Edgar Filing: COMMTOUCH SOFTWARE LTD

As filed with the Securities and Exchange Commission on January 7, 2005.
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

COMMTOUCH SOFTWARE LTD.
(Exact name of registrant as specified in its charter)

Israel Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1A Hazoran Street
Poleg Industrial Park, P.O. Box 8511
Netanya 42504, Israel
011-972-9-863-6888
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)

c/o Commtouch Inc.
Devyani Patel, Vice President, Finance
1300 Crittenden Lane, Ste. 103
Mountain View, California 94043
(650) 864-2000
(Name, address, including zip code and telephone number,
including area code, of agent for service)

Copies to:

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Gary Davis Aaron M. Lampert Nathaniel M. Cartmell III
General Counsel & Secretary Naschitz, Brandes & Co. Pillsbury Winthrop LLP
Commtouch Inc. 5 Tuval Street 50 Fremont Street
1300 Crittenden Lane, Suite 103 Tel Aviv 67897 Israel San Francisco, CA 94105-2228
Mountain View, CA 94043 Tel: 972-3-623-5000 Tel: (415) 983-1000
Tel: (650) 864-2000 Fax: 972-3-623-5005 Fax: (415) 983-1200
Fax: (650) 864-2006

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Approximate date of commencement of the proposed sale of the securities to the
public: From time to time after the Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

Calculation of Registration Fee
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Proposed
Title of Each Class Maximum Proposed
of Securities Amount to be Aggregate Price Maximum Aggregate Amount of
To Be Registered Registered(1) Per Unit(2) Offering Price Registration Fee(3)
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Ordinary Shares, NIS 0.05 nominal value per share 6,955,684 $0.35 $2,434,489 $286.54
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(1) Represents shares being registered for resale by the holders (the "selling securityholders") of Ordinary Shares and associated
warrants for purchase of Ordinary Shares of the Company, pursuant to an agreement between the Company and selling securityholders,
as follows: (i) 2,340,000 Ordinary Shares, representing 130% of shares issuable to selling securityholders upon conversion of Series
A Preferred Shares under the Redemption, Amendment and Exchange Agreement of October 31, 2004 (the "RAE"); (ii) 4,333,336 Ordinary
Shares, representing 130% of shares issuable upon exercise of warrants issued to selling securityholders under the RAE; (iii)
282,348 Ordinary Shares, representing shares issuable to selling securityholders upon exercise of additional investment rights
arising under the Securities Purchase Agreement of May 18, 2004 as a result of anti-dilution protections triggered by the closing of
the Securities Purchase Agreement of October 31, 2004; and (iv) an indeterminable number of additional Ordinary Shares, pursuant to
Rule 416 under the Securities Act of 1933 that may be issued to prevent dilution resulting from stock splits, stock dividends or
similar transactions affecting the shares to be offered by the selling securityholders.

(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) based on the average of
the high and low prices of the Company's Ordinary Shares as reported on The Nasdaq SmallCap Market System on January 3, 2005.

(3) The Registrant initially filed a Registration Statement on Form F-1 (Registration No. 333-31836) on March 6, 2000 (the "Form
F-1"), to register certain offers and sales of its Ordinary Shares as set forth in that Registration Statement. Subsequently, the
Registrant withdrew the Form F-1 on April 12, 2000. The Registrant is filing this Registration Statement on Form F-3 to register the
reoffer and resale of the securities indicated on this cover page. A registration fee of $49,468.00 was paid in connection with the
filing of the Form F-1. Pursuant to Rule 457(p), the aggregate total dollar amount of the filing fee associated with the unsold
Ordinary Shares under the F-1 has previously been offset by the filing fees in the amounts of (a) $119.80 for Registration Statement
on Form S-8 No. 333-65532 filed on July 20, 2001; (b) $158.24 for Registration Statement on Form F-3 No. 333-68248 filed on August
24, 2001; (c) $104.45 for Registration Statement on Form F-3 No. 333-88248 filed on May 15, 2002; (d) $687.66 for Registration
Statement on Form F-3 No. 333-109837 filed on October 20, 2003; (e) $824.58 for Registration Statement on Form F-3 No. 333-111731
filed on January 6, 2004; (f) $302.53 for Registration Statement on Form F-3 No. 333-111734 filed on January 6, 2004; and (g)
$1,268.19 for Registration Statement on Form F-3 No. 333-117085 filed on July 1, 2004. The remaining balance of $46,002.55 is being
further offset by the filing fee due for this Registration Statement.
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EXPLANATORY NOTE

Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus which is a part of this registration statement also incorporates and
amends the prospectuses that are included in the Registration Statements on Form
F-3 No. 333-117085 and No. 333-1111734 filed on July 1, 2004 and January 6,
2004, respectively.

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SECURITYHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED JANUARY__, 2005

PROSPECTUS

Commtouch Software Ltd.

23,605,490 Ordinary Shares
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Private Placements of Ordinary Shares and Ordinary Shares Underlying Series A
Preferred Shares, Additional Investment Rights and Warrants

As we describe further below under "Plan of Distribution," the selling
securityholders identified in this prospectus are selling up to 23,605,490 of
our Ordinary Shares, 2,340,000 of which underlie convertible Series A Preferred
Shares, 5,413,931 of which underlie additional investment rights and 11,784,396
of which underlie warrants. The Series A Preferred Shares, additional investment
rights and warrants themselves are not being offered by this prospectus. The
selling securityholders acquired the Ordinary Shares, convertible Series A
Preferred Shares and rights to purchase Ordinary Shares from the Company in
three private placements - a convertible note transaction entered into on
November 26, 2003, a private equity sale transaction of May 18, 2004 and a
Redemption, Amendment and Exchange Agreement of October 31, 2004 (the "RAE"),
which primarily modified the terms of the convertible note transaction of
November 26, 2003. It is noted that Iroquois Capital LP is a selling
securityholder hereunder only by way of its participation in the May 18, 2004
transaction. Shareholders of the Company approved the May 18, 2004 transaction
at an extraordinary meeting of shareholders held on June 28, 2004 and approved
the RAE at the annual meeting of shareholders held on December 6, 2004.

The Ordinary Shares offered hereby are being registered pursuant to
registration rights granted to the selling securityholders by the Company in
connection with the RAE. 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. The Company has
agreed to indemnify the selling securityholders against certain liabilities,
including liabilities under the Securities Act. For additional detail, please
see the section below entitled "Plan of Distribution".

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.

Our Ordinary Shares are currently traded on The Nasdaq SmallCap Market
under the symbol "CTCHC." On January 6, 2005 the last reported sales price of
an Ordinary Share on The Nasdaq SmallCap Market was $0.50 per share.

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This investment involves risk. See "Risk Factors" beginning on page 5.
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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 _________, 2005

TABLE OF CONTENTS

Page
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Special Note Regarding Forward-Looking Information..................... 1
Commtouch Software Ltd. ............................................... 2
Risk Factors .......................................................... 5
Capitalization and Indebtedness ....................................... 15
The Offer and Listing.................................................. 16
Reasons for the Offer and Use of Proceeds ............................. 17
Selling Securityholders ............................................... 17
Shares Eligible for Future Sale ....................................... 20
Plan of Distribution................................................... 21
Legal Matters ......................................................... 23
Experts ............................................................... 23
Where You Can Find More Information ................................... 23
Information Incorporated by Reference ................................. 24
Enforceability of Civil Liabilities ................................... 24
Financial Statements .................................................. F-1

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 of 1933
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",
"estimate", anticipate", or "believe" are forward-looking statements. These
statements are based on information available to us at the time of filing of
this document; we do not assume any obligation to update any of them. 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 the failure of the Company to satisfy the conditions
imposed by the Nasdaq Listing Qualifications Panel for the continued listing of
Commtouch shares on The Nasdaq SmallCap Market; business conditions and growth
or deterioration in the Internet 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; and technological
difficulties and resource constraints encountered in developing new products as
well as those risks described in the Company's Annual Reports on Form 20-F and
reports on Form 6-K, which are available through www.sec.gov.

COMMTOUCH SOFTWARE LTD.

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 third party distribution 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 patented 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 enterprise anti-spam solution consists of both a software element (the
"Enterprise Gateway") and a service component (the "Detection 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 Detection Center, all
allowing for real-time reaction to worldwide spam attacks. At the heart of the
solution, however, is the Detection Center, which detects new spam attacks as
soon as they are launched and distributed over the Internet. The Detection
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 Detection
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.

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

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

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

o 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 cache of recently
identified spam;

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

o The outgoing query consists of digital signatures taken from email
header information. The signatures may be hashed (one-way
encrypted) to ensure enterprise security and confidentiality. The
query does not contain the full email body or its attachments and
it is therefore very small in size (500 Bytes);

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

o 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 Detection 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 Detection 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 its solution. For example, if the Detection
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 Application Programming Interfaces, or APIs, which
receive characteristics of incoming messages as input from the vendor's
application, returning the status of the message as output from the Detection
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; and

o Other network appliances

Further, we are marketing an Internet Solution Provider anti-spam solution ("ISP
Solution"). ISPs purchasing this solution will install Commtouch software
("engine") on a front end server (in front of the ISP's messaging server), which
will initially receive and classify email, in conjunction with the detection
capabilities of the Commtouch Detection Center. ISPs will be allowed the
flexibility of defining which Internet protocols (IPs) will be banned from
delivering messages to their messaging system, and those messages that are
allowed to enter but are suspected of being spam will be delivered to end users
with a special tag identifying them as suspected spam.

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. 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. These
factors are based on information available to us at the time of filing of this
document; we do not assume any obligation to update any of them.

Overview

During 2004 and 2003, our business was to develop and sell, through a variety of
third party distribution channels, anti-spam solutions to various customers. The
Company expects that it will continue to be dependent upon third party
distribution channels for a significant portion of its revenues, which will be
derived from sales of the Company's anti-spam solutions.

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

Our enterprise anti-spam solution consists of both a software element (the
"Enterprise Gateway") and a service component (the "Detection Center"). At the
Enterprise Gateway, messages are filtered at the customer organization's entry
point, before being distributed to recipients. At the heart of the solution is
the Detection Center, which detects new spam attacks as they are launched and
distributed over the Internet. The Detection 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. The Detection Center collects information from multiple
sources about new spam attacks, analyzes the input using our 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
resolution.

The service component of our revenues is considered essential to the
functionality of the software components. Furthermore, the software components
cannot be used on a standalone basis, or with another party's service.

Revenues from anti-spam service are recognized when persuasive evidence of an
arrangement exists, services are provided, no significant obligation with regard
to the implementation remains, the fee is fixed and determinable and
collectibility is probable. Revenues deriving from anti-spam services are
recognized ratably over the life of the service period.

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

We started to recognize revenues from sales of anti-spam solutions during the
third quarter of 2003. Revenues associated with sales of anti-spam solutions are
recognized ratably over the period during which services are provided, which is
usually one to two years.

Results of Operations (U.S. dollars in thousands)

Nine Months Nine Months
Ended Ended
Sept. 30, Sept. 30,
2004 2003
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Revenues: ........................................... $ 933 $ 260

Cost of revenues: ................................... 475 447
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Gross profit (loss) ................................. 458 (187)
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Operating expenses:
Research and development ........................ 1,055 1,095
Sales and marketing ............................. 2,964 1,137
General and administrative ...................... 1,383 1,335
Amortization of stock-based employee
deferred compensation ....................... 30 189
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Total operating expenses ........................ 5,432 3,756
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Operating loss ...................................... (4,974) (3,943)
Interest and other income (expense), net ........ 398 (283)
Equity in Income of Imatrix ..................... (63) 282
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Net loss ............................................ $(4,639) $(3,944)
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Comparison of the Nine Months Ended September 30, 2004 and 2003 --
(U.S. dollars in thousands, except share and per share data)

Revenues. Revenues increased over two and a half fold from $260 for the
nine-months ended September 30, 2003 to $933 for the same period in 2004.
Revenues were expected to rise for the nine-months ended September 30, 2004 as
we had a full nine months of sales due to our anti-spam solutions compared to
the same period 2003, where we had just started to sell the product in the third
quarter of 2003. For the nine-months ended September 30, 2004, 33.57% of the
revenues were derived from one customer. For the nine-months ended September 30,
2003, 82.16% of the revenues were derived from three customers (35.32% from
customer A, 31.52% from customer B and 15.32% from customer C).

Cost of Revenues. Due to an increase in sales, cost of revenues increased
marginally for the nine-months ended September 30, 2004 in comparison to the
same period in 2003. Cost of revenues did not increase in the same proportion as
sales during the period due to economies of scale.

Research and Development. Research and development expenses decreased 3.7% from
$1,095 for the nine-months ended September 30, 2003 to $1,055 for the same
period in 2004 due to the decrease in personnel and other related costs.

Sales and Marketing. Sales and marketing expenses increased 161% from $1,137 for
the nine-months ended September 30, 2003 to $2,964 for the same period in 2004,
as we hired sales and marketing personnel to sell our new anti-spam solutions.
We also earmarked additional marketing resources towards our new product
offerings.

General and Administrative. General and administrative expenses increased 3.6%
from $1,335 for the nine-months ended September 30, 2003 to $1,383 for the same
period in 2004.

Amortization of Stock-Based Employee Deferred Compensation. Our stock-based
employee deferred compensation expenses decreased from $189 for the nine-months
ended September 30, 2003 to $30 for the same period in 2004. Deferred
compensation totaling $13 remaining from 1999was amortized using the
sum-of-digits method over the vesting schedule, generally four years. This
amortization concluded during the third quarter of 2003.Deferred compensation
expenses of $30 and $176 for the nine-months ended September 30, 2004 and 2003,
respectively, relating to the repricing of stock options during 2001, was
amortized using the straight-line method over a three year vesting schedule.
This amortization concluded during the first quarter of 2004.

Interest and Other Income, Net. Our interest and other income, net, increased
from a net loss of $283 for the nine-months ended September 30 2003 to a net
income of $398 for the nine-months ended September 30, 2004, due primarily to
the company recording a non-cash financial income of approximately $613 relating
to the November 2003 convertible loan and related warrants and fair value
adjustment thereof.

Liquidity and Capital Resources

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

As of September 30, 2004, we had approximately $5,107 of cash, which we believe
is sufficient to fund operations through at least December 2005. See "Risk
Factors - Investment Risks - We may need additional capital." For the
nine-months ended September 30, 2004 and 2003, we utilized $3,987 and $3,190,
respectively of cash to fund operating losses. Net cash provided by financing
activities was approximately $5,120 and $4,455 for the nine-months ended
September 30, 2004 and 2003, respectively, mainly due to proceeds from issuance
of convertible notes and Ordinary Shares.

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 current and future anti-spam
solutions, we will fail to generate revenues.

Our success depends on the acceptance and use of our anti-spam solutions by
enterprise, OEM and ISP customers and partners. While we have been selling our
anti-spam products for over one year, it remains difficult to estimate the size
or growth rate of the potential market for our anti-spam offerings. This is
accentuated by the fact that during the third quarter of 2004

o we signed five new OEM agreements, with the majority of the new
integrated products utilizing our technology only having launched
in the fourth quarter of 2004 - therefore we do not have
experience with the sales potential of these OEMs, and

o our new Enterprise Gateway version 4.0 was launched, which may
have different market acceptance from our previous products.

Therefore, we have yet to achieve a level of customer experience that will
enable us to accurately predict the market's reaction to these important, new
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 and
our business could fail.

Our business may be adversely affected as a consequence of legislation imposing
legal penalties on distributors of unsolicited email.

On December 16, 2003, President Bush signed into law the Controlling the Assault
of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act), which
establishes a framework of administrative, civil, and criminal tools to combat
spam. The law establishes both civil and criminal prohibitions to assist in
deterring the most offensive forms of spam, including unmarked sexually-oriented
messages and emails containing fraudulent headers. Under the law, senders of
email are required to honor a request by a consumer not to receive any further
unsolicited messages. Recent high profile prosecutions of direct marketers are
likely to have some deterrent effect on the future activities of these and other
similar direct marketers of unsolicited email.

In addition, various state legislatures have enacted laws aimed at regulating
the distribution of unsolicited email.

Furthermore, each member state in the European Union was obligated by October
2003 to implement the Electronic Communications Directive that imposes
restrictions on the use of unsolicited email for commercial purposes.

These and similar legal measures may have the effect of reducing the amount of
unsolicited email that is distributed and hence diminish the need for our
anti-spam solutions. Any such developments would have an adverse impact on our
revenues.

Dependence upon resellers and product concentration.

We expect to continue to be dependent upon resellers and OEM partners for a
significant portion of our revenues, which will be derived from sales of our
anti-spam solutions. Also, we are still developing our distribution channels and
are currently dependent on a relatively small number of our global resellers and
OEM partners to close the majority of sales transactions. If anticipated orders
from these resellers fail to materialize, or one of the key resellers or
distribution channels ceases the promotion of our business, our operating
results and financial condition will be materially adversely affected.

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 anti-spam solutions and because of
the highly competitive 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 or cause our
share price to decline. These factors include:

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

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 The threat of delisting by Nasdaq;

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 customers;

o The success of our resellers' and OEM partners' sales efforts to
potential customers;

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

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

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

o Our ability to successfully develop and market new, modified or
upgraded solutions, as may be needed; o The substantial decrease
in information technology spending;

o Pricing of our solutions;

o Our ability to timely collect fees owed by resellers and OEM
partners; and

o The effectiveness of our customer support, whether provided by our
resellers and OEM partners, 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 have been
and will be going to market with new solutions and have been marketing our
Enterprise Gateway solution only since late June 2003, it remains difficult to
evaluate our business and prospects.

We commenced operations in 1991. Up to 1998, we focused on selling, maintaining
and servicing stand-alone email client software products for mainframe and
personal computers. From 1998 through 2001, we were a provider of outsourced
Web-based email services and, during the first half of 2002, we concentrated on
marketing our software messaging solution. In mid-2002, we began focusing
exclusively on completing development of and selling our new anti-spam
solutions. This change required us to adjust our business processes and to
readjust the workforce at Commtouch (predominantly, the sales force). Therefore,
we have little operating history as a provider of our anti-spam solutions upon
which you may be able to evaluate our business and prospects. While recent
success in signing agreements with OEM partners is encouraging, it is still 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)
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, which 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. One such example of this is the recent acquisition of Brightmail by
Symantec Corp.

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.

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.

(R)Brightmail, Postini, Microsoft and Yahoo are trademarks of Brightmail, Inc.,
Postini, Inc., Microsoft Corporation and Yahoo! Inc., respectively.

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. It may take time for our current and
future employees and resellers to learn how to most effectively market our
solutions. Additionally, it is difficult to predict the possibility of success
selling our newly introduced solutions, either by way of resellers or OEM
partners, and on which we are relying 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 $61.0 million in 2001, $4.9 million in
2002 and $6.8 million in 2003. As of December 31, 2003 and October 31, 2004, we
had an accumulated deficit of approximately $158.5 million and approximately $
163.6 million, respectively. We are participating in a relatively new and
unstable market, 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.

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.

In September 2003, a final order was entered by a U.S. District Court for the
Northern District of California, thereby settling the shareholder class action
lawsuit filed on behalf of shareholders against the Company in early 2001. The
litigation was initiated against the Company and two members of management in
response to the Company's announcement that it had decided to restate unaudited
earnings for the first three quarters of 2000, alleging violations of the
antifraud provisions of the Securities Exchange Act of 1934.

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 liability imposed upon
such a director for the benefit of a third party pursuant to a court judgment,
including a settlement or an arbitrator's decision, confirmed by a 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 by or on behalf of the Company or by others, or in a
criminal action in which he was acquitted, or in a criminal action which does
not require proof of criminal intent in which he was convicted.

Risk due to economic conditions.

Should economic conditions fail to improve, our ability to sell our 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, OEM
partners' customers or our resellers or OEM partners 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 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 low head-count of 49 employees (as of November 30, 2004) continues to strain
our operational resources, and the lack of sufficient personnel may compromise
our ability to enhance revenues.

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

As of November 30, 2004, we had sales offices in Israel and the United States.
We also are marketing 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;

o The adoption of new legal penalties which may discourage the
distribution of unsolicited email messages; 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. The U.S. government has
been actively pursuing and taking military and other action against those behind
the September 11, 2001 attacks, and may initiate broader action against national
and global terrorism. 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 may 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, OEM
partners 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, OEM 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, OEM partners 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 solution offerings, 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.

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, 2003 and October 31, 2004 was approximately $4.1 million and
approximately $4.6 million, respectively. Based on the cash balance at December
31, 2003, the payment to the Company in January 2004 of approximately $1 million
as a result of the exercise of warrants by previous convertible note holders,
the closing of two private placements in June and December 2004 totaling
approximately $7 million to the Company, the Company's repayment of $3 million
in convertible notes in December 2004, current projections of revenues, related
expenses and the ability to further curtail certain discretionary expenses, the
Company believes it has sufficient cash to continue operations through at least
December 2005.

However, the Company may need to raise additional funds during the first quarter
of 2005, and potentially thereafter, in order to satisfy Nasdaq's shareholders'
equity maintenance requirements. See the risk factor immediately 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 shareholders.

In the past we have received funds for the development of our business from the
State of Israel through the Office of the Chief Scientist, or the OCS. Grants
received from the OCS through 2002 that the Company potentially will be
obligated to repay totaled approximately $800,000.

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, among other requirements, 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. Since our share price as quoted on The Nasdaq SmallCap Market was at a
price that resulted in our market value being below $35,000,000 and our
shareholders' equity was below $2.5 million, we received a Nasdaq Staff
Determination letter on May 10, 2004 indicating that Commtouch had failed to
comply with the shareholders' equity, net income and market value of publicly
held shares requirements for continued listing, as set forth in Nasdaq's
Marketplace Rule 4320(e)(2)(B), and that Commtouch's securities were therefore
subject to delisting from The Nasdaq SmallCap Market. The subject rule requires
compliance with at least one of the above requirements in order to maintain
listing with The Nasdaq SmallCap Market.

Commtouch appealed the Nasdaq Staff Determination and a hearing was held on June
17, 2004 before a Nasdaq Listing Qualifications Panel ("Panel") to review the
Staff Determination. The Panel, in its decision of June 28, 2004, determined
that the Company's Ordinary Shares would continue to be listed on The Nasdaq
SmallCap Market pursuant to an exception from the requirement that the Company
maintain at least $2.5 million in shareholders' equity. The Panel imposed
several conditions to the continued availability of that exception.

While the Company was successful in meeting the Panel's initial conditions, it
failed to satisfy the requirement to submit to Nasdaq by October 31, 2004
evidence of compliance, for the quarter ending September 30, 2004, with the $2.5
million shareholders' equity requirement, as set forth in Marketplace Rule
4310(c)(2)(B) (the "September 30th Requirement").

On October 27, 2004, the Panel granted the Company's request for an extension of
the September 30th Requirement, subject to the following amended conditions:

1. By no later than November 1, 2004, the Company was to have signed a
definitive agreement for the investment transactions that closed in
December 2004, and to have issued a press release announcing the
proposed transaction. The Company complied with these conditions.

2. On or before November 15, 2004, the Company was to have filed with the
SEC and Nasdaq a proxy statement evidencing the Company's intent to
seek shareholder approval of the investment transactions that closed in
December 2004. The Company complied with this condition on November 12,
2004.

3. On or before December 15, 2004, the Company was to have made a public
filing with the SEC and Nasdaq that included an unaudited balance
sheet, no older than 60 days and containing all appropriate pro forma
adjustments (including for any consummation of the investment
transactions), evidencing the Company's compliance with the $2.5
million shareholders' equity requirement. The Company complied with
this condition on December 15, 2004.

4. On or before January 31 and April 30, 2005, the Company must submit to
Nasdaq an unaudited balance sheet evidencing the Company's continued
compliance with the $2.5 million shareholders' equity requirement as of
December 31, 2004 and March 31, 2005, respectively.

5. On or before June 30, 2005, the Company must file with the SEC and
Nasdaq the Company's annual report on Form 20-F evidencing the
Company's compliance with the $2.5 million shareholders' equity
requirement, on an audited basis, as of December 31, 2004.

In addition, the Company must continue to maintain compliance with all other
requirements for continued listing on The Nasdaq SmallCap Market. Failure to
satisfy any of the foregoing conditions or noncompliance with these other
requirements will result in the Company's delisting. The Company will remain
subject to this listing exception until such time as the Company has
demonstrated to the Panel an ability to sustain compliance with the minimum
shareholders' requirement over the long term.

There can be no assurance that the Company will continue to have the ability to
meet the Nasdaq's conditions to the exception and, accordingly, there can be no
assurance that we will continue to comply with the Nasdaq listing requirements
for listing on the Nasdaq SmallCap Market. If our shares are delisted by the
Nasdaq, 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 51.72% of
our outstanding Ordinary Shares and convertible Series A Preferred Shares
(aggregated for purposes of determining voting power) as of December 31, 2004
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. 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 the 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.

Substantial sales of our Ordinary Shares could adversely affect our share price;
Potential dilution.

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 under various registration
statements declared effective by the SEC. In addition, a significant number of
shares will be eligible for resale in the future, if the shareholders in the two
transactions of October 31, 2004 decide to convert their Series A Preferred
Shares into Ordinary Shares, as well as those shares that will be eligible for
resale due to the exercise of warrants issued during 2004 and prior periods.
Until September 14, 2005, Series A Preferred Shares are convertible into
Ordinary Shares on a one for one basis; from September 15, 2005, each
outstanding Series A Preferred Share may be converted into two Ordinary Shares.
These shares will dilute existing shareholders.

Risk of failure to honor registration rights for the 2002, 2003 and 2004 private
placements.

According to the agreements with the selling securityholders under registration
statements on Forms F-3 filed with the SEC on May 15, 2002, October 20, 2003,
January 6, 2004 and July 1, 2004, as well as the agreements under the two
transactions signed on October 31, 2004 pertaining to the registration of
Ordinary Shares to be issued thereunder, should the Company fail to a) timely
file those registration statements, b) receive from the SEC in a timely manner
(as defined in the agreements with selling securityholders) a declaration of
effectiveness of those registration statements, or c) maintain the effectiveness
of those registration statements for the periods stated in the respective
agreements, the Company risks having imposed on it liquidated damages as defined
in those agreements. For example, one of the October 31, 2004 agreements
provides for liquidated damages of up to one million additional unregistered
Series A Preferred Shares. For details about the penalties for the 2002 private
placement, refer to Exhibit 2.8 of the Report on Form 20-F filed on April 26,
2002. For details about the penalties for the July 2003 private placements,
refer to the Report on Form 6-K for the month of July, filed on July 28, 2003,
and for the month of August filed on August 15, 2003. For details about the
penalties for the November 2003 private placement, refer to Form 6-K for the
month of November, filed December 2, 2003. For details about the penalties for
the May 2004 private placement, refer to Form 6-K for the month of May, filed
May 19, 2004. For details about the penalties for the two October 31, 2004
transactions, refer to Form 6K for the month of November, filed November 5,
2004.

Reduced proceeds from sale or liquidation of the Company.

Upon a sale of the Company by way of an Organic Change, as defined in the
Company's Amended and Restated Articles of Association (see Form 6-K for the
month of November, filed November 12, 2004) or Company liquidation, the holders
of Series A Preferred Shares, in exchange for each Preferred Share, are entitled
to receive from the sale consideration or remaining liquidation assets, as the
case may be, at least $1.00 in the form of securities or other assets. This
could result in a reduction in the amount of sales or liquidation proceeds
otherwise available for holders of our Ordinary Shares.

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 patented and 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. We recently purchased a patent, and
have one pending formal patent application, as well as one outstanding
provisional patent application covering certain aspects of our anti-spam
technology. We may seek to patent certain additional software or other
technology in the future. Any such patent applications might not result in
patents issued within the scope of the claims we seek, or at all.

Third parties may infringe or misappropriate our patent or our patent pending
technology, trade secrets, copyrights, trademarks and similar proprietary
rights. We may not have the proper resources in order to adequately protect our
intellectual property.

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. Therefore, 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. We may not
have the proper resources in order to adequately defend against such claims.

Also, 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.

If we are unable to obtain third-party content licenses, on commercially
reasonable terms, our business, financial condition and operating results may
suffer.

We also continue to hold a perpetual mail server license which was previously
utilized in our hosted email service offering, 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 the U.S.
federal government and some states (see above Risk Factors - Business Risks),
enforcement has not been widespread and generally there has been a continuing
trend of increasing 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 the
substantial majority 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.

Since the establishment of the State of Israel in 1948, a state of hostility has
existed between Israel and most of 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.

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.

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 in the event of a national emergency. 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. Any disruption
in our operations would harm our business.

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, or 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
years prior to 1999, the rate of devaluation of the NIS against the dollar
exceeded the rate of inflation. This trend has been reversed since the beginning
of 2003. We cannot predict the trend for future years. 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, or OCS, for the financing of a significant
portion of our research and development expenditures in Israel. 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 submitted an application
for an additional grant in 2003, we decided not to draw any funds thereunder
during 2003. We did not submit an application for funding during 2004. However,
we may apply for additional grants in the future. The OCS budget has been
subject to reductions which may affect the availability of funds for possible
future grants. 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 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 linkage adjustment to the
Israeli consumer price index and interest, and would likely be ineligible to
receive OCS grants in the future.

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 previously 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 (together with linkage adjustment to the Israeli consumer price
index and interest) 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 in effect is
March 31, 2005 (which may be extended by ministerial decision until June 30,
2005), 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
March 31, 2005 or that benefits will be continued in the future at their current
levels or at all. Various proposals have been put forth for new legislation to
replace the Law for the Encouragement of Capital Investments. We are not able to
predict whether or when this new legislation will be enacted, nor can we predict
the nature and scope of benefits that may be available under any new law.

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 prospectus. 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 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 law treats stock-for-stock acquisitions
between an Israeli company and a foreign company less favorably than does U.S.
tax law. For example, Israeli tax law may subject a shareholder who exchanges
his ordinary shares for shares in a foreign corporation to immediate taxation or
to taxation before his investment in the foreign corporation becomes liquid.
These provisions may adversely affect the price of our shares. 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 October 31, 2004, actual and as adjusted for the financing related
transactions, which closed on December 9, 2004 pursuant to agreements dated as
of October 31, 2004:

(UNAUDITED) (UNAUDITED)
Actual As adjusted
(IN THOUSANDS) (IN THOUSANDS)
------------ ------------

Long-term liabilities $ 3,432 $ 679
--------- ---------
Shareholders' equity:
Ordinary Shares 150,000,000 shares authorized,
with 42,533,464 issued and outstanding, 517 517

Series A Preferred Shares 8,280,000 shares authorized,
with 7,280,000 issued and outstanding -- 3,365

Additional paid-in capital 163,533 165,760
Preferred stock discount -- (1,893)
Accumulated other comprehensive income (7) (7)
Notes receivable from shareholders (57) (57)
Accumulated deficit (163,593) (164,936)
--------- ---------
Total shareholders' equity $ 393 $ 2,749
--------- ---------
Total capitalization and indebtedness $ 3,825 $ 3,428
--------- ---------

The as adjusted numbers reflect the issuance of 7,280,000 Series A Preferred
Shares under the two financing related transactions of October 31, 2004, which
resulted in new funding of $3.19 million to the Company and the Company's early
repayment of $3 million plus accumulated interest under the convertible notes
issued pursuant to the November 2003 Securities Purchase Agreement.

THE OFFER AND LISTING

The Offering

Ordinary Shares offered by selling securityholders.......... 23,605,490 shares, NIS 0.05 par value per share

Price....................................................... As determined by each selling securityholder

Ordinary Shares outstanding after the offering.............. 66,393,392 shares (taking into account 42,787,902
Ordinary Shares outstanding prior to the offering
on December 31, 2004)

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 .............................. CTCHC

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

Market Information

The Company's Ordinary Shares were traded publicly on The Nasdaq Stock Market
under the symbol "CTCH" from July 13, 1999 (up to June 7, 2002 on the National
Market, and subsequently on the SmallCap Market) through June 29, 2004, and
thereafter under the symbol "CTCHC".

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): .................. $ 49.12 $ 11.0625

2000: ............................................ $ 66.50 $ 7.44

2001: ............................................ $ 3.81 $ 0.20

2002: ............................................ $ 0.42 $ 0.06

2003: ............................................ $ 1.47 $ 0.10

2002:
First Quarter .................................... $ 0.42 $ 0.23
Second Quarter ................................... $ 0.25 $ 0.11
Third Quarter .................................... $ 0.15 $ 0.08
Fourth Quarter ................................... $ 0.22 $ 0.06

2003:
First Quarter .................................... $ 0.16 $ 0.10
Second Quarter ................................... $ 0.69 $ 0.16
Third Quarter .................................... $ 0.96 $ 0.55
Fourth Quarter ................................... $ 1.47 $ 0.79

2004:
First Quarter .................................... $ 1.24 $ 0.83
Second Quarter ................................... $ 1.09 $ 0.55
Third Quarter .................................... $ 0.58 $ 0.27
Fourth Quarter ................................... $ 0.55 $ 0.31

Most Recent Six Months:
July 2004 ........................................ 0.58 0.37
August 2004 ...................................... 0.40 0.27
September 2004 ................................... 0.36 0.30
October 2004 ..................................... 0.53 0.31
November 2004 .................................... 0.50 0.40
December 2004 .................................... 0.55 0.38

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. However, we will receive the exercise price if
the selling securityholders exercise their warrants or additional investment
rights. We cannot be certain as to when and if all of these warrants or
additional investment rights will be exercised and as to the amount of the
proceeds we will actually receive from exercises. All proceeds from the sale of
the shares will be for the account of the selling securityholders, as described
below. See "Selling Securityholders" and "Plan of Distribution."

SELLING SECURITYHOLDERS

The Ordinary Shares being offered by the selling securityholders (i) are
issuable upon conversion of Series A Preferred Shares and exercise of warrants
issued under the Redemption, Amendment and Exchange Agreement of October 31,
2004 ("RAE") (ii) were issued under the Securities Purchase Agreement dated May
18, 2004, (iii) are issuable upon exercise of additional investment rights and
warrants, which were also issued pursuant to the Securities Purchase Agreement
of May 18, 2004, and (iv) are issuable upon exercise of warrants issued under
the Securities Purchase Agreement of November 26, 2003. For additional
information regarding the issuance of those shares, additional investment
rights, convertible Series A Preferred Shares and warrants, see "Private
Placements of Ordinary Shares and Ordinary Shares Underlying Series A Preferred
Shares, Additional Investment Rights and Warrants" above. We are registering the
Ordinary Shares in order to permit the selling securityholders to offer the
shares for resale from time to time. Except for their participation in the
various agreements described above and Israel Seed IV, L.P.'s participation in
the Company's private placement of late July 2003, the selling securityholders
have not had any material relationship with us within the past three years.

The table below presents information provided by the selling securityholders
with respect to beneficial ownership of our Ordinary Shares as of December 31,
2004, as adjusted to reflect the sale of the shares offered under this
prospectus by the selling securityholders, and assumes that all shares being
offered under this prospectus are ultimately sold in the offering. The second
column lists the number of Ordinary Shares beneficially owned by each selling
securityholder, based on its ownership of the Ordinary Shares, Series A
Preferred Shares, additional investment rights and warrants, as of December 31,
2004, assuming conversion of all Series A Preferred Shares and exercise of the
additional investment rights and warrants held by the selling securityholders on
that date, without regard to any limitations on conversions or exercise.

The fourth column lists the Ordinary Shares being offered under this prospectus
by the selling securityholders.

In accordance with the terms of registration rights agreements with the selling
securityholders, this prospectus generally covers the resale of the sum of (i)
130% of the number of Ordinary Shares issuable upon exercise of warrants and
conversion of Series A Preferred Shares issued to the selling securityholders
under the RAE (ii) the number of Ordinary Shares issued to the selling
securityholders in the private placement of May 18, 2004, (iii) 130% of the
number of Ordinary Shares issuable upon exercise of the warrants under such
transaction, (iv) the number of Ordinary Shares issuable upon exercise of
additional investment rights under such transaction and (iv) 130% of the number
of Ordinary Shares issuable upon exercise of the warrants issued under the
November 26, 2003 transaction, determined as if the outstanding additional
investment rights, warrants and convertible Series A Preferred Shares were
exercised in full, in each case, as of the trading day immediately preceding the
date the registration statement relating to this prospectus was initially filed
with the SEC. Because the exercise price and number of the additional investment
rights and warrants may be adjusted pursuant to the terms of those documents,
the number of shares that will actually be issued may be more or less than the
number of shares being offered by this prospectus. The sixth column assumes the
sale of all of the shares offered by the selling securityholders pursuant to
this prospectus.

Under the terms of the additional investment rights and warrants, a selling
securityholder may not exercise the additional investment rights or warrants, to
the extent such exercise or conversion would cause such selling securityholder,
together with its affiliates, to beneficially own a number of Ordinary Shares
which would exceed 4.99% of our then outstanding Ordinary Shares following such
exercise, excluding for purposes of such determination Ordinary Shares issuable
upon exercise of the additional investment rights and warrants which have not
been exercised. The number of shares in the second column does not reflect this
limitation. The selling securityholders may sell all, some or none of their
shares in this offering. See "Plan of Distribution."

In the table below, the applicable percentage of ownership for each selling
securityholder is based on 42,787,902 Ordinary Shares and 7,280,000 Series A
Preferred Shares outstanding as of December 31, 2004 and 66,393,392 Ordinary
Shares and 6,380,000 Series A Preferred Shares outstanding immediately following
the completion of this offering, together with any remaining warrants and Series
A Preferred Shares held by that selling securityholder that are exercisable and
convertible within 60 days of December 31, 2004.

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

Israel Seed IV, L.P.(1) 9,629,023 19.75 7,863,975 16.16 2,679,785 5.39
c/o Maples and Calder, P.O. Box
309 G.T., Ugland House, South
Church Street
Grand Cayman, Cayman Island

Smithfield Fiduciary LLC(2) 3,163,417 6.88 3,846,784 8.25 200,000 0.43
c/o Highbridge Capital
Management, LLC
9 West 57th Street, 27th Floor
New York, New York 10019

Omicron Master Trust (3) 3,570,901 7.85 4,111,649 8.93 100,000 0.22
c/o Omicron Capital
810 Seventh Avenue
39th Floor
New York, New York 10019

Cranshire Capital L.P. (4) 3,076,542 6.77 3,741,432 8.12 100,000 0.22
c/o Downsview Capital, Inc.
The General Partner
666 Dundee Road, Suite 1901
Northbrook, IL 60062

Vertical Ventures, LLC (5) 2,592,468 5.78 3,168,749 6.98 0 0
900 Third Avenue, 26th Floor
New York, New York 10022

Iroquois Capital LP (6) 1,108,433 2.54 872,900 2.01 300,000 0.69
641 Lexington Avenue, 26th Floor
New York, New York 10022

TOTALS 23,140,784 38.45 23,605,490 37.87 3,379,785 5.28

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

(1) Israel Seed IV, L.P. ("ISLP IV") is organized as a "blind pool"
partnership in which the limited partners have no discretion over investment or
sale decisions, are not able to withdraw from ISLP IV except under exceptional
circumstances, and generally participate ratably in each investment made by ISLP
IV. The sole General Partner of ISLP IV is Israel Venture Partners 2000 Ltd.
("IVP"), which has sole investment control with respect to ISLP IV. The sole
principals of the investment advisors to IVP are Jonathan Medved, Neil Cohen and
Michael Eisenberg and, as such, they may be deemed to share voting control over
the shares of the Company held by the ISLP IV. No other persons have investment
control over IVP or ISLP IV. IVP and Jonathan Medved, Neil Cohen and Michael
Eisenberg disclaim beneficial ownership of any shares held by ISLP IV except to
the extent of their respective pecuniary interests. Shares shown as beneficially
owned by Israel ISLP IV prior to the offering also include shares acquired as a
result of its investment in the Company in a private placement of July 2003.

(2) Highbridge Capital Management, LLC ("Highbridge"), is the trading
manager of Smithfield Fiduciary LLC ("Smithfield") and consequently has voting
control and investment discretion over the Ordinary Shares held by Smithfield.
Glenn Dubin and Henry Swieca control Highbridge. Each of Highbridge and Messrs.
Dubin and Swieca disclaims beneficial ownership of the shares held by
Smithfield.

(3) Omicron Capital, L.P., a Delaware limited partnership ("Omicron
Capital"), serves as investment manager to Omicron Master Trust, a trust formed
under the laws of Bermuda ("Omicron"). Omicron Capital, Inc., a Delaware
corporation ("OCI"), serves as general partner of Omicron Capital, and
Winchester Global Trust Company Limited ("Winchester") serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may be deemed
to share dispositive power over the shares of our Ordinary Shares owned by
Omicron, and Winchester may be deemed to share voting and dispositive power over
our Ordinary Shares owned by Omicron. Omicron Capital, OCI and Winchester
disclaim beneficial ownership of such shares. Omicron Capital has delegated
authority from the board of directors of Winchester regarding the portfolio
management decisions with respect to the shares of common stock owned by Omicron
and, as of April 21, 2003, Mr. Olivier H. Morali and Mr. Bruce T. Bernstein,
officers of OCI, have delegated authority from the board of directors of OCI
regarding the portfolio management decisions of Omicron Capital with respect to
the shares of common stock owned by Omicron. By reason of such delegated
authority, Messrs. Morali and Bernstein may be deemed to share dispositive power
over our Ordinary Shares owned by Omicron. Messrs. Morali and Bernstein disclaim
beneficial ownership of such shares and neither of such persons has any legal
right to maintain such delegated authority. No other person has sole or shared
voting or dispositive power with respect to our Ordinary Shares being offered by
Omicron, as those terms are used for purposes under Regulation 13D-G of the
Securities Exchange Act of 1934, as amended. Omicron and Winchester are not
"affiliates" of one another, as that term is used for purposes of the Securities
Exchange Act of 1934, as amended, or of any other person named in this
prospectus as a selling securityholder. No person or "group" (as that term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the
SEC's Regulation 13D-G) controls Omicron or Winchester.

(4) Mitchell P. Kopin is the president of Downsview Capital, Inc., the
general partner of Cranshire Capital, L.P., and has sole voting control and
investment discretion over securities held by Cranshire Capital, L.P.

(5) Joshua Silverman, a partner of Vertical Ventures, LLC has voting
control and investment discretion over securities held by Vertical Ventures,
LLC. Mr. Silverman disclaims beneficial ownership of the shares held by Vertical
Ventures, LLC.

(6) Shares shown as beneficially owned by Iroquois Capital, L.P. prior
to the offering also include Ordinary Shares underlying convertible Series A
Preferred Shares purchased in a separate private placement of October 31, 2004.
Joshua Silverman has voting control and investment discretion over securities
held by Iroquois Capital, LP. Mr. Silverman disclaims beneficial ownership of
the shares held over by Iroquois Capital, LP.

SHARES ELIGIBLE FOR FUTURE SALE

Freely Tradable 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, 2004, we had 42,787,902 Ordinary Shares and 7,280,000
convertible Series A Preferred Shares outstanding, plus 15,162,840 outstanding
warrants exercisable into an identical amount of Ordinary Shares, additional
investment rights to purchase 5,413,931Ordinary Shares and related rights to an
additional 2,706,964 warrants exercisable into an identical amount of Ordinary
Shares. The primary transactions pursuant to which the above described
securities were issued by the Company are summarized as follows: 3,450,000
Ordinary Shares sold in our initial public offering in July 1999; 1,344,086
Ordinary Shares issued to InfoSpace and Vulcan Ventures concurrent with our
initial public offering and registered in 2000 in a secondary offering along
with 707,965 Ordinary Shares we issued to Microsoft Corporation; 315,789 shares
we issued to Rideau Ltd., a private investor, on June 30, 2001; 1,406,612 shares
registered in August 2001 in a secondary offering for shareholders of Wingra, a
former subsidiary of the Company; 7,095,886 shares and shares underlying
warrants registered in May 2002 for certain shareholders under a private
placement, as identified in the Form F-3 filed with the SEC on May 15, 2002;
8,793,564 shares and shares underlying warrants registered on November 3, 2003
for certain shareholders under the two July 2003 private placements, as
identified in the Form F-3 filed with the SEC on October 20, 2003; 11,345,358
shares and shares underlying warrants registered in January 2004 under the first
Form F-3 filed with the SEC on January 6, 2004 relating to certain shareholders
who participated in the convertible loan transaction of January 29, 2003, as
amended on March 28, 2003, May 15, 2003 and November 18, 2003; 780,000 shares
underlying warrants registered on January 20, 2004 under the second Form F-3
filed with the SEC on January 6, 2004 relating to certain shareholders under the
convertible loan transaction of November 26, 2003, as amended on May 18, 2004
and October 31, 2004; 15,869,806 shares and shares underlying warrants and
additional investment rights registered on July 15, 2004 for certain
shareholders under the private placement of May 18, 2004, as identified in the
Form F-3 filed with the SEC on July 1, 2004; and 6,380,000 Series A Preferred
Shares issued to certain shareholders pursuant to the Securities Purchase
Agreement of October 31, 2004.

Apart from the Ordinary Shares underlying Series A Preferred Shares relating to
the Securities Purchase Agreement of October 31, 2004, which are to be
registered on a Form F-3 to be filed by early February 2005, the above described
shareholdings 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, the 6,955,684 Ordinary Shares included for registration under the
Form F-3 filed in January 2005 will also be freely tradable without restriction
under this prospectus, unless otherwise indicated in the related prospectus
supplement.

We have 3,684,211 shares remaining under a shelf Registration Statement on file
with and previously declared effective by the SEC. All of the shares thereunder
would be freely tradable as and when issued if the Registration Statement were
to continue to meet SEC requirements relating to its effectiveness. The Company
has no present intention of utilizing this shelf Registration Statement.

Freely Tradable Shares--Shares Under Employee Benefit Plans

On January 20, 2000, we filed a Form S-8 Registration Statement under the
Securities Act to register 5,000,000 Ordinary Shares under the Company's
employee stock option plans, 250,000 under the Company's non-employee director
stock option plan and 150,000 Ordinary Shares under the Company's Employee Stock
Purchase Plan. On July 20, 2001, the Company filed a Form S-8 Registration
Statement to register: an additional 250,000 Ordinary Shares under the Company's
non-employee 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. On July 27,
2004, the Company filed a Form S-8 Registration Statement to register an
additional 6,460,000 Ordinary Shares under the Company's employee stock option
plans and an additional 1,790,000 Ordinary Shares under the Company's
non-employee director stock option plan.

The obligations of the Company to employees under the Wingra plan ended with the
Company's sale of Wingra in early 2002. The Employee Stock Purchase Plan was
terminated in late 2001, with the remaining unsold 56,323 Ordinary Shares
deregistered by way of a post-effective amendment to Form S-8 filed on June 25,
2004.

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
17,841,144 options issued in the past, as of December 15, 2004 there are
9,796,550 options outstanding, with 5,608,478 option shares being vested and
unexercised and 2,184,983 options having been exercised. Of these options,
601,390 options priced at $0.0125 remain outstanding and exercisable, with
568,108 being fully vested.

Warrants, Additional Investment Rights and Conversion Rights of Series A
Preferred Shares

Please see the section above entitled "Freely Tradable Shares--Registered
Shares", as well as our annual report on Form 20-F for 2003 filed with the SEC
on June 18, 2004 for detail relating to outstanding warrants, additional
investment rights and conversion rights granted in the past by the Company.

As of the date of this prospectus, only conversion rights pertaining to Series A
Preferred Shares remain outstanding. Until September 14, 2005, Series A
Preferred Shares are convertible into Ordinary Shares on a one for one basis;
from September 15, 2005, each outstanding Series A Preferred Share may be
converted into two Ordinary Shares. A full description of the rights, powers and
authorities of Series A Preferred Shares can be found in the Amended and
Restated Articles of Association attached to the Company's Proxy Statement filed
with the SEC on Form 6-K on November 12, 2004.

PLAN OF DISTRIBUTION

We are registering the Ordinary Shares issued and issuable upon
exercise of the additional investment rights and warrants and conversion of the
Series A Preferred Shares, in order to permit the resale of these Ordinary
Shares by the holders of the Ordinary Shares, additional investment rights,
convertible Series A Preferred Shares and the warrants from time to time after
the date of this prospectus. We will not receive any of the proceeds from the
sale by the selling securityholders of the Ordinary Shares. We will bear all
fees and expenses incident to our obligation to register the Ordinary Shares.

The selling securityholders may sell all or a portion of the Ordinary
Shares beneficially owned by them and offered hereby from time to time directly
or through one or more underwriters, broker-dealers or agents. If the Ordinary
Shares are sold through underwriters or broker-dealers, the selling
securityholders will be responsible for underwriting discounts or commissions or
agent's commissions. The Ordinary Shares may be sold in one or more transactions
at fixed prices, at prevailing market prices at the time of the sale, at varying
prices determined at the time of sale, or at negotiated prices. These sales may
be effected in transactions, which may involve crosses or block transactions,

o on any national securities exchange or quotation service on which
the securities may be listed or quoted at the time of sale;

o in the over-the-counter market;

o in transactions otherwise than on these exchanges or systems or in
the over-the-counter market;

o through the writing of options, whether such options are listed on
an options exchange or otherwise;

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o short sales;

o broker-dealers may agree with the selling securityholders to sell
a specified number of such shares at a stipulated price per share;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

The selling securityholders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus.

If the selling securityholders effect such transactions by selling
Ordinary Shares to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling securityholders or
commissions from purchasers of the Ordinary Shares for whom they may act as
agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the Ordinary Shares or otherwise, the selling securityholders may
enter into hedging transactions with broker-dealers, which may in turn engage in
short sales of the Ordinary Shares in the course of hedging in positions they
assume. The selling securityholders may also sell Ordinary Shares short and
deliver Ordinary Shares covered by this prospectus to close out short positions.
The selling securityholders may also loan or pledge Ordinary Shares to
broker-dealers that in turn may sell such shares.

The selling securityholders may pledge or grant a security interest in
some or all of the additional investment rights, convertible Series A Preferred
Shares, warrants or Ordinary Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the Ordinary Shares from time to time pursuant to this prospectus
or any amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act of 1933, as amended, amending, if necessary, the
list of selling securityholders to include the pledgee, transferee or other
successors in interest as selling securityholders under this prospectus. The
selling securityholders also may transfer and donate the Ordinary Shares in
other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.

The selling securityholders and any broker-dealer participating in the
distribution of the Ordinary Shares may be deemed to be "underwriters" within
the meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the Ordinary Shares is made, a prospectus supplement, if required,
will be distributed which will set forth the aggregate amount of Ordinary Shares
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.

Under the securities laws of some states, the Ordinary Shares may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in some states the Ordinary Shares may not be sold unless such shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.

There can be no assurance that any selling securityholder will sell any
or all of the Ordinary Shares registered pursuant to the shelf registration
statement, of which this prospectus forms a part.

The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of purchases and sales of any of the Ordinary Shares by the selling
securityholders and any other participating person. Regulation M may also
restrict the ability of any person engaged in the distribution of the Ordinary
Shares to engage in market-making activities with respect to the Ordinary
Shares. All of the foregoing may affect the marketability of the Ordinary Shares
and the ability of any person or entity to engage in market-making activities
with respect to the Ordinary Shares.

We will pay all expenses of the registration of the Ordinary Shares
pursuant to the registration rights agreements, as detailed below, including,
without limitation, Securities and Exchange Commission filing fees and expenses
of compliance with state securities or "blue sky" laws; provided, however, that
a selling securityholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling securityholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling securityholders will be
entitled to contribution. We may be indemnified by the selling securityholders
against civil liabilities, including liabilities under the Securities Act, that
may arise from any written information furnished to us by the selling
securityholder specifically for use in this prospectus, in accordance with the
related registration rights agreements, or we may be entitled to contribution.

Once sold under the shelf registration statement, of which this
prospectus forms a part, the Ordinary Shares will be freely tradable in the
hands of persons other than our affiliates.

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, and our legal and accounting fees. We estimate these expenses to be
approximately $36,087, which include the following categories of expenses:

SEC registration fee............................................ $ 287*
Blue Sky filing fees............................................ 1,800
Printing and engraving expenses................................. 0
Legal fees and expenses ........................................ 20,000
Accounting fees and expenses.................................... 12,000
Transfer agent and registrar fees and expenses.................. 0
Miscellaneous expenses.......................................... 2,000
------
Total........................................................... $36,087

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

LEGAL MATTERS

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 the firm itself, beneficially own in the aggregate
15,000 Ordinary Shares of the Company.

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, 2003, have been audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst
& Young Global, an independent registered public accounting firm, as set forth
in their report to the Form 20-F 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, 2003;

(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;

(c) The description of our Series A Preferred Shares contained in the Amended
and Restated Articles of Association of the Company attached to Proxy Statement
filed with the SEC on Form 6-K on November 12, 2004;

(d) The terms of the RAE and Securities Purchase Agreement of October 31, 2004
contained in the Form 6-K filed with the SEC on November 5, 2004;

(e) The terms of the private placement of May 18, 2004 contained in the Form 6-K
filed with the SEC on May 19, 2004; and

(f) Our first, second and third quarter 2004 financial results included on Forms
6-K filed by the Company with the SEC on June 29, 2004, July 29, 2004 and
November 12, 2004, respectively.

(g) The report on Form 6-K filed with the SEC on December 15, 2004 in relation
to the Nasdaq Listing Qualifications Panel's requirements for continued listing
of the Company's shares on The Nasdaq SmallCap Market.

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, Suite 103, 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:

o the judgment was obtained by fraud,
o there was no due process,
o the judgment was rendered by a court not competent to render it
according to the laws of private international law in Israel,
o 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
o 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)

Sept. 30, December 31,
2004 2003
(Unaudited) Audited*
-------- --------

Assets
Current Assets:
Cash and cash equivalents................................................................. $ 5,107 $ 4,125
Trade receivables, net.................................................................... 52 92
Receivables on account of shares.......................................................... -- 955
Prepaid expenses and other accounts receivable............................................ 232 171
-------- --------
Total current assets......................................................................... 5,391 5,343
-------- --------
Long-term lease deposits..................................................................... 5 5
Severance pay fund........................................................................... 412 391
Investment in affiliate ..................................................................... 223 339
Deferred charges............................................................................. 266 353*
Property, equipment and other assets, net.................................................... 382 452
-------- --------
$ 6,679 $6,883
-------- --------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.......................................................................... 354 479
Employees and payroll accruals............................................................ 520 418
Deferred revenues......................................................................... 1,127 222
Accrued expenses and other liabilities.................................................... 434 376
-------- --------
Total current liabilities.................................................................... 2,435 1,495
-------- --------
Convertible loan, net...................................................................... 2,753 2,134
Accrued severance pay...................................................................... 457 425
Other long term liabilities ............................................................... 192 372
-------- --------
3,402 2,931
-------- --------
Shareholders' Equity
Ordinary Shares, nominal value NIS 0.05 par value - Authorized : 75,000,000
and 40,000,000 shares as of September 30, 2004 and 2003: issued and
outstanding : 42,787,902 and 28,091,148,
as of September 30, 2004 and 2003, respectively.......................................... 517 456
Additional paid-in capital................................................................ 163,533 160,592
Deferred stock compensation............................................................... -- (30)
Notes receivable from shareholders........................................................ (57) (102)
Accumulated other comprehensive income (loss)............................................. (7) 46
Accumulated deficit....................................................................... (163,144) (158,505)
-------- --------
Total shareholders' equity................................................................ 842 2,457
-------- --------
$ 6,679 $6,883
======== ========

* - reclassified to conform to current period presentation

F-2

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

Nine Nine
Months Months
Ended Ended
Sept. 30, Sept. 30,
2004 2003
------- -------
Revenues:........................................... $ 933 $ 260

Cost of revenues:................................... 475 447
------- -------
Gross profit (loss)................................... 458 (187)
------- -------
Operating expenses:
Research and development........................... 1,055 1,095
Sales and marketing................................ 2,964 1,137
General and administrative......................... 1,383 1,335
Amortization of stock-based employee
deferred compensation........................... 30 189
------- -------
Total operating expenses........................... 5,432 3,756
------- -------
Operating loss........................................ (4,974) (3,943)
Interest and other income (expense), net........... 398 (283)
Equity in earnings (losses) of affiliate........... (63) 282
------- -------
Net loss ............................................. $(4,639) $(3,944)
======= =======
Basic and diluted net loss per share.................. $ (0.12) $ (0.17)
======= =======
Weighted average number of shares used
in computing basic and diluted net loss per share.. 39,080 23,173
======= =======

F-3

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

Nine months Nine months
ended ended
Sept. 30, Sept. 30,
2004 2003
------- -------

Cash flows from operating activities:
Net loss ........................................................................ $(4,639) $(3,944)
Adjustments to reconcile net loss to net cash used in Operating activities:
Depreciation and amortization ................................................ 340 460
Amortization of stock-based employee deferred
compensation and warrants issued for services received .................... 82 189
Amortization of convertible loan discount related beneficial
conversion feature and warrants fair value ................................ (763) 167

Equity in earnings (losses) of affiliate ..................................... 63 (282)
Changes in assets and liabilities:
Trade receivables, net ....................................................... 40 64
Prepaid expenses and other accounts receivable ............................... (61) 2
Accounts payable ............................................................. (125) 83
Employee and payroll accruals, accrued expenses and other liabilities ........ 160 26
Deferred revenues ............................................................ 905 48
Accrued severance pay, net ................................................... 11 4

Other ......................................................................... -- (7)
------- -------
Net cash used in operating activities .............................................. (3,987) (3,190)
------- -------
Cash flows from investing activities:
Purchase of property. equipment and other assets ................................ (151) --
------- -------

Net cash used in investing activities .............................................. (151) --
------- -------
Cash flows from financing activities:
Repayment of note receivable by shareholder ..................................... 45 198
Proceeds from issuance of convertible loan ...................................... 1,455 1,258
Deferred charges related to convertible loan .................................... 87 --
Proceeds from issuance of shares, net ........................................... 3,533 2,999
------- -------
Net cash provided by financing activities .......................................... 5,120 4,455
------- -------
Increase in cash and cash equivalents .............................................. 982 1,265
Cash and cash equivalents at the beginning of the period ........................... 4,125 1,388
------- -------
Cash and cash equivalents at the end of the period ................................. $ 5,107 $ 2,653
======= =======
Supplemental disclosure
Non-cash transaction
Investment in affiliate - foreign currency translation adjustment .................. $ 53 $ --
------- -------

F-4

NOTE 1: GENERAL

a. Commtouch Software Ltd. ("Commtouch", "the Company") was incorporated under
the laws of Israel in 1991. The Company and its subsidiary (Commtouch Inc.)
develop and provide email anti-spam solutions to various customers through
various third party distribution channels. The Company expects that it will
continue to be dependent upon resellers and OEM partners for a significant
portion of its revenues, which will be derived from sales of the Company's
anti-spam solutions.

For the nine-months ended September 30, 2004, 33.57% of the revenues were
derived from one customer. For the nine-months ended September 30, 2003, 82.16%
of the revenues were derived from three customers (35.32% from customer A,
31.52% from customer B and 15.32% from customer C).

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 nine-months ended September 30, 2004,
are not necessarily indicative of the results of operations that may be expected
for the year ended December 31, 2004.

The balance sheet at December 31, 2003 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's
annual report on Form 20-F for the year ended December 31, 2003.

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. Recently Issued Accounting Pronouncements:

In March 2004, the Financial Accounting Standards Board (FASB) approved the
consensus reached on the Emerging Issues Task Force (EITF) issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". The issue's objective is to provide guidance for identifying
other-than-temporarily impaired investments. EITF 03-1 also provides new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF
03-1-1 that delays the effective date of the measurement and recognition
guidance in EITF 03-1 until after further deliberations by the FASB. Once the
FASB reaches a final decision on the measurement and recognition provisions, the
Company will evaluate the impact of the adoption of EITF 03-1.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the statement of
operations based on their fair values. Pro forma disclosure is no longer an
alternative. The new standard will be effective for public entities in the first
interim or annual reporting period beginning after June 15, 2005. The Company
has not completed a valuation or determined the impact of adopting Statement
123(R).

NOTE 3: MAY 2004 PRIVATE PLACEMENT

On May 18, 2004, the Company entered into a definitive agreement for the private
placement of 5,131,583 ordinary shares of the Company at a purchase price of
$0.76 per share to existing institutional investors for gross proceeds to the
Company of approximately $3.9 million.

The investors also received five year warrants to purchase up to an additional
2,565,793 ordinary shares, with an exercise price of $0.836 per share. In
addition, the Company had granted the investors additional investment rights to
purchase up to an additional 5,131,583 ordinary shares at $0.836 per share. Upon

F-5

such additional purchases the investors would also receive additional warrants
to purchase up to an additional 2,565,793 ordinary shares with an exercise price
of $0.836 per share, for a period of one year following the effectiveness of the
registration statement covering the resale of the ordinary shares underlying
these rights.

The Company agreed to reduce the conversion and exercise prices of the
convertible notes and warrants issued to the investors in the November 26, 2003
transaction between those investors and the Company. The conversion price of the
notes previously set at $1.153 was reduced to $0.83 and the exercise price of
the initial warrants was similarly reduced. The conversion price of the
additional notes and exercise price of the additional warrants issuable in
connection with the November 26, 2003 transaction (if and when the investors'
option to loan additional funds is exercised) was reduced to $0.90. In addition,
the exercise period for the additional loan was extended for a period 18 months
from the effectiveness of the registration statement (January 20, 2004).

The closing of the financing occurred in late June 2004.

NOTE 4: 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.

As at the balance sheet date, the Company continues to apply APB 25. The Company
applies the disclosure requirements SFAS 148, "Accounting for Stock Based
Compensation Transition and Disclosure" - an amendment of FASB Statement No. 123
("SFAS 148"). FAS 148 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. Pro forma information under
SFAS 123 are as follows:

Nine months Nine months
ended ended
Sept. 30, Sept.30,
2004 2003
------- -------

Net loss as reported............................ $(4,639) $(3,944)

Add:
Stock based compensation expense
included in the determination
of net loss, as reported ....................... 30 189

Deduct:
Stock based compensation expense
determined under fair value method
for all awards.................................. (1,034) (687)
------- -------
Pro forma net loss.............................. $(5,643) $(4,442)
======= =======
Pro forma basic and diluted
net loss per share.............................. $ (0.14) $ (0.19)
======= =======

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.

NOTE 5: 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-6

Revenues from external customers:

Nine months Nine months
ended ended
Sept. 30, Sept. 30,
2004 2003
---- ----
Israel ................................... $113 $ 18
U.S.A. ................................... 777 224
Europe ................................... 20 ---
Japan .................................... 23 18
---- ----
$933 $260
==== ====

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

Nine months Year
ended ended
Sept. 30, December 31,
2004 2003
---- ----
Israel.................................... $85 $294
U.S.A..................................... 257 158
---- ----
$342 $452
==== ====

NOTE 6: LOSS PER SHARE:

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

1. Numerator:
Nine months ended
Sept. 30,
----------------------
2004 2003
------ ------
Unaudited
----------------------

Numerator for basic and diluted loss per share -

Numerator for basic and dilutedloss available to Ordinary shareholders $ (4,639) $ (3,944)
========= =========
2. Denominator (in thousands):

Denominator for basic and diluted loss per share --
Weighted average number of shares 39,080 23,173
========= =========

All outstanding stock options and warrants have been excluded from the
calculation of the diluted loss per share because all such securities are
anti-dilutive 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 15,047,899 and 15,919,861 for the nine-months ended
September 30, 2004 and September 30, 2003, respectively.

NOTE 7: SUBSEQUENT EVENTS

a. OCTOBER 2004 REDEMPTION, AMENDMENT AND EXCHANGE AGREEMENT

On October 31, 2004, the Company entered into a Redemption, Amendment and
Exchange Agreement ("RAE") that provided for the Company's repayment of the
outstanding convertible notes described in Note 3 above, plus the performance of
certain other obligations delineated below (see also Form 6-K of November 5,
2004). The transaction closed on December 9, 2004. Under the RAE transaction:

1. At the closing, the Company repaid in full the $3 million in principal
amount, plus accrued interest, outstanding under the convertible notes.

2. In exchange for the cancellation by the convertible note holders of
their rights, pursuant to the terms of the November 2003 financing, to
purchase up to $3 million in additional notes convertible into
approximately 3.3 million Ordinary Shares at a $0.90 conversion price
(plus the issuance of an additional 600,000 warrants as warrant

F-7

coverage thereon), the Company issued to such holders warrants to
purchase an aggregate of approximately 3.3 million Ordinary Shares at
an exercise price of $0.90 per share.

3. The note holders (and the additional investor under the May 2004
Securities Purchase Agreement) waived certain rights restricting the
ability of the Company to enter into the private placement described
under subparagraph b of this Note. In exchange for such waiver, the
Company delivered to such persons an aggregate of 900,000 Series A
Preferred Shares.

4. The note holders' security interests in Company assets were terminated.

In accordance with EITF 00-19, the value of the warrants of $333,000 will be
classified as equity. The overall loss from the transaction will amount to $1.2
million.

b. OCTOBER 2004 SERIES A PREFERRED SHARE PRIVATE PLACEMENT

On October 31, 2004, the Company entered into a Securities Purchase Agreement
("SPA") for the sale of Series A Preferred Shares to investors of the Company
identified in the schedule of buyers to the SPA. The transaction closed on
December 9, 2004. Under the transaction:

1. The Company sold 6,380,000 Series A Preferred Shares to new and
existing investors, including three of its current directors, for an
aggregate purchase price of $3.19 million dollars. The purchase price
per share paid in the transaction was $0.50.

2. The Series A Preferred Shares are convertible into the Company's
Ordinary Shares, and enjoy certain preferences and other rights
relating to liquidation and business combinations, as described in the
Amended and Restated Articles of Association (see Form 6-K of November
12, 2004).

In accordance with the terms of the SPA and the requirements of EITF 98-05 and
EITF 00-27, a beneficial conversion feature was valued at approximately $1.9
million, which will be amortized over a nine month period.

F-8

23,605,490 Ordinary Shares

COMMTOUCH SOFTWARE LTD.

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

PROSPECTUS

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

_________, 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 8. Indemnification of Directors and Officers.

Israeli law permits a company to insure an office holder in respect of
liabilities incurred by him as a result of the breach of his duty of care to the
company or to another person, or as a result of the breach of his fiduciary duty
to the company, to the extent that he acted in good faith and had reasonable
cause to believe that the act would not prejudice the company. A company can
also insure an office holder for monetary liabilities as a result of an act or
omission that he committed in connection with his serving as an office holder.
Moreover, a company can indemnify an office holder for any of the following
obligations or expenses incurred as a result of an act or omission of such
person in his capacity as an office holder: (a) monetary liability imposed upon
him in favor of other persons pursuant to a court judgment, including a
settlement or an arbitrator's decision confirmed by a court and (b) reasonable
litigation expenses, including attorneys' fees, actually incurred by him or
imposed upon him by a court (i) in an action, suit or proceeding brought against
him by or on behalf of the company or other persons, (ii) in a criminal action
in which he was acquitted, or (iii) in a criminal action which does not require
proof of criminal intent in which he was convicted. The term "office holder" of
a company includes any person who, either formally or in substance, serves as a
director, general manager or chief executive officer, or other executive officer
who reports directly to the general manager or chief executive officer of a
company.

Israeli Law provides that a company's articles of association may permit the
company to (a) indemnify an office holder following a determination to this
effect made by the company after the occurrence of the event in respect of which
the office holder will be indemnified; and (b) undertake in advance to indemnify
an office holder, provided that the undertaking is limited to types of
occurrences, which, in the opinion of the company's board of directors, are, at
the time of the undertaking, foreseeable and to an amount the board of directors
has determined is reasonable in the circumstances. Israeli law also allows a
company, if permitted by its articles of association, to exculpate an office
holder in advance, in whole or in part, from liability for damages sustained by
a breach of duty of care to the company.

Our Amended and Restated Articles of Association allow us to insure, indemnify
and exculpate office holders to the fullest extent permitted by law provided
such insurance, indemnification or exculpation is approved in accordance with
Israel's Companies Law. The Company has acquired directors' and officers'
liability insurance covering the officers and directors of the Company and its
subsidiaries for certain claims. In addition, the Company has entered into an
undertaking to indemnify the directors of the Company subject to certain
limitations, as well as indemnification and exculpation agreements, and these
undertakings and agreements have been ratified by our shareholders.

Certain members of our management team are officers of our subsidiary, Commtouch
Inc., a California Corporation, or reside in California. The Articles of
Incorporation of Commtouch Inc. provide that the liability of the directors of
the corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law and that the corporation is authorized to
provide for the indemnification of agents of the corporation, as defined in
Section 317 of the California General Corporation Law, in excess of that
expressly permitted by Section 317 for breach of duty to the corporation and its
shareholders to the fullest extent permissible under California law.

With respect to all proceedings other than shareholder derivative actions,
Section 317 permits a California corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. In the case of derivative actions, a
California corporation may indemnify any of its directors, officers or agents
only if such person acted in good faith and in a manner such person believed to
be in the best interests of the corporation and its shareholders. Furthermore,
in derivative actions, no indemnification is permitted (i) with respect to any
matter with respect to which the person to be indemnified has been held liable
to the corporation, unless such indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise disposing of a pending action without
court approval; or (iii) of expenses incurred in defending a pending action
which is settled or otherwise disposed of without court approval. To the extent
that a director, officer or agent of a corporation has been successful on the
merits in defense of any proceeding for which indemnification is permitted by
Section 317, a corporation is obligated by Section 317 to indemnify such person
against expenses actually and reasonably incurred in connection with the
proceeding.

Pursuant to the terms under which the Ordinary Shares were issued to the selling
securityholders, the Company has agreed to indemnify the selling securityholders
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 necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading. Such
indemnification includes liabilities under the Securities Act, the Exchange Act,
state securities laws and the rules thereunder, but excludes liabilities for
statements or omissions that were based on information provided by the selling
securityholders, as to which the selling securityholders have agreed to
indemnify the Company.

II-1

Item 9. Exhibits.

The exhibits listed on the exhibit index to this filing are incorporated herein
by reference.

Item 10. Undertakings.

(a) The undersigned Registrant hereby undertakes:

(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement.

(iii) to include any material information with respect to the Plan of
Distribution not previously disclosed in the Registration Statement or any
other material change to such information in the Registration Statement.

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by Item 8.A of Form 20-F at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act need not be furnished, provided that the Registrant includes in
the prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary to
ensure that all other information in the prospectus is at least as current as
the date of those financial statements. Notwithstanding the foregoing, with
respect to Registration Statements on Form F-3, a post-effective amendment need
not be filed to include financial statements and information required by Section
10(a)(3) of the Securities Act or Item 8.A of Form 20-F if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or Section
15(d) of the Exchange Act that are incorporated by reference in the Form F-3.

(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-2

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Mountain View, state of California, on
January 7, 2005.

COMMTOUCH SOFTWARE LTD.

By: /s/ DEVYANI PATEL
------------------------------------
Devyani Patel
Vice President, Finance

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

Name Title Date
------------------------- -------------------------------------- ------------------------

/s/ GIDEON MANTEL* Chief Executive Officer and Director January 7, 2005
------------------------- (Principal Executive Officer)
Gideon Mantel

/s/ DEVYANI PATEL* Vice President, Finance January 7, 2005
------------------------- (Principal Financial
Devyani Patel and Accounting Officer)

/s/ IAN BONNER* Chairman of the Board January 7, 2005
-------------------------
Ian Bonner

/s/ CAROLYN CHIN* Director, Chairman of the Board January 7, 2005
-------------------------
Carolyn Chin

/s/ AMIR LEV* Director January 7, 2005
-------------------------
Amir Lev

/s/ OFER SEGEV* Director January 7, 2005
-------------------------
Ofer Segev

/s/ NAHUM SHARFMAN* Director January 7, 2005
-------------------------
Nahum Sharfman

/s/ LLOYD E. SHEFSY* Director January 7, 2005
-------------------------
Lloyd E. Shefsky

*/s/ DEVYANI PATEL *Individually and as January 7, 2005
------------------------- Attorney-in-fact and Authorized
Devyani Patel U.S. Representative

Exhibit Index

Exhibit Number Description of Document
-------------- -----------------------------------------------------------------

5.1 Opinion of Naschitz, Brandes & Co., Israeli counsel to the
Registrant, as to certain legal matters with respect to the
legality of the shares.

23.1 Consent of Kost, Forer,Gabbay & Kasierer , a Member of Ernst &
Young Global.

23.2 Consent of Naschitz, Brandes & Co. (contained in Exhibit 5.1).

24.1 Power of Attorney of directors and certain officers of the
Registrant.

99.1 Redemption, Amendment and Exchange Agreement dated October 31,
2004 and form of warrant relating thereto, by and between
Commtouch Software Ltd. and each Investor thereto (incorporated
by reference to Exhibits 99.5 and 99.6, respectively, to Report
of Foreign Private Issuer on Form 6-K for the month of November
2004 (File No. 000-26495).