shares entitled to voting rights in
the Company), these shareholders will be able to exercise significant influence
over all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also delay or prevent a change in control of Commtouch. The
above percentage of beneficial ownership includes warrants and options totaling
7.36% of the outstanding ordinary shares which are underwater as of August 12,
2003.

In addition to certain of the Selling Securityholders in this offering who
beneficially hold over 5% of our outstanding ordinary shares (See "Selling
Securityholders" below), the following individuals also beneficially hold at
least 5% of our outstanding ordinary shares:

o Gideon Mantel, CEO and a director in the Company, beneficially owns
approximately 6.7% of our outstanding ordinary shares (inclusive of
warrants underwater as of August 12, 2003 constituting approximately
1% of the outstanding ordinary shares); and

o Nahum Sharfman, a director in the Company, beneficially owns
approximately 5.0% of our outstanding ordinary shares (inclusive of
warrants and options underwater as of August 12, 2003 constituting
0.8% of the outstanding ordinary shares).

These significant shareholders will be able to significantly influence and
possibly exercise control over most matters requiring approval by our
shareholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control. In addition, conflicts of
interest may arise as a consequence of these significant shareholders control
relationship with us, including:

o conflicts between significant shareholders, and our other
shareholders whose interests may differ with respect to, among other
things, our strategic direction or significant corporate
transactions;

o conflicts related to corporate opportunities that could be pursued by
us, on the one hand, or by these shareholders, on the other hand; or

o conflicts related to existing or new contractual relationships
between us, on the one hand, and these shareholders, on the other
hand.

Furthermore, InfoSpace holds the right to name one director to our Board as long
as it continues to hold at least 620,022 shares, including the shares issuable
upon exercise of the InfoSpace warrant. It named Thomas Camp to the Board under
this provision, who resigned on August 22, 2001 and was not replaced by
Infospace.

Substantial sales of our ordinary shares could adversely affect our share price.

The sale, or availability for sale, of substantial quantities of our ordinary
shares may have the effect of further depressing its market price. A large
number of our ordinary shares which were previously subject to resale
restrictions, are currently eligible for resale. In addition a significant
number of shares are eligible for resale in the future (i.e. those shares
covered by warrants issued in the private round of financing of February 2002
those shares that may be issued if the lenders in the convertible loan
transaction decide to exercise warrants and/or convert the Company's loan
obligations to equity and those shares that will be eligible for resale at
various dates in the future pursuant to this Registration Statement. These
shares will dilute existing shareholders.

Risk of failure to honor registration rights for the 2002 and 2003 private
placements

According to the agreements with the Selling Securityholders, should the Company
fail to meet certain deadlines for filing the Registration Statement and
achieving the effectiveness thereof, the Company risks having imposed on it
liquidated damages as defined in the agreements.

Risk of occurrence of event of default under Convertible Loan Agreement

The Company is required to abide by the terms and provisions of the Convertible
Loan Agreement. Upon failure to do so, for example, failure to pay principal or
interest, failure to obtain the registration with the SEC of the shares that may
be issued to lenders under the agreement, failure to maintain consolidated cash
reserves of at least $500,000, upon the lenders' demand, we would be in default
of the agreement. The lenders were granted security interests in all of the
Company's assets. If an event of default were not cured by the Company, the loan
would accelerate and all amounts due under the loan would immediately become due
and payable. If the Company were unable to repay the loan amounts, the lenders,
among other things, would have the right to foreclose on their security
interests in the Company's assets by seizing and selling all the Company's
assets.

Intellectual Property Risks

If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages.

We regard our patent pending technology, copyrights, service marks, trademarks,
trade secrets and similar intellectual property as critical to our success, and
rely on patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees and customers to
protect our proprietary rights. Third parties may infringe or misappropriate our
patent pending technology, trade secrets, copyrights, trademarks and similar
proprietary rights. We have recently filed a provisional patent application
covering certain aspects of our anti-spam technology, and we may convert this
application into a formal patent application or seek to patent certain
additional software or other technology in the future. Any such future patent
applications may not be issued within the scope of the claims we seek, or at
all. We cannot be certain that our software does not infringe issued patents
that may relate to our anti-spam solutions. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications previously may have been filed which relate to our
anti-spam solutions.

Other parties may assert infringement claims against us. We may also be subject
to legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the patents, trademarks
and other intellectual property rights of third parties by ourselves and our
licensees. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.

Despite our precautions, unauthorized third parties may copy certain portions of
our technology or reverse engineer or obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competitors may independently develop similar technology.

We also continue to hold a perpetual mail server license which was utilized in
our hosted service offering and is still being utilized by us to service a
current customer, and may license other technology as the need arises. We cannot
be certain that, apart from the mail server license, other third-party content
licenses will be available to us on commercially reasonable terms or that we
will be able to successfully integrate the technology into our products. These
third-party licenses may expose us to increased risks, including risks
associated with the assimilation of new technology, the diversion of resources
from the development of our own proprietary technology, and our inability to
generate revenues from new technology sufficient to offset associated
acquisition and maintenance costs. The inability to obtain any of these licenses
could result in delays in product development until equivalent technology can be
identified, licensed and integrated. Any such delays could cause our
business/financial condition and operating results to suffer.

Governmental regulation and legal uncertainties could impair the growth of the
Internet, decrease the distribution of unsolicited bulk (spam) email and
decrease demand for our anti-spam solutions or increase our cost of doing
business.

While laws aimed at curtailing the spread of spam have been adopted by some
states, enforcement has not been widespread and the lack of a body of federal
anti-spam law has highlighted an increase in the amount of spam traffic. The
growth and development of the spam market may prompt calls for more stringent
Internet user protection laws that may limit the ability

of companies promoting or delivering spam online. Moreover, the applicability to
the Internet of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. The adoption of additional laws or
regulations, or the application of existing laws or regulations to the Internet,
may impair the growth of the Internet or commercial online services. All or some
of the above laws could decrease the demand for our anti-spam solutions and
increase our cost of doing business, or otherwise harm our business and
operating results.

Risks Relating to Operations in Israel

We have important facilities and resources located in Israel, which has
historically experienced severe economic instability and military and political
unrest.

We are incorporated under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although
substantially all of our past sales were made to customers outside Israel, we
are nonetheless directly influenced by the political, economic and military
conditions affecting Israel. Any major hostilities involving Israel, or the
interruption or curtailment of trade between Israel and its present trading
partners, could significantly harm our business, operating results and financial
condition.

Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant inflation in the early to mid-1980's, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. In addition, Israel and some companies doing business with Israel have
been the subject of an economic boycott by Arab countries since Israel's
establishment. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or expansion of our business.

Since the establishment of the State of Israel in 1948, a state of hostility has
existed between Israel and the Arab countries in the region. Peace talks between
Israel and the Palestinian Authority began in the early 1990s, but they broke
down in mid-2000. Attacks on Israel by Palestinian terrorists, and military
responses by Israel, have accelerated considerably since late 2000. We cannot
predict whether or when a peace process will resume, whether a full resolution
of these problems will be achieved, the nature of any such resolution or any
consequences that any of these factors may have on us. Any future armed
conflicts or political instability in the region could negatively affect our
business or harm our results of operations.

Our results of operations may be negatively affected by the obligation of key
personnel to perform military service.

Certain of our officers and employees are currently obligated to perform annual
reserve duty in the Israel Defense Forces and are subject to being called for
active military duty at any time. Although Commtouch has operated effectively
under these requirements since its inception, we cannot predict the effect of
these obligations on Commtouch in the future. Our operations could be disrupted
by the absence, for a significant period, of one or more of our officers or key
employees due to military service.

Because a substantial portion of our revenues historically have been generated
in U.S. dollars and a portion of our expenses have been incurred in New Israeli
Shekels, our results of operations may be adversely affected by inflation and
currency fluctuations.

We have generated a substantial portion of our revenues in U.S. dollars and
incurred a portion of our expenses, principally salaries and related personnel
expenses in Israel, in New Israeli Shekels, commonly referred to as NIS. As a
result, we have been exposed to the risk that the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the dollar or that
the timing of any devaluation may lag behind inflation in Israel. In 2002 and
for a number of prior to 1999, the rate of devaluation of the NIS against the
dollar exceeded the rate of inflation. We cannot be assured that this trend will
continue. If the dollar cost of our operations in Israel increases, our
dollar-measured results of operations will be adversely affected. Our operations
also could be adversely affected if we are unable to guard against currency
fluctuations in the future. Accordingly, we may enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the
exchange rate of the dollar against the NIS. These measures, however, may not
adequately protect us from material adverse effects due to the impact of
inflation in Israel.

The government programs and benefits which we currently receive require us to
meet several conditions and may be terminated or reduced in the future.

Prior to 1998, we received grants from the Government of Israel, through the
Office of the Chief Scientist (OCS), for the financing of a significant portion
of our research and development expenditures in Israel. In 2001 and 2002, we
applied

for additional grants and we may apply for additional grants in the future. In
1999 and 2000, we did not receive any grants from the OCS. In 2001 we received
$0.6 million and in 2002 we received $0.2 million. While we have applied for an
additional grant in 2003, the OCS budget has been subject to reductions which
may affect the availability of funds for this prospective grant and other grants
in the future. Therefore, we cannot be certain that we will continue to receive
grants at the same rate, or at all. In addition, the terms of any future OCS
grants may be less favorable than our past grants.

In connection with research and development grants received from the OCS, we
must pay royalties to the OCS on the revenue derived from the sale of products,
technologies and services developed with grants from the OCS. We account for
these contingent royalties by recording an accrual in our financial statements.
Because we determined that no revenue is expected from some of these projects,
as of December 31, 2001 we decided to write down the related $0.4 million
accrual we recorded in past years. The OCS subsequently confirmed the status of
these projects as being non-royalty-bearing. The OCS would be entitled to
revisit the status of these projects in the future if the Company were to
commence utilizing technology developed under these projects.

The terms of the OCS grants and the law pursuant to which the grants are made
restrict our ability to manufacture products or transfer technologies developed
using OCS grants outside of Israel. This restriction may limit our ability to
enter into agreements for those products or technologies, without OCS approval.
We cannot be certain that the approvals of the OCS will be obtained on terms
that are acceptable to us, or at all. In connection with our grant applications,
we have made representations and covenants to the OCS. The funding from the OCS
is subject to the accuracy of these representations and covenants and to our
compliance with the conditions and restrictions imposed by the OCS. If we fail
to comply with any of these conditions or restrictions, we could be required to
repay any grants previously received, together with interest and penalties, and
would likely be ineligible to receive OCS grants in the future.

Also, under our Convertible Loan Agreement, we have agreed to limit our total
funding received or receivable from the OCS to a maximum in the aggregate of
$1,500,000 during the term of the loan. Grants received from the OCS through
2002 that the Company potentially will be obligated to repay totaled
approximately $800,000.

The tax benefits we are currently entitled to from the Government of Israel may
be reduced or terminated in the future.

Pursuant to the Law for the Encouragement of Capital Investments, the Government
of Israel through the Investment Center has granted "approved enterprise" status
to a portion of our capital investment programs. The portion of our income
derived from our approved enterprise program will be exempt from tax for a
limited period of two years commencing in the first year in which we have
taxable income, and will be subject to a reduced tax for an additional period of
five to eight years dependent on the percentage of holdings of our shares by
foreign shareholders. The benefits available to an approved enterprise are
conditioned upon the fulfillment of specified conditions, including a required
amount of investments in fixed assets and a portion of these investments being
made with net proceeds of equity capital raised by us as stipulated in
applicable law and in the specific certificates of approval. If we fail to
comply with these conditions, in whole or in part, we may be required to pay
additional taxes for the period in which we benefited from the tax exemption or
reduced tax rates and would likely be denied these benefits in the future. In
addition, the law and regulations prescribing the benefits provide for an
expiration date for the grant of new benefits. The expiration date has been
extended several times in the past. The expiration date currently is end of
December 2003 and no new benefits will be granted after that date unless the
expiration date is extended. We cannot assure you that new benefits will be
available after December 2003 or that benefits will be continued in the future
at their current levels or at all.

Israeli courts might not enforce judgments rendered outside of Israel and it
might therefore be difficult for an investor to recover any judgment against any
of our officers or directors resident in Israel.

We are organized under the laws of Israel, and we maintain significant
operations in Israel. Certain of our officers and directors named in this report
reside outside of the United States. Therefore, you might not be able to enforce
any judgment obtained in the U.S. against us or any of such persons. You might
not be able to bring civil actions under U.S. securities laws if you file a
lawsuit in Israel. However, we have been advised by our Israeli counsel that,
subject to several limitations, Israeli courts may enforce a final judgment of a
U.S. court for liquidated amounts in civil matters after a hearing in Israel. We
have appointed Commtouch Inc., our U.S. subsidiary, as our agent to receive
service of process in any action against us arising from this report. We have
not given our consent for our agent to accept service of process in connection
with any other claim and it may therefore be difficult for an investor to effect
service of process against us or any of our non-U.S. officers, directors and
experts relating to any other claims. If a foreign judgment is enforced by an
Israeli court, it may be payable in Israeli currency.

Provisions of Israeli law may delay, prevent or make difficult an acquisition of
Commtouch, which could prevent a change of control and therefore depress the
price of our shares.

Israeli corporate law regulates mergers, votes required to approve mergers and
acquisitions of shares through tender offers, requires special approvals for
transactions involving significant shareholders and regulates other matters that
may be relevant to these types of transactions. Furthermore, Israel tax
considerations may make potential transactions unappealing to us or to some of
our shareholders and, as noted hereinabove, tax reform in Israel can reduce
potential tax benefits, and limit our potential profitability.

You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any jurisdiction where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that date.

CAPITALIZATION AND INDEBTEDNESS

The following table sets forth the capitalization and indebtedness of Commtouch
as of June 30, 2003, actual and as adjusted for the two private placements in
July 2003:

(UNAUDITED) (UNAUDITED)
Actual As adjusted
(IN THOUSANDS) (IN THOUSANDS)
------------ ------------
Long-term liabilities ......................... $ 706 $ 706
Shareholders' equity:
Ordinary shares, NIS 0.05 par value;
55,000,000 shares authorized, with
22,262,631 and 27,809,298 actual and
as adjusted shares issued and outstanding,
respectively ............................. 290 353
Additional paid-in capital .................... 154,536 157,513
Deferred compensation ......................... (151) (151)
Notes receivable from shareholders ............ (339) (339)
Accumulated deficit ........................... (153,852) (153,852)
--------- ---------
Total shareholders' equity .................... $ 484 $ 3,524
--------- ---------
Total capitalization and indebtedness ......... $ 1,190 $ 4,230
--------- ---------

THE OFFER AND LISTING

The Offering

Ordinary shares offered .................................... 13,947,992 shares, NIS 0.05 par value per share

Price....................................................... As determined be each Selling SecurityHolder

Ordinary shares outstanding after the offering.............. 33,717,150 shares [based on ordinary shares outstanding prior to the
offering on August 12, 2003 of 27,809,298]

Use of proceeds............................................. Commtouch will not receive any of the proceeds from the sale of the
shares by the Selling Securityholders in this offering.

NASDAQ SmallCap Market Symbol .............................. CTCH

Shares will be offered on a registered basis and not as bearer shares.

Except as otherwise specified, all information in this prospectus is based on
the number of shares outstanding as of August 12, 2003, and:

o assumes the issuance of 1,136,068 ordinary shares issuable upon
exercise of options granted to executive officers and directors
within 60 days of August 12, 2003 at a weighted average exercise
price of $0.17 per share; and

o with respect to financial information, is reported in U.S. dollars;

and does not include:

o 2,020,189 ordinary shares issuable to employees and consultants upon
exercise of outstanding options under our stock option plans and
stock option agreements as of August 12, 2003 at a weighted average
exercise price of $0.19; and

o 1,065,983 ordinary shares available for future grant or issuance
under our stock option plans as of August 12, 2003.

Market Information

The Company's Ordinary Shares have traded publicly on The Nasdaq Stock Market
under the symbol "CTCH" since July 13, 1999.

The following table lists the high and low closing sales prices for the
Company's Ordinary Shares, for the periods indicated, as reported by The Nasdaq
Stock Market:

High Low
----------- -------------
1999 (beginning July 13, 1999) $ 49.125 $ 11.0625

2000: $ 66.50 $ 7.44

2001:
First Quarter $ 3.81 $ 0.75
Second Quarter 1.19 0.28
Third Quarter 0.67 0.20
Fourth Quarter $ 0.46 $ 0.20

2002:
First Quarter $ 0.43 $ 0.23
Second Quarter $ 0.25 $ 0.11
Third Quarter $ 0.15 $ 0.08
Fourth Quarter $ 0.06 $ 0.22

2003:
First Quarter $ 0.16 $ 0.10
Second Quarter $ 0.69 $ 0.12
Third Quarter $ 0.96 $ 0.55

Most Recent Six Months:

May 2003 $ 0.69 0.33
June 2003 0.61 0.47
July 2003 0.96 0.55
August 2003 0.93 0.71

September 2003 0.89 0.72
October 2003 1.47 0.80

REASONS FOR THE OFFER AND USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares by the Selling
Securityholders in this offering.

SELLING SECURITYHOLDERS

The following table presents information provided by the Selling Securityholders
with respect to beneficial ownership of our ordinary shares as of August 12,
2003, and as adjusted to reflect the sale of the shares offered by this
prospectus, by the Selling Securityholders and assumes that all shares being
offered by this prospectus are ultimately sold in the offering.

The table includes all shares issuable within 60 days of August 12, 2003 upon
the exercise of options, warrants and other rights beneficially owned by the
indicated shareholders on that date. Beneficial ownership as set forth below
includes the power to direct the voting or the disposition of the securities or
to receive the economic benefit of ownership of the securities. To our
knowledge, except for individuals affected by applicable community property laws
or as otherwise indicated, the persons named in the table have sole voting, sole
investment control and sole right to receive the economic benefit with respect
to all shares listed. The applicable percentage of ownership for each
shareholder is based on 27,809,298 ordinary shares outstanding as of August 12,
2003 and 33,717,150 ordinary shares outstanding immediately following the
completion of this offering, together with applicable options and/or warrants
for that shareholder that are exercisable within 60 days of August 12, 2003.

Shares
Shares Beneficially to be Shares Beneficially
Owned Prior to Offering Offered Owned After Offering
------------------------- ---------- -------------------------
Percent of Percent of
Outstanding Outstanding
Name of Beneficial Owner Number Shares Number Number Shares
--------------------------- ---------- ----------- ---------- ---------- ------------

Israel Seed IV, L.P. 2,666,667 9.26 2,666,667 0 0
Queensgate Bank & Trust Company Ltd.
Harbour Place, 5th Floor
103 South Church Street
P.O. Box 30464 SMB
Grand Cayman, Cayman Island
Attn: Daniel Chinn

Argos Capital Management, Inc. 777,778 2.75 777,778 0 0
211 West 61st Street, 6th Floor
New York, NY 10023
Attn. Ephraim F. Gildor

OZF Ltd. 3,113,834 10.59 2,393,834 720,000 2.1
Tropic Isle Building
Wickhams Cay, P.O. Box 964
Road Town, Tortola,
British Virgin Islands
c/o Tis Prager, Prager Dreifuss,
Muehlebachstr. 6, CH-8008
Zurich, Switzerland

Clarenville Ltd. 1,150,000 4.04 750,000 400,000 1.18
Nora Court 86, CY-3040
Athinon Street
Limassol, Cyprus
Attn: Shlomo Weintraub
Tel: +1 408 666 8201
Fax: +1 408 255 7420
Email: shlomowein@yahoo.com;
simon@capital-inv.com
Attn: Mr. Elikos Elia

Victor Haim Amara 660,512 2.35 660,112 400 0
Marcus St. 8
Jerusalem, 92333 Israel

Apollo Nominees Inc. 300,000 1.07 300,000 0 0
Suite 100
One Financial Place,
Lower Collymore Rock,
St.Michael, Barbados

Yosef Pinson 300,000 1.07 300,000 0 0
4 Hausner St., #30
Tel Aviv, Israel 69363

Chen Bardichev 1/ 75,000 0.27 75,000 0 0
Ein Vered, 40696
Israel

Moshe Bardichev 1/ 75,000 0.27 75,000 0 0
Ein Vered, 40696
Israel

Compugen Systems Ltd. 1,225,000 4.24 225,000 1,000,000 2.9
25 Leek Crescent
Richmond Hill, ON Canada L4B4B3

Amnon Shoham 225,000 0.81 225,000 0 0
25 Farley Pond Lane
Needham, MA 02492.

Isaac Applbaum 150,000 0.54 150,000 0 0
837 Longridge Road
Oakland, CA 94610

AxcessNet Resources LLC. 1,650,000 5.6 50,000 1,600,000 4.6
1050 Winter Street (Suite 2400),
Waltham MA 02451

Yuval Cohen 63,000 0.23 63,000 0 0
52 Etzion St.
Raanana 43563 Israel

Delta Capital Ltd. 150,000 0.54 150,000 0 0
788-790 Finchley Road
London, NW117TJ

Delta Capital Investments Ltd. 400,000 1.42 0 400,000 1.18
37-41 Bedford Row
London, WC1R4JH

Hawkeye Ventures, Inc. 150,000 0.54 150,000 0 0
c/o Zysman, Aharoni, Gayer
51A Hayarkon Street
Tel Aviv (Attn: Shai Baranov)

JoRon Management 150,000 0.54 150,000 0 0
C/o Seed Capital Partners
Key Center
50 Fountain Plaza
Buffalo, NY 14202

KKB Ventures LLC 2,150,000 7.2 150,000 2,000,000 5.6
Attn: Ken Casey
285 Musketaquid Rd.
Concord, Ma. 01742
Timothy J. Straight, Trustee 2/
The Straight Trust 150,000 0.54 150,000 0 0
626 Partridge Avenue
Menlo Park, Ca 94025

Shem Basum Ltd. 90,000 0.32 90,000 0 0
8 Hanna Senesh St.
Kfar-Sava 44358
Israel

Ehud Hillman 108,985 0.39 106,985 2,000 .01
I.D. No. 051745818
Amirim 12,
Tel-Aviv, Israel-69357

Gil Agmon 67,260 0.24 67,260 0 0
Barazani 11, Ramat Aviv,
Tel Aviv, Israel
ID No: 570261822

Jacob Benasayag 67,260 0.24 67,260 0 0
I.D. No. 16538100
Haduhifat 41, Raanana, Israel

Arie Pundak 100,405 0.36 100,405 0 0
I.D. No. 065178444 Asher
Bar-Lev 5/13 Petach-Tikva,
Israel

Danitan Nihul Ltd. 161,985 0.58 136,985 25,000 0.07
Reg. No. 511718470
Lamerhav 53b',
Ramat Hasharon, Israel - 47226

Gideon Mantel 3/ 1,914,773 6.7 1,123,288 791,485 2.34
c/o Commtouch Software, Inc.
1300 Crittenden Lane, Ste. 102
Mountain View, CA 94043-4655

Amir Lev 3/ 899,931 3.2 273,974 625,957 1.86
Be'er Gan St. 17
Ein Vered, 40696 Israel

Nahum Sharfman 4/ 1,394,006 4.93 921,506 472,500 1.41
22 Hameyasdim St.
Karkur, Israel 37064

Origami Ltd. 256,470 0.92 256,470 0 0
57 Achad Ha'am St.
Tel Aviv, CA 65207

Dr. A.I. Mlavsky 273,974 0.98 273,974 0 0
c/o Gemini Israel Venture Funds Ltd.
9 Hamenofim Street
Herzliya 46725, Israel

Yossi Sela 273,974 0.98 273,974 0 0
c/o Gemini Israel Venture Funds Ltd.
9 Hamenofim Street
Herzliya 46725, Israel

Shmuel Sagi 628,945 2.25 547,945 81,000 0.24
PO Box 589
Karkur, 37105 Israel

Bingham McCutchen LLP 5/ 246,576 0.88 246,576 0 0
Three Embarcadero Center
San Francisco, CA 94111

TOTALS 22,066,335 54.81 13,947,993 8,118,342 20.17

1/ Messrs. Chen and Moshe Bardichev are relatives (brothers in-law) of
Mr. Amir Lev, President, Chief Technology Officer and director, of
Commtouch.

2/ Mr. Straight is VP Sales of Commtouch.

3/ Messrs. Mantel and Lev are, respectively, Chief Executive Officer and
director, and President, Chief Technology Officer and director, of
Commtouch.

4/ Mr. Sharfman is a director of Commtouch.

5/ Bingham McCutchen LLP represents Commtouch in U.S. corporate and
securities matters and has passed upon certain legal matters for
Commtouch in connection with this offering (See "Legal Matters"
below).

SHARES ELIGIBLE FOR FUTURE SALE

Freely Tradeable Shares--Registered Shares

Future sales of substantial amounts of our ordinary shares in the public market,
or the possibility of these sales occurring, could adversely affect prevailing
market prices for our ordinary shares or our future ability to raise capital
through an offering of equity securities.

As of December 31, 2002 we had 22,219,696 ordinary shares outstanding. The
3,450,000 ordinary shares sold in our initial public offering in July 1999; the
1,344,086 ordinary shares and the 1,136,000 shares underlying a warrant held by
InfoSpace and Vulcan Ventures registered in 2000 in a secondary offering along
with the 707,965 ordinary shares we issued to Microsoft Corporation; the 315,789
shares we issued to Rideau Ltd., a private investor, on June 30, 2001; the
1,406,612 shares registered in August 2001 in a secondary offering for
shareholders of Wingra, a former subsidiary of the Company; and the 7,095,886
shares registered in May 2002 for certain selling securityholders under a
private placement, as identified in the Form F-3 relating thereto, are all
freely tradable in the public market without restriction under the Securities
Act, unless the shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. In addition, 8,793,564 of the
shares under this prospectus, relating to the two private placements of July
2003, will also be freely tradeable without restriction, unless otherwise
indicated in the related prospectus supplement.

We have 3,684,211 shares remaining under a shelf Registration Statement on file
with the SEC. Subject to this Registration Statement first being updated, as may
be required under applicable law, all of the shares thereunder will be freely
tradeable when, as and if issued.

Freely Tradeable Shares--Shares Under Employee Benefit Plans

On January 20, 2000, we filed a Form S-8 Registration Statement under the
Securities Act to register 5,250,000 ordinary shares issuable in connection with
option exercises and shares reserved for issuance under all stock plans and
agreements as well as 150,000 ordinary shares under the Company's Employee Stock
Purchase Plan which the Company may issue to employees from time to time. On
July 20, 2001, the Company filed another Form S-8 Registration Statement to
register: an additional 250,000 of our ordinary shares approved by our
shareholders on August 10, 2000 for issuance under the Company's director stock
option plan; an additional 79,156 shares issuable under our Employee Stock
Purchase Plan; and 162,257 shares underlying options issuable to employees of
Wingra pursuant to the terms of the Wingra merger agreement and the Wingra
Technologies, LLC 1998 Unit Option Plan. [The Employee Stock Purchase Plan was
since terminated in late 2001].

The Company issues employee and director stock options from time to time. Such
options are subject to vesting periods after which the shares may be resold by
the holders, subject to Rule 144 limitations if the holder is an affiliate. Of
12,479,644 options issued in the past, as of August 31, 2003 there are 5,222,769
options outstanding, with 1,787,947 option shares being vested and unexercised
and 1,567,348 options having been exercised.

On April 30, 2001 our Board of Directors approved the "repricing" of outstanding
stock options previously granted to employees. Previously granted options were
subsequently cancelled and new options issued with an exercise price equal to
the $0.0125 per share par value of the shares. Unexercised options subject to
the repricing had an original exercise price of more than $10 per share. The
replacement options vest over three years with 1/3 vesting on February 15, 2002
and the remaining 2/3 vesting every six months for the following two years. The
decreased option exercise price is lower than the current market price of our
stock which may cause optionees to exercise options and immediately resell the
shares received in the exercise on the open market, which may cause downward
pressure on the price of the shares. Options to purchase 1,521,988 shares were
covered by this repricing, with 373,990 having been exercised and 636,439 still
exercisable as of August 31, 2003.

Warrants and Conversion Rights

Please see Form 20-F for 2002 filed by the Company for detail relating to
outstanding warrants and conversion rights granted in the past by the Company.

Restricted Shares--Rule 144

The remaining ordinary shares outstanding, if any, upon completion of this
offering will be "restricted securities" as that term is defined under Rule 144.
We issued and sold these restricted securities in private transactions in
reliance on exemptions from registration under the Securities Act. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act, as summarized below. We believe that the majority of these
shares may fulfill the requirements of Rule 144(k).

Most of the restricted shares are subject to certain volume and other resale
restrictions pursuant to Rule 144 because the holders are affiliates of
Commtouch. In general, under Rule 144, an affiliate of Commtouch, or a person
(including a group of related persons whose shares must be aggregated under the
Rule) who has beneficially owned restricted shares for at least one year, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of

o 1% of the then outstanding ordinary shares (approximately 335,103
shares immediately following completion of the offering), or

o the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Commission.

Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
Commtouch. A person who was not an affiliate of Commtouch for 90 days before the
sale and who has beneficially owned the shares for at least two years may sell
under Rule 144(k) without regard to the above limitations.

Additional Restrictions

In addition to the restrictions imposed by the securities laws, 670,180
restricted shares were issued to certain Commtouch employees under agreements
which give Commtouch Inc. a repurchase option on any unvested shares. Due to
restrictions under Israeli law, the repurchase of these shares is unlikely.

OFFER STATISTICS AND EXPECTED TIMETABLE AND PLAN OF DISTRIBUTION

The Selling Securityholders may sell, directly or through brokers, the ordinary
shares in one or more long or short transactions at fixed prices, at market
prices at the time of sale, at varying prices determined at the time of sale or
at negotiated prices.

Although none of the Selling Securityholders has advised us of the manner in
which such Securityholder currently intends to sell ordinary shares offered
hereby, the Selling Securityholders may choose to sell all or a portion (or
none) of such shares from time to time in one or more of the following
transactions:

o On any national securities exchange or quotation service on which the
ordinary shares may be listed or quoted at the time of sale,
including the Nasdaq SmallCap Market;

o In the over-the-counter market;

o In private transactions;

o Through options or other derivative instruments;

o By pledge to secure debts or other obligations;

o Through block transactions;

o Any other legally available means; or

o A combination of any of the above transactions.

In connection with such sales, the Selling Securityholders and any participating
broker may be deemed to be "underwriters" of the shares within the meaning of
the Securities Act, although the offering of these securities may not be
underwritten by a broker-dealer firm. If a Selling Securityholder qualifies as
an "underwriter" under the Securities Act and the rules and

regulations and interpretations thereunder, such person will be subject to the
prospectus delivery requirements of the Act. Such broker-dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Securityholders. Any such commissions and profits realized on
any resale of the shares might be deemed to be underwriting discounts and
commissions under the Securities Act. Sales in the market may be made to
broker-dealers making a market in the ordinary shares or other broker-dealers,
and such broker-dealers, upon their resale of such securities, may be deemed to
be underwriters in this offering.

In addition, any ordinary shares offered by this prospectus that qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus.

The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the ordinary shares, other
than any discounts or commissions payable with respect to sales of such
securities.

From time to time this prospectus may be supplemented or amended as required by
the Securities Act. During any time when a supplement or amendment is required,
the Selling Securityholders are required to stop making sales until the
prospectus has been supplemented or amended. Further, the Company is required to
maintain the effectiveness of the Registration Statement until the earlier of
(i) the date that all of the shares offered hereby have been sold pursuant to
this prospectus, (ii) the date the Selling Securityholders receive an opinion
from counsel to the Company that the shares offered hereby may be sold under the
provisions of Rule 144 without limitation as to volume, (iii) the date that all
shares offered hereby have been otherwise transferred to persons who may trade
such shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such shares not
bearing a restrictive legend, or (iv) thirty-six months (eighteen months for
ordinary shares sold under the February 2002 private placement) from the date
the Registration Statement of which this prospectus is a part became effective.
We will make copies of this prospectus available to the Selling Securityholders
and have informed the Selling Securityholders of the need for delivery of a copy
of this prospectus to each purchaser of the ordinary shares prior to or at the
time of such sale.

Pursuant to the terms under which the ordinary shares were issued to the Selling
Securityholders, the Company has agreed to indemnify the Selling Securityholders
and certain of their associates against such liabilities as they may incur as a
result of any untrue statement of a material fact in the Registration Statement,
or any omission therein to state a material fact required to be stated therein
or necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. Such indemnification
includes liabilities under the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), state securities laws and the rules
thereunder, but excludes liabilities for statements or omissions that were based
on written information provided by or on behalf of the Selling Securityholders
specifically for use in the Registration Statement, as to which the Selling
Securityholders have agreed to indemnify the Company. The Company has also
agreed to reimburse such persons for legal and other expenses reasonably
incurred in connection with investigating or defending any action relating to
such statements or omissions which result in such persons' becoming entitled to
such indemnification.

Each Selling Securityholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Securityholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distribution, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.

Expenses Associated with Registration

We are paying substantially all of the expenses of registering the ordinary
shares under the Securities Act and of compliance with blue sky laws, including
registration and filing fees, printing and duplication expenses, administrative
expenses, our legal and accounting fees and the legal fees of counsel on behalf
of the Selling Securityholders. We estimate these expenses to be approximately
$106,888, which include the following categories of expenses:

SEC registration fee ................................. $ 792.11*
Printing and engraving expenses....................... 10,000
Legal fees and expenses .............................. 55,000
Accounting fees and expenses.......................... 25,000
Transfer agent and registrar fees and expenses........ 11,200
Miscellaneous expenses................................ 4,895.89
-----------
Total................................................. $106,888

* This fee is being offset against the filing fee previously paid for
Registration No. 333-31836, which was withdrawn prior to
effectiveness.

LEGAL MATTERS

Certain legal matters with respect to United States law are being passed upon
for Commtouch by Bingham McCutchen LLP, San Francisco, California which is also
a Selling Securityholder in this offering. The validity of the ordinary shares
offered hereby is being passed upon for Commtouch by Naschitz, Brandes & Co.,
Tel-Aviv, Israel. The partners of Naschitz, Brandes & Co. and Bingham McCutchen
LLP, respectively, and the firms themselves, beneficially own, in the aggregate,
15,000 and 246,576 outstanding shares of the Company, including upon exercise of
options, warrants or other derivative securities.

EXPERTS

The Consolidated Financial statements of Commtouch Software Ltd. appearing in
Commtouch Software Ltd's Annual Report (Form 20-F) for the year ended December
31, 2002, have been audited by Kost, Forer & Gabbay, a member of Ernst & Young
Global, independent auditors, as set fourth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a Registration Statement on Form F-3 with the SEC for the shares
we are offering by this prospectus. This prospectus does not include all of the
information contained in the Registration Statement. You should refer to the
Registration Statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the Registration Statement for copies of the actual
contract, agreement or other document.

We are required to file annual and special reports and other information with
the SEC. You can read our SEC filings, including the Registration Statement,
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, NW, Room 1024, Washington, DC 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.

We are subject to certain of the informational requirements of the Exchange Act.
As a "foreign private issuer," we are exempt from the rules under the Exchange
Act prescribing certain disclosure and procedural requirements for proxy
solicitations and our officers, directors and principal shareholders are exempt
from the reporting and "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act, with respect to their purchases and sales of
ordinary shares. In addition, we are not required to file quarterly reports or
to file annual and current reports and financial statements with the Securities
and Exchange Commission as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we intend to file
with the Securities and Exchange Commission, within 180 days after the end of
each fiscal year, an annual report on Form 20-F containing financial statements
that will be examined and reported on, with an opinion expressed by an
independent accounting firm, as well as quarterly reports on Form 6-K containing
unaudited financial information, within 60 days after the end of each calendar
quarter.

INFORMATION INCORPORATED BY REFERENCE

The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed by us with the SEC. Information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by this prospectus or by information we file with the
SEC in the future.

The following documents are incorporated by reference:

(a) Our Annual Report on Form 20-F for the fiscal year ended December 31, 2002;

(b) The description of our ordinary shares contained in the Registration
Statement under the Exchange Act on Form 8-A as filed with the Commission on
June 25, 1999, and any subsequent amendment or report filed for the purpose of
updating this description.

In addition, all subsequent annual reports filed on Form 20-F prior to the
termination of this offering are incorporated by reference into this prospectus.
Also, we may incorporate by reference our future reports on Form 6-K by stating
in those Forms that they are being incorporated by reference into this
prospectus.

We will provide without charge to any person (including any beneficial owner) to
whom this prospectus has been delivered, upon oral or written request, a copy of
any document incorporated by reference in this prospectus but not delivered with
the prospectus (except for exhibits to those documents unless a document states
that one of its exhibits is incorporated into the document itself). Such
requests should be directed to Devyani Patel, Vice President, Finance, c/o
Commtouch Inc., 1300 Crittenden Lane, Mountain View, California 94043. Our
corporate website address is http://www.commtouch.com. The information on our
website is not intended to be a part of this prospectus.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in Israel, and many of our directors and many of the
executive officers and the Israeli experts named herein are not residents of the
United States and substantially all of their assets and our assets are located
outside the United States. Service of process upon our non-U.S. resident
directors and executive officers or the Israeli experts named herein and
enforcement of judgments obtained in the United States against us, and our
directors and executive officers, or the Israeli experts named herein, may be
difficult to obtain within the United States. Commtouch Inc. is the U.S. agent
authorized to receive service of process in any action against us arising out of
this offering or any related purchase or sale of securities. We have not given
consent for this agent to accept service of process in connection with any other
claim.

We have been informed by our legal counsel in Israel, Naschitz, Brandes & Co.,
that there is doubt as to the enforceability of civil liabilities under the
Securities Act or the Exchange Act in original actions instituted in Israel.
However, subject to certain time limitations, an Israeli court may declare a
foreign civil judgment enforceable if it finds that:

* the judgment was rendered by a court which was, according to the laws
of the state of the court, competent to render the judgment,

* the judgment is no longer appealable,

* the obligation imposed by the judgment is enforceable according to
the rules relating to the enforceability of judgments in Israel and
the substance of the judgment is not contrary to public policy, and

* the judgment is executory in the state in which it was given.

Even if the above conditions are satisfied, an Israeli court will not enforce a
foreign judgment if it was given in a state whose laws do not provide for the
enforcement of judgments of Israeli courts (subject to exceptional cases) or if
its enforcement is likely to prejudice the sovereignty or security of the State
of Israel. An Israeli court also will not declare a foreign judgment enforceable
if (i) the judgment was obtained by fraud, (ii) there was no due process, (iii)
the judgment was rendered by a court not competent to render it according to the
laws of private international law in Israel, (iv) the judgment is at variance
with another judgment that was given in the same matter between the same parties
and which is still valid, or (v) at the time the action was brought in the
foreign court a suit in the same matter and between the same parties was pending
before a court or tribunal in Israel. Judgments rendered or enforced by Israeli
courts will generally be payable in Israeli currency. Judgment debtors bear the
risk associated with converting their awards into foreign currency, including
the risk of unfavorable exchange rates.

FINANCIAL STATEMENTS

Page
----

Condensed Consolidated Balance Sheets................................... F-2
Condensed Consolidated Statements of Operations......................... F-3
Consolidated Statements of Cash Flows................................... F-4
Notes to Consolidated Financial Statements.............................. F-5

F-1

CONDENSED CONSOLIDATED BALANCE SHEETS
(USD in thousands)

June 30, December 31,
2003 2002
(Unaudited) Audited
--------- ---------
Assets
Current Assets:
Cash and cash equivalents .................... $ 1,034 $ 1,388
Trade receivables, net ....................... -- 64
Prepaid expenses and other accounts receivable 145 231
--------- ---------
Total current assets ......................... 1,179 1,683
--------- ---------
Long-term lease deposits ........................ 5 5
Equity investment in Imetrix .................... 240 3
Severance pay fund .............................. 311 264
Property and equipment, net ..................... 698 1,029
--------- ---------
$ 2,433 $ 2,984
--------- ---------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ............................. 347 338
Employees and payroll accruals ............... 615 424
Accrued expenses and other liabilities ....... 281 372
--------- ---------
Total current liabilities .................... 1,243 1,134
--------- ---------
Other liabilities ............................ 135 135
Convertible loan, net ........................ 243 --
Accrued severance pay ....................... 328 278
--------- ---------
706 413
--------- ---------
Shareholders' Equity
Ordinary Shares .............................. 290 290
Additional paid-in capital ................... 154,536 153,460
Deferred stock compensation .................. (151) (277)
Notes receivable from shareholders ........... (339) (365)
Accumulated deficit .......................... (153,852) (151,671)
--------- ---------
Total shareholders' equity ................... 484 1,437
--------- ---------
$ 2,433 $ 2,984
========= =========

F-2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(USD in thousands, except per share amounts)

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------

Revenues:
Email services .................................. $ 70 $ 805 $ 176 $ 2,076
Software licenses ............................... -- 200 -- 200
-------- -------- -------- --------
Total revenues .................................. $ 70 $ 1,005 $ 176 $ 2,276
-------- -------- -------- --------
Cost of revenues:
Email services .................................. 143 406 317 1,339
-------- -------- -------- --------
Gross profit (loss) ................................ (73) 599 (141) 937
-------- -------- -------- --------
Operating expenses:
Research and development, net ................... 362 530 708 1,103
Sales and marketing ............................. 340 244 528 765
General and administrative ...................... 332 421 774 1,187
Amortization of stock-based employee
deferred compensation ........................ 63 138 126 276
-------- -------- -------- --------
Total operating expenses ........................ 1,097 1,333 2,136 3,331
-------- -------- -------- --------
Operating loss ..................................... (1,170) (734) (2,277) (2,394)
Interest and other income (expense), net ........ (104) (20) (141) 24
Equity in Income of Imetrix ..................... 237 18 237 18
Minority interest ............................... -- 11 -- 74
-------- -------- -------- --------
Loss from continuing operations ................. (1,037) (725) (2,181) (2,278)
-------- -------- -------- --------
Gain on disposal of Wingra ...................... -- -- -- 1,014
Discontinued operations - Wingra ................ -- -- -- (335)
-------- -------- -------- --------
Gain from sale of discontinued operations .......... -- -- -- 679
-------- -------- -------- --------
Net loss ........................................... $ (1,037) $ (725) $ (2,181) $ (1,599)
======== ======== ======== ========
Basic and diluted net loss per share
Loss from continuing operations ................. $ (0.05) $ (0.03) $ (0.10) $ (0.12)
Gain from sale of discontinued operations ....... -- -- -- 0.04
-------- -------- -------- --------
Net loss ........................................ $ (0.05) $ (0.03) $ (0.10) $ (0.08)
======== ======== ======== ========
Weighted average number of shares used
in computing basic and diluted net loss per share 22,241 21,414 22,240 19,455
======== ======== ======== ========

F-3

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(USD in thousands)

Six months Six months
ended ended
June 30, June 30,
2003 2002
------- -------

Cash flows from operating activities:
Net loss .................................................................. $(2,181) $(1,599)
Less loss for the period from discontinued operations .................. -- 335
Adjustments to reconcile net loss to net cash used in Operating activities:
Depreciation and amortization .......................................... 331 1,050
Amortization of stock-based employee deferred
compensation and warrants issued for services received .............. 126 276
Amortization of convertible loan discount related beneficial
conversion feature and warrants fair value .......................... 69 --
Loss from sale of property and equipment ............................... -- 194
Gain from sale of discontinued operations .............................. -- (1,014)
Share of equity interest ............................................... (237) (18)
Changes in assets and liabilities:
Trade receivables, net ................................................. 64 (79)
Prepaid expenses and other accounts receivable ......................... 86 451
Accounts payable ....................................................... 9 (826)
Employee and payroll accruals, accrued expenses and other liabilities .. 100 (663)
Deferred revenues ...................................................... -- (339)
Accrued severance pay, net ............................................. 3 (83)
Minority interest in losses of a consolidated subsidiary ............... -- (74)
Other .................................................................. (11) 357
------- -------
Net cash used in operating activities ........................................ (1,641) (2,032)
------- -------
Cash flows from investing activities:
Long-term lease deposits .................................................. -- (3)
Sale of Wingra ............................................................ -- (193)
Sale of consolidated subsidiary ........................................... -- 1
Proceeds from sale of property and equipment .............................. -- 402
------- -------
Net cash provided by investing activities .................................... -- 207
------- -------
Cash flows from financing activities:
Repayment of note receivable by shareholder ............................... 26 3
Proceeds from issuance of convertible loan ................................ 1,258 --
Principal payment of capital lease ........................................ -- (40)
Proceeds from issuance of shares, net ..................................... 3 1,352
------- -------
Net cash provided by financing activities .................................... 1,287 1,315
------- -------
Decrease in cash and cash equivalents ........................................ (354) (510)
Cash and cash equivalents at the beginning of the period ..................... 1,388 2,248
------- -------
Cash and cash equivalents at the end of the period ........................... $ 1,034 $ 1,738
======= =======

F-4

The proceeds from the sale of Wingra, for six months ended June 30, 2002 were as
follows:

Tangible assets sold .................... $ 314
Liabilities transferred ................. (1,521)
-------
Net liabilities transferred: ............ (1,207)
Cash transferred: ....................... 193
-------
Gain from sale of Wingra ................ $(1,014)

The proceeds from the sale of shares in consolidated subsidiary (Commtouch K.K.
(Japan), now known as Imetrix), for six months ended June 30, 2002 were as
follows:

Tangible assets ......................... $ 421
Liabilities ............................. (267)
-------
Net assets transferred: ................. 154
Cash received: .......................... 1
-------
Loss from sale of consolidated subsidiary $ 153

F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
--------------------------------------------------------------------------------

NOTE 1: GENERAL

a. Commtouch Software Ltd. ("Commtouch", "the Company") was incorporated under
the laws of Israel in 1991. Commtouch has five subsidiaries: Commtouch Inc.,
Commtouch (UK) Ltd, Commtouch Latin America Inc. (dissolved during 2002),
Wingra, Inc. ("Wingra") (sold during 2002) and Commtouch K.K. (Japan)(now known
as Imetrix) (majority owned during a portion of 2002, and in which Commtouch
Software Ltd. currently holds a 32% interest).

The Company and its subsidiaries develop and provide email anti-spam solutions
to enterprises. Until December 31, 2002, the Company and its subsidiaries
provided email and messaging solutions, to customers ranging from service
providers to large and small businesses, who offered the Company's Web-based
email through their website to their end users.

In 2002, the Company sold its migration service business and most of its hosted
email services and, while it initially changed its focus to providing email and
messaging solutions to service providers, it subsequently ceased promoting its
email and messaging solutions and began concentrating solely on developing its
anti-spam solutions.

In consideration of the sale of most of its hosted email services, the Company
received up front non-refundable license fee and is entitled to royalties from
the sales to its past customers. Royalties are paid according to the collection
from these customers.

For the six-months ended June 30, 2003, 100% of the revenues were derived from
four customers (39% from customer A, 38% from customer B, 12% from customer C
and 11% from customer D). For the six-months ended June 30, 2002, 51% of the
revenues were derived from two customers (34% from customer A and 17% from
customer B).

b. Basis of preparation:

The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2003, are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 2003.

The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries' annual
report on Form 20-F for the year ended December 31, 2002.

c. Discontinued operations

In November 2000, the Company acquired Wingra Technologies Inc. ("Wingra"), a
provider of messaging integration and migration solutions for large enterprises.

In February 2002, the Company sold off its migration service business, Wingra,
to Wingra's senior management. The results of operations of Wingra have been
eliminated from the consolidated results of operations of Commtouch as a result
of the disposal transaction.

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
--------------------------------------------------------------------------------

The proceeds from the sale of Wingra, for six months ended June 30, 2002 were as
follows:

Tangible assets: ........... $ 314
Liabilities transferred .... (1,521)
-------
Net liabilities transferred: (1,207)
Cash transferred: .......... 193
-------
Gain from sale of Wingra ... $ 1,014
=======

The results of operations including revenue, operating expenses and other income
and expense of Wingra for 2002 have been reclassified in the accompanying
statements of operations as discontinued operations.

Summary operating results from the discontinued operation for the six months
ended June 2002 are as follows:

Revenues ................... $ 157
Cost of revenues ........... 76
-------
Gross profit ............... 81
Operating expenses ......... 416
-------
Operating loss ............. $ (335)
=======

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP").

a. Use of Estimates:

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

b. Stock-Based Compensation:

The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25") "Accounting for Stock Issued to Employees" and FASB Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation," ("FIN
44") in accounting for its employee stock option plans. Under APB 25, when the
exercise price of the Company's stock options equals or is above the market
value of the underlying stock on the date of grant, no compensation expense is
recognized.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation Transition and Disclosure" - an amendment of FASB Statement No. 123
("SFAS 148"). SFAS 148 permits two additional transition methods for entities
that adopt the fair value based method of accounting for stock-based employee
compensation. The statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results. The Statement
also requires that those effects be disclosed more prominently by specifying the
form, content, and location of those disclosures. The transition guidance and
annual disclosure provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. As at the balance sheet date, the Company continues to apply
APB 25.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
--------------------------------------------------------------------------------

Pro forma information under SFAS 123 are as follows:

Six months Six months
ended ended
June 30, June 30,
2003 2002
------- -------

Net loss as reported ............. $(2,181) $(1,599)

Add:
Stock based compensation expense
included in the determination
of net loss, as reported ......... 276 276

Deduct:
Stock based compensation expense
determined under fair value method
for all awards ................... (2,210) (2,111)
------- -------
Pro forma net loss ............... $(4,115) $(3,434)
======= =======

Pro forma basic and diluted
net loss per share ............... $ (0.19) $ (0.17)
======= =======

The Company applies SFAS 123 and Emerging Issues Task Force 96-18 "Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services" ("EITF 96-18") with respect to
options issued to non-employees. SFAS 123 requires use of an option valuation
model to measure the fair value of these options at the grant date. In
accounting for warrants granted to those other than employees, the Company
applied the provisions of SFAS No. 123, and EITF 96-18. The fair value of these
warrants was estimated at the grant date, using the Black-Scholes option-pricing
model.

c. Recently Issued Accounting Pronouncements:

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). The objective of FIN 46 is to improve
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation of
variable interest entities. FIN 46 requires certain variable interest entities
("VIE's") to be consolidated by the primary beneficiary if the entity does not
effectively disperse risks among the parties involved. The provisions of FIN 46
are effective immediately for those variable interest entities created after
January 31, 2003. The provisions, as amended, are effective for the first
interim or annual period ending after December 15, 2003 for those variable
interests held prior to February 1, 2003. While the Company believes this
Interpretation will not have a material effect on its financial position or
results of operations, it is continuing to evaluate the effect of adoption of
this Interpretation.

NOTE 3: EQUITY INTEREST

At June 30, 2003 the Company owned 32% of the equity and voting rights of
Commtouch, K.K. (Japan) (now known as Imetrix). During the second quarter ended
June 30, 2003, Commtouch recognized $237 as equity in income of Imetrix
(formerly Commtouch Japan).

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
--------------------------------------------------------------------------------

NOTE 4: CONVERTIBLE LOAN

On January 29, 2003 Commtouch entered into a Convertible Loan Agreement with
certain lenders according to which the Company is entitled to receive up to a
maximum possible loan (the "Loan") amount of $1,258. Through June 2003 the
Company has received the total Loan amount of $1,258 from the lenders. The Loan
is to be repaid after three years, unless converted into Commtouch shares by the
lenders or a defined event triggering early repayment is met. The Loan bears
interest at a rate of ten percent per annum. Furthermore, the Loan's principal
and interest may be converted by the lenders into equity in the Company at any
time during the Loan term, at a conversion price of $0.25 per ordinary share
("Conversion Price"). Warrants exercisable for purchase of up to 5,000,000 of
the Company's ordinary shares have been issued to the lenders (based on such
Loan amounts advanced divided by the Conversion Price). Each one-third of the
warrants are exercisable at prices per ordinary share of $0.25, $0.33 and $0.50
respectively, and the warrants are exercisable at any time within five years of
issuance. Warrants shall also be issued on an annual basis for any accumulated
interest on the Loan.

In accordance with APB No. 14 "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" ("APB 14"), Commtouch allocated a portion of the
proceeds to the warrants, based on their applicable fair values. Amounts
allocated to the warrants totaling $1,045, were recorded as additional paid in
capital.

The fair value of the warrants was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 3.7%, dividend yield of 0%, volatility factors of the expected
market price of the Commtouch Ordinary shares of 1.384 and an expected life of
five years.

In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingent Adjustable Conversion Rations"
("EITF 98-5"), Commtouch recorded to additional paid in capital $39 as the
beneficial conversation feature attributed to the convertibility feature of the
Loan.

Amounts reflecting the fair value of the warrants and the beneficial conversion
feature of the Loan have been recorded as discounts on the Loan. The discount
related to the warrants and the beneficial conversion feature was amortized as
financial expenses over the term of the Loan.

NOTE 5: LITIGATION

Class Action Litigation

NOTE 6: GEOGRAPHIC INFORMATION

The Company conducts its business on the basis of one reportable segment (see
Note 1 for brief description of the Company's business).

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
--------------------------------------------------------------------------------

Revenues from external customers:

Six-months Six-months
ended ended
June 30, June 30,
2003 2002
------ ------
Israel ...... $ 18 $ 436
U.S.A ....... 158 698
Europe ...... -- 894
Japan ....... -- 227
Latin America -- 31
------ ------
$ 176 $2,276
====== ======

The Company's long-lived assets are as follows:

Six-months Six-months
ended ended
June 30, June 30,
2003 2002
------ ------
Israel .... $ 435 $ 441
U.S.A ..... 263 588
------ ------
$ 698 $1,029
====== ======

NOTE 7: LOSS PER SHARE:

The following table sets forth the computation of basic and diluted net loss per
share:

1. Numerator:

Six months ended
June 30,
-------------------------------
2003 2002
---------- ----------
Unaudited
------------------------------

Numerator for basic and diluted loss per share --
Numerator for basic and Loss available to Ordinary shareholders $ (2,181) $ (1,599)
========== ==========
2. Denominator (in thousands):
Denominator for basic and diluted loss per share --
Weighted average number of shares 22,240 19,455
========== ==========

All outstanding stock options and warrants have been excluded from the
calculation of the diluted loss per share because all such securities are
anti-dilative for all periods presented. The total number of shares related to
outstanding options and warrants excluded from the calculations of diluted net
loss per share were 12,554,982 and 4,835,088 six months ended June 30, 2003 and
June 30, 2002, respectively.

NOTE 8: SUBSEQUENT EVENTS:

In July 2003 Commtouch entered into a private placement agreement with several
existing and new investors. Commtouch issued approximately 2.88 million ordinary
shares against the investment of $1,440, or $0.50 per ordinary share by the
investors. The investors also received warrants to purchase up to an additional
1.44 million ordinary shares, exercisable at a price of $0.50 per share. The
warrants are currently exercisable and expire in five years.

Additionally, a private placement was secured in late July 2003 from Israel Seed
Partners, a major Israel venture capital group, Argos Capital Management, a New
York based hedge fund and a private individual investor. Commtouch issued
2,666,667 million ordinary shares against the investment in the company by
Israel Seed Partners of $1,000, Argos Capital of $500 and the individual
investor of $100, or $0.60 per ordinary share. The investor also received
warrants to purchase up to an additional 1.6 million ordinary shares,
exercisable at a price of $0.65 per share. The warrants are currently
exercisable and expire in five years.

F-10

13,947,992 Ordinary Shares

COMMTOUCH SOFTWARE LTD.

----------------------

PROSPECTUS

----------------------

November 20, 2003