AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1999

REGISTRATION NO. 333-78531



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 1

TO

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

COMMTOUCH SOFTWARE LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             ISRAEL                               7389                             NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF       (PRIMARY STANDARD INDUSTRIAL                (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)        CLASSIFICATION CODE NUMBER)               IDENTIFICATION NO.)

10 TECHNOLOGY AVENUE
EIN VERED 40696, ISRAEL
011-972-9-796-1053
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) C/O COMMTOUCH SOFTWARE INC.
JAMES E. COLLINS, CHIEF FINANCIAL OFFICER
3945 FREEDOM CIRCLE, SUITE 730
SANTA CLARA, CALIFORNIA 95054

(408) 653-4358

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)

COPIES TO:

    LIOR O. NUCHI               AARON M. LAMPERT             ROBERT P. LATTA             BARRY P. LEVENFELD
     DAWN L. JUDD                 AMIR ENGLER                CHRIS F. FENNELL          SHERYL SILVER OCHAYON
IRENE SONG SHARKANSKY              NASCHITZ,              CHRISTIAN E. MONTEGUT          YIGAL ARNON & CO.
   JASON J. TAYLOR               BRANDES & CO.            PRIYA CHERIAN HUSKINS        3 DANIEL FRISCH STREET
    ORIT H. REGWAN               5 TUVAL STREET               WILSON SONSINI           TEL AVIV 64731, ISRAEL
  MCCUTCHEN, DOYLE,          TEL AVIV 67897 ISRAEL          GOODRICH & ROSATI
 BROWN & ENERSEN, LLP                                       650 PAGE MILL ROAD
  3150 PORTER DRIVE                                        PALO ALTO, CA 94304
 PALO ALTO, CA 94304

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

As soon as practicable after the Registration Statement becomes effective.

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. [ ]

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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [ ]

CALCULATION OF REGISTRATION FEE

--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
                                                             PROPOSED MAXIMUM
           TITLE OF EACH CLASS OF SECURITIES                    AGGREGATE               AMOUNT OF
                    BEING REGISTERED                          OFFERING PRICE         REGISTRATION FEE
--------------------------------------------------------------------------------------------------------
ordinary shares, NIS 0.05 nominal value per share.......       $58,650,000           $16,305.00(1)(2)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

(1) Calculated pursuant to Rule 457(a).

(2) Previously paid.

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.




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

SUBJECT TO COMPLETION, DATED JUNE 3, 1999

COMMTOUCH SOFTWARE LTD.

3,000,000 ORDINARY SHARES LOGO

$ PER SHARE


- CommTouch Software Ltd. is offering 3,000,000 of its ordinary shares.

- We anticipate that the initial public offering price will be between $15.00 and $17.00 per share.

- This is our initial public offering and no public market currently exists for our shares.

- Proposed trading symbol: Nasdaq National Market -- CTCH.


THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.


                                                              PER SHARE      TOTAL
                                                              ---------   ------------
Public Offering Price.......................................    $         $
Underwriting Discounts and Commissions......................    $         $
Proceeds to CommTouch.......................................    $         $


The underwriters have a 30 day option to purchase up to 450,000 additional ordinary shares from us to cover over-allotments, if any.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The Israel Securities Authority has granted CommTouch an exemption from the obligation to publish an Israeli prospectus relating to this offering. This exemption shall not be construed as a determination that this prospectus is truthful or complete or as an expression of opinion as to the securities offered.

U.S. Bancorp Piper Jaffray
Prudential Securities Warburg Dillon Read LLC
THE DATE OF THIS PROSPECTUS IS , 1999.


YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, ORDINARY SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR ORDINARY SHARES.

IN THIS PROSPECTUS, THE "COMPANY," "COMMTOUCH," "WE," "US," AND "OUR" REFER COLLECTIVELY TO COMMTOUCH SOFTWARE LTD., AN ISRAELI COMPANY, AND ITS UNITED STATES SUBSIDIARY, COMMTOUCH SOFTWARE INC. (UNLESS THE CONTEXT OTHERWISE REQUIRES). ALL REFERENCES TO "DOLLARS" OR "$" IN THIS PROSPECTUS ARE TO UNITED STATES DOLLARS AND ALL REFERENCES TO "NIS" ARE TO NEW ISRAELI SHEKELS.


TABLE OF CONTENTS

                                                              PAGE
                                                              ----
Summary.....................................................    1
Risk Factors................................................    4
Use of Proceeds.............................................   16
Dividend Policy.............................................   16
Capitalization..............................................   17
Dilution....................................................   18
Selected Consolidated Financial Information.................   19
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   21
Business....................................................   31
Management..................................................   48
Certain Transactions........................................   56
Principal Shareholders......................................   59
Description of Share Capital................................   61
Shares Eligible for Future Sale.............................   65
U.S. Tax Considerations Regarding Ordinary Shares Acquired
  by U.S. Taxpayers.........................................   67
Israeli Taxation and Investment Programs....................   71
Conditions In Israel........................................   76
Underwriting................................................   78
Legal Matters...............................................   79
Experts.....................................................   79
ISA Exemption...............................................   80
Where You Can Find More Information.........................   80
Enforceability of Civil Liabilities.........................   80
Index to Consolidated Financial Statements..................  F-1

We have the following registered trademarks: COMMTOUCH (registered in the U.S.); PRONTO (U.S. and other countries); COMMTOUCH SOFTWARE (Australia and New Zealand); PRONTO FAMILY, PRONTO SECURE (Japan); and PRONTO MAIL (Japan and New Zealand). We also have the following pending trademark applications: ZAPZONE NETWORK, ZZN (U.S., Israel and other countries); and PRONTO (Canada, Mexico, European Community and India). This prospectus also includes trademarks, trade names and service marks of other companies, each of which belongs to its holder.

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SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider in making an investment. Therefore, you should also read the more detailed information set out in this prospectus, including the Consolidated Financial Statements and the Notes thereto.

COMMTOUCH

We are a leading global provider of email and other messaging services. Our flexible and highly customizable solutions enable us to satisfy the different email and messaging needs of a wide range of business partners, including websites of all sizes and businesses worldwide. We provide a full-featured, branded Web-based email service that enhances online brand image, promotes website usage and creates the opportunity to generate additional revenues from advertising and direct marketing online. For businesses, we provide email and communication services to employees and online customers, thereby increasing communication, brand awareness and revenue opportunities.

Email is one of the most widely used applications on the Internet and has become a significant communications medium. International Data Corporation, or IDC, projects that email traffic in the United States will increase from 1.2 billion messages per day in 1997 to 8.0 billion messages per day in 2002. Further, Web-based email, which is email accessed over the Internet using a browser program, is one of the fastest growing categories of email. With the dramatic growth of international Internet usage, websites and businesses worldwide are seeking to differentiate themselves online.

We have been providing our Web-based email and other messaging services since January 1998. As of May 16, 1999, we had over 100 business partners offering our Web-based email from their sites. Our business partners include Excite, LookSmart, FortuneCity, Talk City and Nippon Telephone and Telegraph. Through our business partners' sites we serve approximately 4.5 million emailboxes. In November 1998, we launched our ZapZone Network service, which enables sites to provide email to their end users at no cost. As of May 16, 1999, we had registered approximately 75,000 sites through the ZapZone Network service, and were serving approximately 480,000 ZapZone Network emailboxes. Our comprehensive email and messaging services offer the following benefits:

- Extensive email features. Our services are easy to use, and include a broad set of email capabilities.

- Ability to support hundreds of millions of emailboxes. We can support hundreds of millions of emailboxes across millions of domains while maintaining a highly reliable service.

- Customization. Our business partners use our proprietary customization tool to make the look and feel of their Web-based email interface consistent with their own brand image.

- Increased website usage. Our services increase the frequency and duration of users' visits to our partners' websites.

- Online marketing capabilities. Our business partners and third parties selling goods and services online can leverage our services and the demographic information of our end users to conduct one-to-one direct marketing and targeted advertising campaigns.

- Rapidly deployable and cost-effective solutions. Our solutions can be quickly implemented and can save our partners the significant costs of developing and maintaining an email service in-house.

- Extensive Language Capabilities. Our email services are available in 14 languages. Additionally, we can support more than one language on any of our business partners' websites.

OFFICE LOCATION

Our principal executive offices are located at 10 Technology Avenue, Ein Vered 40696, Israel, where our telephone number is 011-972-9-796-3445, and 3945 Freedom Circle, Santa Clara, California 95054, where our telephone number is
(408) 653-4330. Our website addresses are www.commtouch.com, www.zzn.com and www.prontomail.com. The information contained on our websites is not a part of this prospectus.

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THE OFFERING

Ordinary shares offered by CommTouch......    3,000,000 shares



Ordinary shares to be outstanding after
the offering..............................    12,258,120 shares


Use of Proceeds...........................    Expansion of sales and marketing
                                              activities; capital expenditures;
                                              expansion of research and
                                              development activities; expansion
                                              of international operations;
                                              working capital and other general
                                              corporate purposes. See "Use of
                                              Proceeds."

Proposed Nasdaq National Market Symbol....    CTCH

Except as set forth in the Consolidated Financial Statements included as part of this prospectus and as otherwise specified, all information in this prospectus (including the information set forth above regarding the ordinary shares offered and the ordinary shares to be outstanding after the offering) is based on the number of shares outstanding as of March 31, 1999 and:

- assumes no exercise of the underwriters' over-allotment option,

- gives effect to the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals and the conversion of those notes,

- gives effect to a 20-for-one split of the ordinary shares to be effected prior to the offering,

- gives effect to the conversion of each of CommTouch's convertible preferred shares into 20 ordinary shares upon the closing of the offering,

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

and does not include:

- 694,860 ordinary shares issuable upon exercise of outstanding options under our stock option plans and stock option agreements as of March 31, 1999 at a weighted average exercise price of $1.25 per share,

- 3,642,460 ordinary shares available for future grant or issuance under our stock option plans as of March 31, 1999,

- 409,940 shares issuable upon exercise of outstanding warrants as of March 31, 1999 at a weighted average exercise price of $1.70 per share, of which warrants to purchase 277,460 shares expire upon the closing of this offering if not exercised and

- 205,000 ordinary shares issuable upon exercise of options granted to officers and directors after March 31, 1999 at a weighted average exercise price of $15.75 per share.

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following tables set forth our summary consolidated financial data. The information set forth for the three months ended March 31, 1999 is unaudited. You should read the following information together with our Consolidated Financial Statements and the Notes thereto beginning on page F-1 of this prospectus, the information under "Selected Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." See Note 1 of the Notes to our Consolidated Financial Statements for an explanation of the weighted average number of shares used in computing per-share data.

                                                                                                THREE MONTHS
                                                                                                   ENDED
                                                             YEAR ENDED DECEMBER 31,             MARCH 31,
                                                       ------------------------------------   ----------------
                                                          1996         1997         1998       1998     1999
                                                       ----------   ----------   ----------   ------   -------
                                                                                                (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Email services.....................................  $       --   $       --   $      389   $   32   $   346
  Software licenses, maintenance and services........       3,134          899           --       --        --
                                                       ----------   ----------   ----------   ------   -------
         Total revenues..............................       3,134          899          389       32       346
  Operating loss.....................................      (1,237)      (3,405)      (4,025)    (892)   (2,040)
  Net loss...........................................      (1,282)      (3,473)      (4,351)    (919)   (2,311)
  Net loss per share -- basic and diluted............       (0.66)       (2.40)       (3.00)   (0.63)    (1.50)
  Weighted average number of shares -- basic and
    diluted..........................................       1,934        1,450        1,450    1,450     1,546
  Pro forma net loss per share -- basic and diluted
    (unaudited)......................................                            $    (0.78)           $ (0.32)
  Pro forma weighted average number of
    shares -- basic and diluted (unaudited)..........                                 5,594              7,313

The following data is presented:

- On an actual basis.

- On a pro forma basis to give effect to (1) the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals and (2) the automatic conversion of all CommTouch's convertible preferred shares, including those issuable under the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the closing of this offering.

- On a pro forma as adjusted basis to give effect to the sale of 3,000,000 ordinary shares in this offering, assuming an initial public offering price of $16.00 per share resulting in net cash proceeds of approximately $42.5 million.

                                                                        MARCH 31, 1999
                                                              -----------------------------------
                                                                                       PRO FORMA
                                                               ACTUAL     PRO FORMA   AS ADJUSTED
                                                              ---------   ---------   -----------
                                                                          (UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents.................................   $ 3,226    $ 16,331      $58,871
  Working capital...........................................     1,418      14,523       57,063
         Total assets.......................................     6,025      19,130       61,670
  Long-term liabilities.....................................       560         560          560
  Shareholders' equity......................................     2,807      15,912       58,452

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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.

RISKS RELATING TO THE COMPANY

BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A WEB-BASED EMAIL SERVICE PROVIDER, IT IS DIFFICULT TO EVALUATE OUR PROSPECTS

We commenced operations in 1991, but we began commercially selling Web-based email services only in 1998 after changing our strategic focus from the sale and service of stand-alone email client software products for mainframe and personal computers. This change required us to adjust our business processes and to restructure CommTouch to become a Web-based email service provider. Therefore, we have only a limited operating history as a provider of Web-based email services upon which you can evaluate our business and prospects.

WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE PROFITABILITY

We incurred net losses of approximately $1.3 million in 1996, $3.5 million in 1997 and $4.4 million in 1998 and $2.3 million in the three months ended March 31, 1999 . As of March 31, 1999, we had an accumulated deficit of approximately $14.0 million. We have not achieved profitability in any period, and we expect to continue to incur net losses for the foreseeable future.

We have invested heavily in technology and infrastructure development. We expect to continue to spend substantial financial and other resources on developing and introducing new service offerings and expanding our sales and marketing organizations, strategic relationships and operating infrastructure. We expect that our expenses will continue to increase in absolute dollars. If our revenues do not correspondingly increase, our operating results and financial condition will be negatively affected. We may never attain sufficient revenues to achieve profitability. If we do achieve profitability, we may not sustain or increase profitability in the future. This may, in turn, cause our stock price to decline.

OUR FUTURE EMAIL SERVICES REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO THE EMERGING MARKET FOR INTERNET-BASED BUSINESSES AND SERVICES

As a result of the recent introduction of our email services, our limited operating history, and the emerging nature of the Web-based email market, we cannot accurately forecast our future revenues. Our revenues and operating results have varied widely in the past and we expect them to fluctuate in the future. In addition, our operating results may not follow any past trends. A number of factors, many of which are enumerated in this "Risk Factors" section, are likely to cause fluctuations in our operating results. Other factors which may cause such fluctuations include:

- the size, timing and fulfillment of orders for our email services;

- our mix of service offerings, including our ability to successfully implement new services;

- pricing of our services; and

- effectiveness of our customer support.

Because of these factors, 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. In this event, the price of our ordinary shares is likely to decline. Despite this uncertainty regarding our future revenues and operating results, we typically make decisions regarding operating expenses based on anticipated revenue trends. Significant portions of these expenses are fixed in the short term. Thus, if our revenue expectations are wrong, our operating results may suffer.

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WE DEPEND ON RAPID GROWTH IN THE DEMAND FOR WEB-BASED EMAIL SERVICES

Our success will depend on the widespread acceptance and use of Web-based email by our customers as a means to increase the value of their services or as a means of communication. The market for Web-based email services is new and rapidly evolving. We cannot estimate the size or growth rate of the potential market for our service offerings. If the market for Web-based email fails to grow or grows more slowly than we currently anticipate, our business will suffer dramatically. Even if that market grows, we do not know whether our service will achieve broad market acceptance. Since we have only recently introduced our services, we do not have sufficient experience to evaluate whether they will achieve broad market acceptance. Also, because all of our revenue is derived directly or indirectly from our Web-based email solutions, we are far more vulnerable to factors that affect that market than we would be if we had more diversified product and service offerings.

WE DEPEND ON OUR BUSINESS PARTNER RELATIONSHIPS, WHICH ARE BASED ON RELATIVELY SHORT TERM, NONEXCLUSIVE AGREEMENTS

Our ability to increase revenues depends upon successful marketing of our services through new and existing business partners. Our agreements with our business partners generally can be terminated for any or for no reason after the first year. The agreements with our business partners are non-exclusive and do not restrict them from introducing competing services. Also, some of our relationships allow termination earlier than one year if we do not provide a specified level of service. Loss of one or a few key business partners to a competitive solution could damage our reputation and hurt our ability to develop new relationships. This could prevent new relationships with business partners as well as with marketing partners. If we fail to develop new relationships or if our business partners terminate or do not renew their contracts with us, our business will suffer, as we will lose potential revenue from the lost business partners and from their underlying base of email users. One of our business partners, Talk City, accounts for 20 percent of the emailboxes we currently host. Another business partner, Excite, accounted for 54 percent of our revenues in 1998.

IF WE DO NOT COMPETE SUCCESSFULLY WITH LARGER AND MORE ESTABLISHED EMAIL SERVICE AND SOFTWARE COMPANIES, OUR OPERATING RESULTS AND BUSINESS WILL SUFFER

The market for Web-based email services is intensely competitive and we expect it to be increasingly competitive. Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer. Many of our current and potential competitors have longer operating histories, larger end user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. These competitors may enter into strategic or commercial relationships with larger, more established and better-financed companies. In addition to competing with companies that develop and maintain in-house services, we compete with email service providers, such as USA.NET, Mail.com and Critical Path, and email software companies, such as Microsoft, Software.com, Inc. and Lotus Development Corporation. Microsoft currently offers free Web- based email through its Hotmail website and has a dominant market share. In addition, Internet service providers, such as AOL (and its subsidiary, Netscape), provide Web-based email services to a large number of end users.

Some of our competitors provide a variety of Web-oriented services, such as Internet access, browser software, homepage design and hosting, in addition to email. The ability of these competitors to offer a broader suite of complementary services may give them a considerable advantage over us in accessing customers, meeting customer needs and minimizing the effect that performance of a single product will have on their business. Some of our competitors may offer services at or below cost. In the future, as we expand our service offerings, we expect to encounter increased competition in the development and delivery of these services.

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OUR SUCCESS DEPENDS ON OUR SUCCESSFUL INTEGRATION OF OUR SALES AND MARKETING PERSONNEL, MANY OF WHOM WERE RECENTLY HIRED

Our ability to increase our revenues will depend on our ability to successfully expand our sales and marketing organization. The complexity of our Internet messaging services and the emerging nature of the Web-based email market require highly trained sales and marketing personnel to educate prospective business partners regarding the use and benefits of our services. The majority of our sales and marketing personnel have only recently joined CommTouch and have limited experience working together. Our Vice President, Marketing has only worked with us since March 1999. It will take time for these employees to learn how to market our solutions and to be integrated into our sales organization. Some of them may not succeed in making this transition. Additionally, we are beginning to roll out a significant number of services that we have no experience marketing and will rely on these services 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 the bigger and more experienced sales and marketing organizations of our competitors.

WE MARKET OUR EMAIL AND MESSAGING SERVICES IN PART THROUGH BUSINESS PARTNERS, MANY OF WHOM HAVE NO EXPERIENCE IN MARKETING SUCH SERVICES

We rely to some extent on our business partners to market our email and messaging services to their end users. These business partners often have no experience marketing these types of services. In addition, even though our business partners can earn revenues from successfully helping us market our services, and are contractually obligated to provide some marketing effort, it will be difficult for us to control that effort.

WE ARE EXPERIENCING RAPID INTERNAL GROWTH WHICH HAS AND LIKELY WILL STRAIN OUR

MANAGEMENT RESOURCES

We recently began to expand our operations rapidly and intend to continue this expansion. The number of our employees increased from 36 on June 30, 1998 to 45 on December 31, 1998 and to 62 on March 31, 1999. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources. To manage any further growth, we will need to improve or replace our existing operational, customer service and financial systems, procedures and controls.

OUR CURRENT AND INCREASING RELIANCE ON INTERNATIONAL OPERATIONS MAKES US PARTICULARLY VULNERABLE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES

We provide our email services in the United States and internationally. We received approximately 40% of our total revenues in 1997 and approximately 72% of our total revenues in 1998 from customers or business partners located outside of North America. We maintain offices in the U.S. and Israel to market and sell our products in those countries and surrounding regions. We plan to establish additional facilities in other parts of the world. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. We cannot be certain that our investment in establishing facilities in other countries will produce desired levels of revenue. We currently have limited experience in developing localized versions of our products, and in marketing and distributing our products internationally. In addition, our international operations are subject to other inherent risks, including, but not limited to:

- slower adoption of the Internet;

- uncertain demand in foreign markets for Web-based email advertising, direct marketing and online commerce applications;

- greater difficulty in accounts receivable collection, and longer collection periods;

- difficulties and costs of staffing and managing foreign operations;

- reduced protection for intellectual property rights in some countries;

- potentially adverse tax consequences; and

- political and economic instability.

6

Some of our international revenues are denominated in local currencies. We do not currently engage in currency hedging activities. Although to date exposure to currency fluctuations has been insignificant, future fluctuations in currency exchange rates may negatively affect revenues from international sales. While most of our revenues and a majority of our expenses are denominated in dollars, a significant portion of our research and development expenses are incurred in NIS. As a result, we may be negatively affected by fluctuations in the exchange rate between the U.S. dollar and the NIS.

WE DEPEND ON A FEW KEY SENIOR MANAGEMENT PERSONNEL, SOME OF WHOM HAVE LIMITED EXPERIENCE WORKING TOGETHER

Our success depends on the skills, experience and performance of our senior management and other key personnel, many of whom have worked together for only a short period of time. The loss of the services of any of our senior management or other key personnel, including Gideon Mantel, our Chief Executive Officer, Isabel Maxwell, the President of our subsidiary, and Amir Lev, our Chief Technical Officer, could materially and adversely affect our business. We do not have long-term employment agreements with any of our senior management or other 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.

WE MUST RECRUIT AND RETAIN QUALIFIED EMPLOYEES IN THE HIGHLY COMPETITIVE TECHNOLOGY LABOR MARKETS OF SILICON VALLEY AND ISRAEL

Our success depends on our ability to recruit, retain and motivate highly skilled sales and marketing, technical and managerial personnel. Competition for these people is intense, particularly in Silicon Valley and Israel, and we may not be able to successfully recruit, train or retain qualified personnel.

WE MAY FAIL TO EXPLOIT OUR POTENTIAL REVENUE STREAMS, WHICH ARE UNPROVEN AND INVOLVE EMERGING PRODUCTS AND SERVICES

Our business plan calls for us to increase our business partner and end user base, to successfully exploit existing sources of revenue and to create new sources of revenue. We have generated our revenues mainly from service fees, advertising sharing with our business partners and set-up and installation fees. We are subject to several constraints which may limit our ability to generate revenues from our business partners and our end user base, such as:

- Infrequency of emailbox usage. On an ongoing basis, many of our end users will not regularly use their emailboxes, and a significant number will cease using our service each month. For example, approximately 1.1 million of the emailboxes we host were established under a program in which one of our business partners issued emailboxes to all of its users on an unsolicited basis, rather than having the end users register for emailboxes. Accordingly, the figure 4.5 million emailboxes, indicated throughout this prospectus, does not necessarily reflect the number of emailboxes from which we will be able to generate revenues.

- Inability to market premium services. Our end users may be reluctant to pay for services provided over the Internet, especially when similar or competing services are offered at no cost.

- Failure of online advertising market to develop. Because we, and our business partners, have only recently begun to offer online advertising, our potential advertisers have little or no experience with this medium. We do not yet have enough experience to demonstrate the effectiveness of this form of advertising. As a result, those advertisers willing to try online advertising are likely to allocate only a limited portion of their advertising budgets to online advertising.

- Potential inaccuracy of demographic data. We may only be able to provide limited information about our end users to advertisers, marketing firms and other third parties concerning the end users of the emailboxes we host. Additionally, we are unable to confirm the accuracy of this data. We rely on our end users to provide limited demographic information about themselves, but we have not made any attempt to verify this user data and have no current plans to do so. As a result, our databases may

7

contain inaccurate user information. This could limit the ability of our business partners to successfully target end users for direct marketing and advertising, and could have a material adverse effect on our business and operating results.

- Lack of acceptance of direct online marketing. Our current and potential business partners may not readily adopt online applications of direct marketing. Enterprises that have already invested substantial resources in other methods of conducting business may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. Furthermore, if a significant number of our end users do not elect to receive direct marketing messages, we will fail to derive meaningful revenues from this potential revenue stream.

BECAUSE OUR BUSINESS IS BASED ON COMMUNICATIONS AND MESSAGING SERVICES, WE ARE SUSCEPTIBLE TO SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS, WHICH COULD HARM OUR BUSINESS

Our ability to successfully receive and send our end users' email messages and provide acceptable levels of service largely depends on the efficient and uninterrupted operation of our computer and communications hardware and network systems and those of our outsourced hosting service. We do not possess insurance to cover losses caused by unplanned system interruptions and software defects. In the past, we have experienced some interruptions in our email service. We believe that these interruptions will continue to occur from time to time. These interruptions may be due to hardware failures, unsolicited bulk email (also known as "spam"), operating system failures, inadequate Internet infrastructure capacity, and other mechanical and human causes. We expect to experience occasional, temporary capacity constraints due to sharply increased traffic, which may cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If we experience frequent or long system interruptions that reduce our ability to provide email services, we may have fewer users of our email services. In addition, we have entered into service agreements with some of our business partners that require minimum performance standards. If we fail to meet these standards, our business partners could terminate their relationships with us.

We must continue to expand and adapt our network infrastructure to changing requirements and increasing numbers of end users. The expansion and adaptation of our network infrastructure will require substantial financial, operational and managerial resources. The ability of our network to continue to connect and manage an expanding number of partners, end users and messages at high transmission speeds is unproven and uncertain. We face risks related to our network's ability to operate with higher use levels while maintaining expected performance levels.

WE ARE A RELATIVELY SMALL COMPETITOR IN THE ELECTRONIC MESSAGING INDUSTRY, AND AS A RESULT, WE MAY NOT HAVE THE RESOURCES TO ADAPT TO THE CHANGING TECHNOLOGICAL REQUIREMENTS AND THE SHIFTING CONSUMER PREFERENCES OF OUR INDUSTRY

The Internet messaging industry is characterized by rapid technological change, changes in end user requirements and preferences, and the emergence of new industry standards and practices that could render our existing services and proprietary technology obsolete. Our success depends, in part, on our ability to continually enhance our existing email and messaging services and to develop new services, functions and technology that address the increasingly sophisticated and varied needs of our prospective business partners. The development of proprietary technology and necessary service 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 our services to business partner or end user requirements or emerging industry standards. Also, in addition to addressing changing technologies and end user needs, we must also do so more quickly than our competition.

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OUR SERVICES MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS

Our service offerings depend on 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 services or enhancements until after they are deployed. Although we have not experienced any material software defects to date, it is possible that, despite testing by us, defects may exist in the software we use. These defects could cause service interruptions that could damage our reputation or increase our service costs, cause us to lose revenue, delay market acceptance or divert our development resources, any of which could cause our business to suffer. Some of our services are based on software provided by third parties. We have no control over the quality of such software.

WE MAY NOT BE SUCCESSFUL IN BUILDING OUR BRAND AND ATTEMPTING TO DO SO WILL BE VERY COSTLY

We believe that a strong brand identity will be important if we are to increase both revenue and end user traffic on our sites. We intend to use a portion of the proceeds of the offering to substantially increase our marketing efforts to build the CommTouch brand. We do not have experience with some of the types of marketing that we are contemplating. Failure to build our brand could have an adverse effect on our business and operating results.

MANY OF OUR BUSINESS PARTNERS ARE EMERGING INTERNET COMPANIES WITH UNPROVEN

BUSINESS MODELS AND MAY BE INSUFFICIENTLY CAPITALIZED

Many of our business partners have limited operating histories, are operating at a loss, and have limited access to capital. Many of these businesses could fail, and as a result we may lose market opportunities with respect to their end users, or those businesses could represent credit risks.

WE RELY ON THE INTEGRITY OF OUR NETWORK SECURITY, WHICH MAY BE SUSCEPTIBLE TO BREACHES THAT COULD HARM OUR REPUTATION AND BUSINESS

A fundamental requirement for online communications is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our business partners. Despite our implementation of third party encryption technology and network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be liable to our business partners and their end users for any breach in our security. Also, such a breach could harm our reputation and consequently our business. We may also be required to expend significant capital and other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Our failure to prevent security breaches could have a material adverse effect on our business and operating results. To our knowledge, we have not experienced a security breach of our system.

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OR TO AVOID OTHERS SUCCESSFULLY CLAIMING THAT WE INFRINGE THEIRS

We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees and business partners to protect our proprietary rights. Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. Although we have not filed any patent applications, we may seek to patent certain software or other technology in the future. Any such future patent applications may not be issued with the scope of the claims we seek, or at all. We cannot be certain that our software does not infringe issued patents that may relate to our software products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products.

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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. End user license provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable under the laws of some jurisdictions and foreign countries. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology.

We may be subject to legal proceedings and claims regarding intellectual property rights from time to time in the ordinary course of our business. Such proceedings may involve claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us or claims by us to protect our proprietary rights. Any intellectual property litigation, regardless of whether we ultimately prevail, would likely be expensive and time-consuming and could divert management's attention away from running our business. If we were to lose any such dispute, we could be subject to substantial liabilities. We could also be prevented from using technology that we rely upon or be forced to license such technology. Such licenses may not be available on acceptable terms or at all. Even if available, such licenses could result in significant expenses that could harm our operating results. If such licenses are not available, we would have to develop the technology ourselves, which could be expensive and cause interruption in the provision of our services.

THIRD PARTIES MAY ALLEGE THAT USERS OF OUR ZAPZONE NETWORK SERVICE INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS AND MAY BRING LEGAL CLAIMS AGAINST US

Our ZapZone Network service allows webmasters to select the email service name of their choice (although we reserve the right to eliminate their account or to change their email service name). There is, therefore, the possibility that they will select email service names that may infringe the rights of others. We have received several complaints about ZapZone Network service webmasters' registered email service names, as described below, and we have referred these complainants directly to the ZapZone Network service subscribers who are allegedly engaging in the infringing activities.

ZapZone Network service's placement of ZapZone Network service icons and advertisements on ZapZone Network service webmasters' web pages may contribute to our perceived liability for any allegedly infringing acts. We do not audit webmasters' email service name choices for compliance with any intellectual property rights of others. We have received complaints from several parties complaining that email service names chosen and registered by ZapZone Network service users are similar or identical to domain names and/or trademarks in which the complainants claim an interest. We responded by referring the complainants to the webmasters who registered those email service names, as it is our policy to do.

WE RELY ON THIRD PARTIES TO PROVIDE TECHNOLOGIES AND COMMUNICATION INFRASTRUCTURE USED IN OUR SOLUTION

We intend to continue to license certain technology from third parties, including our Web server, mail server, database server and encryption technology. We also license technology that enables us to provide some features of our communications functionality. The market is evolving and we may need to license additional technology to remain competitive. We may not be able to license this technology on commercially reasonable terms, or at all. An inability to obtain any of these licenses could delay product and service development until equivalent technology can be identified, licensed or developed internally and integrated. In addition, we may fail to successfully integrate any licensed technology into our services. These third-party licenses may expose us to increased risks of diversion of resources from the development of our own proprietary technology. We also may not be able to generate revenues from new technology sufficient to offset the costs of acquiring these third party technology licenses.

We are also dependent on other companies to supply certain key components of our telecommunications infrastructure and system and network management solutions. This includes telecommunications services and networking equipment that, in the quantities and quality demanded by us, are available only from sole or limited sources. In particular, we currently have almost all of our website and Internet-based mail

10

servers, which are critical components of our solutions, hosted by a single company. That hosting is pursuant to an agreement which may be terminated by either party upon 90 days' written notice. If any of these providers were to discontinue these arrangements, and alternative providers did not quickly emerge or were to increase the cost of providing access, our ability to transmit email or provide any of our services could be reduced.

WE MAY HAVE LIABILITY FOR EMAIL CONTENT AND WE MAY NOT HAVE ADEQUATE LIABILITY INSURANCE

As a provider of email services, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials transmitted via email. We do not and cannot screen all of the content generated by end users, and we could be exposed to liability with respect to this content. Some foreign governments, such as the government of Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. Although we carry general liability insurance, our insurance may not adequately protect us from such claims. Any imposition of liability, particularly liability that is not covered by insurance, or is in excess of insurance coverage, could damage our reputation and hurt our business and operating results, or could result in criminal penalties.

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS

There are currently few laws and regulations directly applicable to the Internet and commercial email services. However, a number of laws have been proposed involving the Internet, including laws addressing user privacy, pricing, content, copyright, antitrust, distribution and characteristics and quality of products and services. Further, the growth and development of the market for email may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business 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. This could decrease the demand for our services and increase our cost of doing business, or otherwise harm our business and operating results.

The Federal Trade Commission is considering regulation regarding the collection and use of personal identifying information obtained from individuals, including children, when accessing websites. Such regulation may include disclosure and privacy provisions, and could reduce our ability to engage in direct marketing.

UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS AND OUR BUSINESS

We may acquire businesses, products and technologies that complement or augment our existing businesses, services and technologies. Integrating any newly acquired businesses or technologies may be expensive and time-consuming, and we may not be able to successfully integrate any acquired business. Such acquisitions, if they involve our issuance of equity, would result in dilution of our existing shareholders' interests in CommTouch.

WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE EXISTING SHAREHOLDERS

We believe that our existing capital resources, including the anticipated proceeds of this offering, will enable us to maintain our current and planned operations for at least the next 12 months. However, we may be required to raise additional funds due to unforeseen circumstances. If our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. Such financing may not be available in sufficient amounts or on terms acceptable to us and may cause dilution to existing shareholders. Also, we may raise such additional capital by issuing securities that have superior rights and preferences to our ordinary shares.

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WE HAVE NO INTENTION OF PAYING DIVIDENDS

We have never declared or paid any cash dividends on our share capital. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future.

IF WE DO NOT ADEQUATELY ADDRESS "YEAR 2000" ISSUES, WE MAY INCUR SIGNIFICANT COSTS AND OUR BUSINESS COULD SUFFER

The "Year 2000" issue is the result of computer programs and embedded hardware systems having been developed using two digits rather than four to define the applicable year. These computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations, causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to comply with the Year 2000 requirements. We have preliminarily tested our internally developed software and are in the process of revising it to make it Year 2000 compliant. Many of our business partners maintain their Internet operations on commercially available operating systems that may be impacted by Year 2000 complications. In addition, we rely on third-party vendors for certain software and hardware included within our services, which may not be Year 2000 compliant. Where we are aware that such software or hardware is not Year 2000 compliant, we are working with those vendors to address these issues and to ensure that those systems will be Year 2000 compliant. Failure of our internal computer systems or third-party equipment or software, or of systems maintained by our suppliers, to operate properly with regard to the year 2000 and thereafter, could require us to incur significant unanticipated expenses to remedy any problems and could cause system interruptions and loss of data. Any of these events could harm our reputation, business and operating results. We have not yet developed a comprehensive contingency plan to address the issues that could result from Year 2000 complications.

AFTER THE LOCK-UP AGREEMENTS EXPIRE, A SIGNIFICANT NUMBER OF ADDITIONAL SHARES WILL BECOME FREELY TRADABLE, WHICH MAY REDUCE THE PER SHARE TRADING PRICE OF OUR STOCK

After this offering, we will have 12,258,120 ordinary shares outstanding. All the shares sold in this offering will be freely tradable. The remaining 9,258,120 ordinary shares outstanding after this offering are subject to lockup agreements that prohibit the sale of the shares for 180 days after the date of this prospectus. Immediately after the 180-day lockup period, 7,825,360 of the ordinary shares which will be outstanding after the offering will become available for sale. The remaining ordinary shares will become available at various times thereafter upon the expiration of one-year holding periods. Sales of a substantial number of ordinary shares in the public market after this offering or after the expiration of the lockup and holding periods could cause the market price of our ordinary shares to decline.

PURCHASERS OF OUR ORDINARY SHARES WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is expected to be substantially higher than the book value per share of our ordinary shares. Some elements of our market value do not originate from measurable transactions. Therefore, there is not a corresponding rise in "book," or historical cost accounting, value for our rise in market value, if any. Examples of these elements include the perceived growth prospects of our core commercial market, perceived growth prospects of our Web-based email services and our perceived competitive position within the market for Web-based email services. Purchasers of our ordinary shares in this offering will experience immediate dilution of $11.23 in the pro forma net tangible book value per share of ordinary shares, assuming a public offering price of $16.00 per share. Purchasers will also experience additional dilution upon the exercise of outstanding stock options.

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OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS WILL BE ABLE TO EXERT SIGNIFICANT INFLUENCE OVER US

After this offering, our directors, executive officers and our shareholders who currently own over five percent of our ordinary shares will beneficially own approximately 44.5 percent of our outstanding ordinary shares. If they vote together, 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.

OUR INDUSTRY IS EXPERIENCING CONSOLIDATION AND THESE MERGERS MAY STRENGTHEN SOME OF OUR COMPETITORS OR ELIMINATE SOME OF OUR CUSTOMERS

The Internet industry has recently experienced substantial consolidation. For example, AOL has acquired Netscape, Yahoo has agreed to acquire Broadcast.com, At Home has agreed to acquire Excite, and Compaq has agreed to acquire ZIP2. We expect this consolidation to continue. These acquisitions could affect us in a number of ways, including if companies from whom we acquire services are acquired by one of our competitors and stop providing their services to us and if our business partners are acquired by one of our competitors and stop purchasing our services.

Furthermore, our business partners can choose not to renew their agreements with us because they have entered into a merger or other strategic relationship with another company that can provide email service. This may become increasingly common in light of the consolidation taking place among websites, ISPs and other Internet-related businesses.

RISKS RELATING TO OPERATIONS IN ISRAEL

WE HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL WHICH HAS HISTORICALLY EXPERIENCED SEVERE ECONOMIC INSTABILITY AND MILITARY AND POLITICAL UNREST

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

Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel's establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved.

In addition, 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. CommTouch has operated effectively under these requirements since its inception. We cannot predict the effect of these obligations on CommTouch in the future.

Inflation in Israel and devaluation of the NIS could impact our financial results. Although Israel has substantially reduced the rates of inflation and devaluation in recent years, they are still relatively high and we could be harmed by inflation or devaluation. If inflation rates in Israel increase again and hurt Israel's economy as a whole, our operations and financial condition could suffer. Moreover, non-residents of Israel are subject to income tax on certain income (including cash dividends) derived from sources in Israel. The tax treaty between Israel and the United States provides for a maximum tax of 25 percent on dividends

13

paid to residents of the United States and for withholding at a rate of 15 percent with respect to dividends paid by an Approved Enterprise, as discussed below.

WE RELY ON TAX BENEFITS AND OTHER FUNDING FROM THE STATE OF ISRAEL

Pursuant to the Law for the Encouragement of Capital Investments, the Israeli government has granted "Approved Enterprise" status to our existing capital investment programs. Consequently, we are eligible for certain tax benefits for the first several years in which we generate taxable income. CommTouch, however, has not yet begun to generate taxable income for purposes of this law and it does not expect to utilize these tax benefits for the foreseeable future. Once we begin to generate taxable income, our financial condition could suffer if our tax benefits were reduced.

In order to receive tax benefits, we must comply with a number of conditions. If we fail to comply with these conditions and criteria, the tax benefits that we receive could be partially or fully canceled, and we could be forced to refund the amount of the benefits we received, adjusted for inflation and interest. We believe that we have operated and will continue to operate in compliance with the required conditions, although we cannot be sure. We further believe that the likelihood is remote that we will be required to refund tax benefits that we receive under our Approved Enterprise status.

ISRAELI COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF 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 prospectus 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 certain 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 Software Inc., our U.S. subsidiary, as our agent to receive service of process in any action against us arising out of this offering. 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 will be payable in Israeli currency.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT AN ACQUISITION OF COMMTOUCH

Certain provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult a merger or other acquisition of CommTouch. The Israeli Companies Ordinance, which governs Israeli corporations, does not contain provisions that deal specifically with a merger that allows for the elimination of minority shareholders. Various provisions that deal with "arrangements" between a company and its shareholders have been used, however, to effect squeeze-out mergers. These generally require that the merger be approved by at least 75 percent of the shareholders present and voting on the proposed merger, at a shareholders meeting that has been called on at least 21 days' advance notice. In addition to shareholder approval, court approval of the merger is required, which entails further delay and the need to obtain a discretionary approval. Alternatively, the acquiror can cause minority shareholders to sell their shares if it acquires at least 90 percent of all outstanding shares (excluding shares held by the acquiror prior to the acquisition) and none of the minority shareholders successfully seeks to block the acquisition in court. The new Israeli Companies Law, which will come into effect on February 1, 2000, does address squeeze-out mergers but does not significantly modify these requirements.

The new Israeli Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. Similarly, the new Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% shareholder of the company. Here too there is an exception, if someone else is already a

14

majority shareholder of the company. Since regulations implementing these new rules have not yet been promulgated, we do not know to what extent or how these rules will apply to Israeli companies that are publicly traded outside of Israel.

Finally, Israeli tax law treats certain acquisitions, particularly stock-for-stock swaps between an Israeli company and a foreign company, less favorably than United States tax law. Israeli tax law may, for instance, subject a shareholder who exchanges his CommTouch shares for shares in a foreign corporation to immediate taxation.

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USE OF PROCEEDS

The net proceeds we will receive from the sale of the 3,000,000 ordinary shares offered by us, assuming an initial public offering price of $16.00 per share, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us, (which are estimated to be $5.5 million, or $6.0 million if the underwriters' over-allotment option is exercised in full) are estimated to be $42.5 million ($49.2 million if the underwriters' over-allotment option is exercised in full).

We intend to use the proceeds of this offering for the following:

- expansion of our sales and marketing activities;

- capital expenditures, including purchase of equipment, primarily for our hosting facilities;

- expansion of research and development activities;

- expansion of our international operations; and

- working capital and other general corporate purposes.

The amounts and timing of these expenditures will vary significantly depending on a number of factors, including, but not limited to, the amount of cash generated by our operations and the market response to the introduction of any new service offerings.

In addition, we may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to our current business, through mergers, acquisitions, joint ventures or otherwise. However, we have no specific agreements or commitments and are not currently engaged in any negotiations with respect to such transactions. Accordingly, our management will retain broad discretion as to the use and allocation of the net proceeds of this offering. Pending the above uses, we intend to invest the net proceeds of this offering in short-term, interest-bearing investment grade securities.

DIVIDEND POLICY

We have never paid cash dividends to our shareholders and we currently do not intend to pay dividends for the foreseeable future. We intend to reinvest earnings in the development and expansion of our business. We may only pay cash dividends in any fiscal year out of profits, as determined under Israeli law. The declaration of any final cash dividend requires shareholder approval. Shareholders may reduce, but not increase, the amount of dividends from the amount proposed by the Board of Directors.

Because of CommTouch's investment programs' Approved Enterprise status, the payment of dividends by CommTouch may subject CommTouch to certain Israeli taxes to which it would not otherwise be subject. The tax exempt income attributable to the Approved Enterprise can be distributed to shareholders without subjecting CommTouch to taxes only upon the complete liquidation of CommTouch. If CommTouch decides to distribute cash dividends out of income that has been exempt from tax, the income out of which the dividend is distributed will be subject to Israeli corporate tax (currently 25%). We have decided to reinvest the amount of tax exempt income derived from our Approved Enterprise and not to distribute such income as dividends. (For a description of our Approved Enterprise status, please see "Israeli Taxation and Investment Programs.")

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CAPITALIZATION

The following table sets forth the capitalization of CommTouch as of March 31, 1999:

The following data is presented:

- On an actual basis.

- On a pro forma basis to give effect to (1) the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals, and the conversion of those notes and (2) the automatic conversion of all CommTouch's convertible preferred shares, including those issuable under the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the closing of this offering.

- On a pro forma as adjusted basis to give effect to the sale of 3,000,000 ordinary shares in this offering, assuming an initial public offering price of $16.00 per share, resulting in net cash proceeds of approximately $42.5 million.

                                                                       MARCH 31, 1999
                                                            ------------------------------------
                                                                        (UNAUDITED)
                                                                       (IN THOUSANDS)
                                                            ------------------------------------
                                                                                      PRO FORMA
                                                             ACTUAL     PRO FORMA    AS ADJUSTED
                                                            --------    ---------    -----------
Long-term liabilities less current portion................  $    560    $    560      $    560
                                                            --------    --------      --------
Shareholders' equity:
  Convertible Preferred Shares, NIS 1 nominal value;
     565,820 shares authorized; 313,409 shares issued and
     outstanding actual; no shares issued and outstanding
     pro forma and pro forma as adjusted..................        96          --            --
  Ordinary shares, NIS 0.05 par value; 10,683,600 shares
     authorized, 2,148,320 shares issued and outstanding
     actual, 9,258,120 shares issued and outstanding pro
     forma; 12,258,120 shares issued and outstanding, pro
     forma as adjusted....................................        35         142           179
  Additional paid-in capital..............................    24,910      38,004        80,507
  Deferred compensation...................................    (7,282)     (7,282)       (7,282)
  Notes receivable from shareholders......................      (964)       (964)         (964)
  Accumulated deficit.....................................   (13,988)    (13,988)      (13,988)
                                                            --------    --------      --------
          Total shareholders' equity......................     2,807      15,912        58,452
                                                            --------    --------      --------
          Total capitalization............................  $  3,367    $ 16,472      $ 59,012
                                                            ========    ========      ========

The number of ordinary shares to be outstanding after this offering does not include the following:

- 694,860 ordinary shares issuable upon exercise of stock options outstanding under our stock option plans and stock option agreements as of March 31, 1999 at a weighted average exercise price of $1.25 per share;

- 409,940 ordinary shares issuable upon exercise of warrants outstanding as of March 31, 1999 at a weighted average exercise price of $1.70 per share, of which warrants to purchase 277,460 shares expire upon the closing of this offering if not exercised;

- 3,642,460 ordinary shares available for future grant or issuance under our stock option plans as of March 31, 1999; and

- 205,000 ordinary shares issuable upon exercise of options granted to officers and directors after March 31, 1999 at a weighted average price of $15.75 per share.

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DILUTION

Our pro forma net tangible book value as of March 31, 1999 was $15,912,000 or $1.72 per ordinary share, after giving effect to the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals and the receipt of the net proceeds therefrom. Pro forma net tangible book value per share is determined by dividing the amount of our total tangible assets less total liabilities by the number of ordinary shares outstanding at that date, assuming conversion of all outstanding convertible preferred shares into ordinary shares. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of ordinary shares in the offering made hereby and the net tangible book value per ordinary share immediately after the completion of this offering. After giving effect to the sale of 3,000,000 ordinary shares by CommTouch in this offering (at an assumed public offering price of $16.00 per share and after deducting the underwriting discounts and commissions and our estimated offering expenses), the pro forma net tangible book value of CommTouch at March 31, 1999 would have been $58.5 million, or $4.77 per share. This represents an immediate increase in pro forma net tangible book value of $3.05 per share to the existing shareholder and an immediate dilution of $11.23 per share to new investors purchasing ordinary shares in this offering. The following table illustrates this per-share dilution:

Assumed initial public offering price per share.............            $ 16.00
                                                                        -------
Pro forma net tangible book value per share as of March 31,
  1999......................................................  $ 1.72
                                                              ------
Increase in pro forma net tangible book value per share
  attributable to this offering.............................  $ 3.05
                                                              ------
Pro forma net tangible book value per share after the
  offering..................................................            $  4.77
                                                                        -------
Dilution per share to new investors.........................            $ 11.23
                                                                        =======

The following table summarizes, on a pro forma basis as of March 31, 1999 after giving effect to (1) the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals and the conversion of those notes, and the receipt of the net proceeds therefrom and (2) the automatic conversion of all CommTouch's convertible preferred shares, including those issuable under the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the closing of this offering, the total number of ordinary shares purchased from CommTouch, the total consideration paid to CommTouch and the average price per share paid by existing shareholders and by new investors purchasing shares in this offering (based upon an assumed initial public offering price of $16.00 per share and before deducting the underwriting discounts and commissions and our estimated offering expenses):

                                       SHARES PURCHASED        TOTAL CONSIDERATION
                                     ---------------------    ----------------------    AVERAGE PRICE
                                       NUMBER      PERCENT      AMOUNT       PERCENT      PER SHARE
                                     ----------    -------    -----------    -------    -------------
Existing shareholders..............   9,258,120     75.5%     $29,825,000     38.3%        $ 3.22
New investors......................   3,000,000     24.5%     $48,000,000     61.7%        $16.00
                                     ----------     ----      -----------     ----
          Total....................  12,258,120      100%     $77,825,000      100%
                                     ==========     ====      ===========     ====

The foregoing table assumes no exercise of the underwriters' over-allotment option or of any outstanding stock options or warrants after March 31, 1999. As of March 31, 1999, there were outstanding options to purchase an aggregate of 694,860 ordinary shares at a weighted average exercise price of $1.25 per share and 409,940 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.70 per share. To the extent any of these options or warrants are exercised, there will be further dilution to new investors. See Note 9 of the Notes to Consolidated Financial Statements.

18

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the selected consolidated balance sheet data as of December 31, 1997 and 1998 have been derived from the Consolidated Financial Statements of CommTouch included elsewhere in this prospectus. The selected consolidated statement of operation data for the years ended December 31, 1994 and 1995 and the selected consolidated balance sheet data as of December 31, 1994, 1995 and 1996 have been derived from the Consolidated Financial Statements of CommTouch not included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 1998 and 1999 and the consolidated balance sheet data at March 31, 1999 have been derived from unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that CommTouch considers necessary for a fair presentation of its financial position at such dates and the results of operations for those periods. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. In addition, our historical results are not necessarily indicative of results to be expected for any future period. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes thereto included elsewhere in this prospectus.

                                                                                                               THREE MONTHS
                                                                                                                  ENDED
                                                                 YEAR ENDED DECEMBER 31,                        MARCH 31,
                                               -----------------------------------------------------------   ----------------
                                                 1994        1995        1996        1997         1998        1998     1999
                                               ---------   ---------   ---------   ---------   -----------   ------   -------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)       (UNAUDITED)
Consolidated Statement of Operations Data:
Revenues
  Email services.............................  $      --   $      --   $      --   $     --     $     389    $   32   $   346
  Software licenses, maintenance and
    services.................................        699       1,733       3,134        899            --        --        --
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
    Total revenues...........................        699       1,733       3,134        899           389        32       346
Cost of revenues
  Email services.............................         --          --          --         --           569        59       405
  Software licenses, maintenance and
    services.................................        109         327         463        165            --        --        --
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
    Total cost of revenues...................        109         327         463        165           569        59       405
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
Gross profit(loss)...........................        590       1,406       2,671        734          (180)      (27)      (59)
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
Operating expenses
    Research and development, net............        197         463       1,479      1,108         1,149       266       307
    Sales and marketing, net.................        956         832       1,965      2,202         2,001       459       481
    General and administrative...............        287         369         465        829           604       138       807
    Amortization of stock-based employee
      deferred compensation..................         --          --          --         --            91         2       386
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
    Total operating expenses.................      1,440       1,664       3,908      4,139         3,845       865     1,981
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
Operating loss...............................       (850)       (258)     (1,237)    (3,405)       (4,025)     (892)   (2,040)
Interest and other expense, net..............        (65)        (62)        (45)       (68)         (326)      (27)     (271)
                                               ---------   ---------   ---------   ---------    ---------    ------   -------
Net loss.....................................  $    (915)  $    (320)  $  (1,282)  $ (3,473)    $  (4,351)   $ (919)  $(2,311)
                                               =========   =========   =========   =========    =========    ======   =======
Net loss per share -- basic and diluted......  $   (0.43)  $   (0.11)  $   (0.66)  $  (2.40)    $   (3.00)   $(0.63)  $ (1.50)
                                               =========   =========   =========   =========    =========    ======   =======
Weighted average shares -- basic and
  diluted....................................      2,113       2,885       1,934      1,450         1,450     1,450     1,546
                                               =========   =========   =========   =========    =========    ======   =======
Pro forma net loss per share (unaudited)
  Net loss per share-basic and diluted.......                                                   $   (0.78)            $ (0.32)
                                                                                                =========             =======
  Weighted average shares-basic and
    diluted..................................                                                       5,594               7,313
                                                                                                =========             =======

19

The following data is presented:

- on an actual basis;

- on a pro forma basis to give effect to (1) the April 1999 issuance of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals and (2) the automatic conversion of all of CommTouch's convertible preferred shares, including those issuable under the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the closing of this offering; and

- on a pro forma as adjusted basis to give effect to the sale of 3,000,000 ordinary shares in this offering, assuming an initial public offering price of $16.00 per share, resulting in net cash proceeds of approximately $42.5 million.

                                                                                                     MARCH 31, 1999
                                                                                                      (UNAUDITED)
                                                              DECEMBER 31,                  --------------------------------
                                               ------------------------------------------                         PRO FORMA
                                               1994    1995     1996     1997      1998     ACTUAL   PRO FORMA   AS ADJUSTED
                                               -----   -----   ------   -------   -------   ------   ---------   -----------
                                                                              (IN THOUSANDS)
Consolidated Balance Sheet Data:
  Cash and cash equivalents..................  $   4   $  54   $  690   $   324   $   834   $3,226   $ 16,331      $58,871
  Working capital (deficit)..................   (555)   (734)     539    (1,264)   (1,440)   1,418     44,523       57,063
  Total assets...............................    497     773    2,180     1,065     2,366    6,025     19,130       61,670
  Long-term liabilities......................    352     324      371       366       530      560        560          560
  Shareholders' equity (deficit).............   (554)   (650)     777    (1,018)     (815)   2,807     15,912       58,452

20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this prospectus. 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 "believes," "anticipates," "plans," "expects," "intends" 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 discussed in "Risk Factors" and elsewhere in this prospectus.

OVERVIEW

We are a leading global provider of outsourced email and messaging solutions. Our flexible and highly customizable solutions enable us to satisfy the unique email and messaging needs of a wide range of customers, including Web-based companies, small websites and businesses worldwide. As of May 16, 1999, we had over 100 business partners offering our Web-based email from their sites. Our business partners include Excite, LookSmart, FortuneCity, Talk City and Nippon Telephone and Telegraph. Through our business partners' sites we host approximately 4.5 million emailboxes. In November 1998, we launched our ZapZone Network service, which enables small sites to provide email to their end users. As of May 16, 1999, we had registered approximately 75,000 sites through the ZapZone Network service, and were hosting approximately 480,000 ZapZone Network emailboxes. Business partners may provide us with a large number of users but pay a relatively small minimum annual service fee. Consumers have historically been reluctant to pay for services on the Internet, and therefore end users may not be willing to pay for premium services. Since untargeted advertising on the Internet has not shown a significant success rate, advertisers may not be willing to pay us to provide banner advertising or direct e-marketing.

Business History and Transition

Email Client Software Business (1991-1997). From 1991 to 1997, we generated all of our revenue from sales of software licenses, maintenance and service for stand-alone email client software for both mainframes and personal computers. In 1996, we generated approximately $3.1 million in revenues from such software licenses.

Transition to Web-Based Email Services (1997). During 1996, the popularity of email at home and at work began to increase rapidly. Microsoft began bundling Outlook, its email client software, in "office suite" packages. At the same time, Netscape began to provide its email client software bundled in its Internet browser software. The entrance into the email client software market by both Microsoft and Netscape resulted in the rapid adoption of email as a mass-market communications channel. At the same time, use of the World Wide Web (Web) began to expand rapidly, and the market for stand-alone email client software began to be dominated by companies which bundled such software with operating systems and/or browsers. We recognized an opportunity to leverage our technology and experience in developing email software to pursue the market created by these two rapidly growing phenomena: email and the Web. As a result, we redeployed the efforts of our existing research and development personnel and independent contractors to adapt the technology embedded in Pronto 96 for use as a Web-based email service. We ceased all stand-alone email software license sales during 1997, and as a result, revenues in 1997 decreased to $899,000. To further support our transition to providing Web-based email services, in 1997 we opened a marketing, sales and support office in Silicon Valley in order to have better access to Web-based business partners.

Web-Based Email Service Business (January 1998-Present). In January 1998, we began to offer email services to business partners. Our services allow our business partners to provide free Web-based email to their end users, thus enhancing the business partner's online presence, increasing the frequency and

21

duration of visits to the partner's website and creating an opportunity for the business partner and us to generate advertising and direct e-marketing revenue through email. Meanwhile, we recognized that webmasters on small sites were seeking a method to promote their sites and offer email to their users. In November 1998, we launched our ZapZone Network service which enables small sites to provide email to their end users at no cost in a matter of minutes.

Revenue Sources

Email Service Revenues. In 1998, our email service revenue was derived from service fees and set up and installation fees. Approximately 60.5% of our email service revenue resulted from contracts that provide for business partners to pay us minimum annual service fees. These agreements also typically provide for the business partner to pay us a share of revenues generated from the sale of banner advertisements on their email site. The minimum annual service fee is credited against the shared portion of the advertising revenue. Revenue from minimum annual service fees is recognized ratably over the contract term from the launch of the email site.

Some of our contracts with business partners provide for email service fees based solely on a share of banner advertising revenue, with no minimum annual commitment. In 1998, revenues from these contracts represented approximately 21.0% of our email service revenue. Revenues from sharing advertising are recognized when such revenues are earned by our business partner.

We anticipate that revenues from advertising will increase both in absolute dollars and as a percentage of total revenues. This is because we have recently attained a platform of approximately 4.5 million emailboxes through our business partners and we believe that we now have a large enough user base to be attractive to advertisers and to generate additional advertising revenues by targeting the user demographic objectives of the advertiser. In addition, by aggregating demographic information garnered from small websites, the ZapZone Network service is providing us with an additional opportunity to focus advertising efforts in a targeted manner. We anticipate that combined service fees and advertising revenues shared by business partners will continue to be our major source of revenue in the future.

The remaining 18.5% of email service revenues in 1998 consisted of setup and installation fees. We charge these fees in instances where the scope and complexity of the solution warrant such a fee. These revenues are recognized upon installation of the email site to which they relate. We expect that these revenues will increase in absolute dollars as such installations increase in number, but will decrease as a percentage of email service revenue in the future, because service fees and advertising revenues are expected to increase at a proportionally greater rate.

Premium Services. In March 1999, we launched our premium service offerings. These services enhance our core service and include features such as:

- Off-line email client access;

- Unified messaging;

- Additional disk storage space;

- Automated, user-defined email forwarding;

- Automated, rules-based pager notification; and

- Email-by-phone.

These services will be paid for by emailbox users. To date we have not generated any revenues from premium services but we anticipate that these revenues will be a meaningful component of our revenues in the future.

22

Direct E-Marketing. In December 1998, we began to offer direct e-marketing opportunities to ecommerce vendors. Ecommerce vendors seek channels through which they can market goods and services. Because of our installed user base and our agreements with our business partners, we can assist ecommerce companies in marketing their products to end users who have opted to receive offers by email. We share with our business partners the revenues from this direct e-marketing, which are earned either on a per-message basis or as a commission on products sold. To date we have made these offerings available to only a limited number of users. However, we anticipate that direct e-marketing revenues will be a meaningful component of our revenues in the future.

RESULTS OF OPERATIONS

The following table sets forth financial data for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 (in thousands):

                                                                                             THREE MONTHS
                                                                YEAR ENDED DECEMBER 31      ENDED MARCH 31
                                                              ---------------------------   ---------------
                                                               1996      1997      1998     1998     1999
                                                              -------   -------   -------   -----   -------
                                                                                              (UNAUDITED)
Revenues:
  Email services............................................  $    --   $    --   $   389   $  32   $   346
  Software licenses, maintenance and services...............    3,134       899        --      --        --
                                                              -------   -------   -------   -----   -------
    Total revenues..........................................    3,134       899       389      32       346
                                                              -------   -------   -------   -----   -------
Cost of revenues:
  Email services............................................       --        --       569      59       405
  Software licenses, maintenance and services...............      463       165        --      --        --
                                                              -------   -------   -------   -----   -------
    Total cost of revenues..................................      463       165       569      59       405
                                                              -------   -------   -------   -----   -------
  Gross profit (loss).......................................    2,671       734      (180)    (27)      (59)
                                                              -------   -------   -------   -----   -------
Operating expenses:
    Research and development, net...........................    1,479     1,108     1,149     266       307
    Sales and marketing.....................................    1,965     2,202     2,001     459       481
    General and administrative..............................      465       829       604     138       807
    Amortization of stock-based employee deferred
      compensation..........................................       --        --        91       2       386
                                                              -------   -------   -------   -----   -------
         Total operating expenses...........................    3,908     4,139     3,845     865     1,981
                                                              -------   -------   -------   -----   -------
  Operating loss............................................   (1,237)   (3,405)   (4,025)   (892)   (2,040)
  Interest expense and other, net...........................      (45)      (68)     (326)    (27)     (271)
                                                              -------   -------   -------   -----   -------
  Net loss..................................................  $(1,282)  $(3,473)  $(4,351)  $(919)  $(2,311)
                                                              =======   =======   =======   =====   =======

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999

Revenues. Email service revenues increased from $32,000 for the three months ended March 31, 1998 to $346,000 for the three months ended March 31, 1999. We began providing email services during the three months ended March 31, 1998. Our business partners have grown from six for the three months ended March 31, 1998 to over 90 business partners for the three months ended March 31, 1999. Revenues from one customer, Excite, amounted to $55,000, or 15.9% of total revenues for the three months ended March 31, 1999. In the future, we expect revenues from Excite to decrease substantially as a percentage of email services revenue.

Cost of Revenues. Our cost of revenues increased from $59,000 for the three months ended March 31, 1998 to $405,000 for the three months ended March 31, 1999 because of the growth of the number of business partners. Costs of revenues consisted primarily of costs related to Internet data center services from a third-party provider, depreciation of equipment, Internet access, personnel and related costs. We

23

expect cost of revenues to increase on an absolute basis, primarily as a result of an increase in our email service revenues, but to decrease as a percentage of email service revenues due to economies of scale.

Research and Development Costs, Net. Research and development costs consist primarily of personnel and related costs, depreciation of equipment, supply costs and royalties paid to the Israeli Government for grants received in prior years for research and development activities. These royalties are paid at rates ranging from 3% to 5% of total revenues. We do not expect to receive further grants from the Israeli Government. At March 31, 1999, our outstanding contingent obligation was approximately $400,000. Research and development expense are charged to operations as incurred. Our research and development costs increased from $266,000 for the three months ended March 31, 1998 to $307,000 for the three months ended March 31, 1999, due primarily to higher personnel and related costs. We expect that research and development costs, net, will increase due to increased personnel and related costs associated with the accelerated development of new email service offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related costs, public relations, direct sales efforts, including travel expenses and royalties paid to the Israeli Government for grants received in prior years for marketing activities. We have a contingent obligation to pay royalties to the Israeli Government for grants received in prior years for marketing activities at a rate of 3% of total revenues. At March 31, 1999, our outstanding contingent obligation was approximately $110,000. Our sales and marketing expenses increased from $459,000 for the three months ended March 31, 1998 to $481,000 for the three months ended March 31, 1999, due primarily to marketing and other costs to support the growth of our email service revenues. We expect sales and marketing expenses to increase in the future as we hire additional personnel and continue to support and develop the email service business.

General and Administrative. General and administrative costs consist primarily of personnel and related costs, professional services and facility costs. Our general and administrative expenses increased from $138,000 for the three months ended March 31, 1998 to $807,000 for the three months ended March 31, 1999, due primarily to substantially higher personnel and related costs, facility costs, higher fees for outside professional services and other costs to support the growth of our email service revenues. We expect general and administrative costs to increase on an absolute basis due to increased personnel and related costs, higher facility costs associated with additional personnel and other costs necessary to support and develop the email service business.

Amortization of Stock-based Employee Deferred Compensation. Our stock-based employee compensation expenses increased from $2,000 for the three months ended March 31, 1998 to $386,000 for the three months ended March 31, 1999, due the amortization of the aggregate of $7.2 million in deferred compensation recorded during the three months ended March 31, 1999. The deferred compensation is being amortized over the vesting schedule, generally four years.

Interest Expense and Other Expense, Net. Our interest expense and other expense, net, increased from $26,000 for the three months ended March 31, 1998 to $271,000 for the three months ended March 31, 1999, due primarily to increased recognized costs of warrants granted to the Bank Lepituach Ha Taasia B'Israel Ltd. (Bank Lepituach Ha Taasia). In April 1999, we fully repaid the short-term bank line of credit.

Income Taxes. As of December 31, 1998, we had approximately $5.7 million of Israeli net operating loss carryforwards and $4.7 million of U.S. federal net operating loss carryforwards available to offset future taxable income. The U.S. net operating loss carryforwards will expire in various amounts in the years 2010 to 2016. The Israeli net operating loss carryforwards have no expiration date.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Revenues. In 1997, we ceased all sales of stand-alone email client software licenses, maintenance and services. Accordingly, revenue comparisons between 1996, 1997 and 1998 are not meaningful. In 1998, our email service revenues were $389,000, of which one customer, Excite, represented 54%. In the future, we

24

expect revenues from Excite to decrease substantially as a percentage of email service revenue because the 1998 revenues from Excite included one-time payments for setup and installation. We had no email service revenue in 1997. Our revenues from software licenses and maintenance fees decreased from $3.1 million in 1996 to $899,000 in 1997 due to the change in our business model and the phasing out of our stand-alone email client software business.

Cost of Revenues. In 1998, our cost of revenues was $569,000 and consisted primarily of costs related to Internet data center services from a third-party provider, depreciation of equipment, Internet access, personnel and related costs. We expect cost of revenues to increase on an absolute basis, primarily as a result of an increase in our email service revenues, but to decrease as a percentage of email service revenues due to economies of scale. We had no email service costs in 1996 and 1997. In 1996 and 1997, our costs of revenues were $463,000 and $165,000. These costs consisted of expenses related to the stand- alone email software business, including personnel and related costs, media duplication and product packaging. The decrease in cost of revenues in 1997 from 1996 was due to the change in our business model as we phased out our stand-alone email client software business.

Research and Development Costs, Net. Research and development costs decreased from $1.5 million in 1996 to $1.1 million in 1997 because of $288,000 in off-setting royalty-bearing grants from the Israeli Government, recorded as a reduction of research and development costs. We have a contingent obligation to pay royalties at the rate of 3%-5% of total revenues. Our outstanding contingent obligation was approximately $481,000 as of December 31, 1998. Research and development costs in 1998 remained relatively unchanged from 1997. However, in 1998 we transferred several key research and development personnel into our operations group to support and maintain our newly developed Web-based email services infrastructure. Costs relating to these personnel were included in cost of revenues in 1998. We expect that research and development costs, net, will increase due to increased personnel and related costs associated with the accelerated development of new email service offerings.

Sales and Marketing. Sales and marketing expenses were $2.0 million in 1996, $2.2 million in 1997 and $2.0 million in 1998. We have a contingent obligation to pay royalties to the Israeli Government for grants received in prior years for marketing activities at a rate of 3% of total revenue. This contingent obligation was approximately $121,000 at December 31, 1998.

General and Administrative. General and administrative costs were $465,000 in 1996, $829,000 in 1997 and $604,000 in 1998. The increase in 1997 was primarily due to the write-off of $171,000 for receivables related to the phasing out of our stand-alone email client software license sales.

Interest Expense and Other, Net. Interest expense and other, net, consists of interest payments and fair value of warrants granted in 1997 and 1998 in connection with a short-term bank line of credit. Interest expense and other expense, net, increased from $45,000 in 1996 to $68,000 in 1997 and to $326,000 in 1998. This increase in 1998 was due to a higher level of borrowing and change in the terms of the agreement with Bank Lepituach Ha Taasia to include the grant of warrants in addition to customary interest payments. In April 1999, we fully repaid that short-term bank line of credit.

Income Taxes. As of December 31, 1998, we had approximately $5.7 million of Israeli net operating loss carryforwards and $4.7 million of U.S. federal net operating loss carryforwards available to offset future taxable income. The U.S. net operating loss carryforwards will expire in various amounts in the years 2010 to 2016. The Israeli net operating loss carryforwards have no expiration date.

25

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly statements of operations data for the five quarters ended March 31, 1999. This information has been derived from CommTouch's consolidated unaudited financial statements, which, in management's opinion, have been prepared on the same basis as the audited Consolidated Financial Statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with our audited Consolidated Financial Statements and the Notes thereto included elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Given the relatively small absolute dollar amounts in the operating results for each quarter presented below, non-periodic amounts accrued in one quarter cause significant fluctuations.

                                                             THREE MONTHS ENDED
                          ----------------------------------------------------------------------------------------
                          MARCH 31, 1998   JUNE 30, 1998   SEPTEMBER 30, 1998   DECEMBER 31, 1998   MARCH 31, 1999
                          --------------   -------------   ------------------   -----------------   --------------
                                                               (IN THOUSANDS)
                                                                (UNAUDITED)
Total email service
  revenues..............      $  32           $    59           $   130              $   168           $   346
Cost of email service
  revenues..............         59                85               166                  259               405
                              -----           -------           -------              -------           -------
Gross profit (loss).....        (27)              (26)              (36)                 (91)              (59)
                              -----           -------           -------              -------           -------
Operating expenses:
  Research and
     development........        266               305               308                  270               307
  Sales and marketing...        459               506               509                  527               481
  General and
     administrative.....        138               137               151                  178               807
                              -----           -------           -------              -------           -------
Amortization of stock-
  based employee
  deferred
  compensation..........          2                 8                18                   63               386
Total operating
  expenses..............        865               956               986                1,038             1,981
                              -----           -------           -------              -------           -------
Operating loss..........       (892)             (982)           (1,022)              (1,129)           (2,040)
Interest expense and
  other, net............        (27)              (59)              (28)                (212)             (271)
                              -----           -------           -------              -------           -------
Net loss................      $(919)          $(1,041)          $(1,050)             $(1,341)          $(2,311)
                              =====           =======           =======              =======           =======

FLUCTUATIONS IN QUARTERLY RESULTS

We have incurred operating losses since inception, and we cannot be certain that we will achieve profitability on a quarterly or annual basis in the future. Our results of operations have fluctuated and are likely to continue to fluctuate significantly from quarter to quarter as a result of a variety of factors, many of which are outside of our control. A relatively large expense in a quarter could have a negative effect on our financial performance in that quarter. Additionally, as a strategic response to a changing competitive environment, we may elect from time to time to make certain pricing, service, marketing or acquisition decisions that could have a negative effect on our quarterly financial performance. Other factors that may cause our future operating results to fluctuate include, but are not limited to:

- continued growth of the Internet and of email usage;

- demand for Web-based email services;

- our ability to attract and retain customers and maintain customer satisfaction;

- our ability to upgrade, develop and maintain our systems and infrastructure;

26

- the amount and timing of operating costs and capital expenditures relating to expansion of our business and infrastructure;

- technical difficulties or system outages;

- dollar/NIS exchange rate fluctuations;

- the announcement or introduction of new or enhanced services by our competitors;

- our ability to attract and retain qualified personnel with Internet industry expertise, particularly sales and marketing personnel;

- the pricing policies of our competitors;

- failure to increase our sales; and

- governmental regulation relating to the Internet, and email in particular.

In addition to the factors set forth above, our operating results will be impacted by the extent to which we incur non-cash charges associated with stock-based arrangements with employees and non-employees.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations principally from the sale of equity securities and to a lesser extent from bank loans and research and development and royalty-bearing marketing grants from the Israeli government. As of March 31, 1999, we had $3,226,000 in cash and cash equivalents.

Net cash provided by financing activities was $2.4 million in 1996, $2.3 million in 1997, $4.5 million in 1998 and $5.0 million in the three months ended March 31, 1999. Net cash used in operating activities was $1.3 million in 1996, $2.6 million in 1997, $3.6 million in 1998 and $1.7 million for the three months ended March 31, 1999. Net cash used in operating activities in 1996, 1997, and 1998 and the three months ended March 31, 1999 is comprised of net loss for each of the years partially offset by depreciation and amortization expenses and in 1996, 1997 and the three months ended March 31, 1999 also impacted by changes in trade receivables in addition to an increase in prepaid expenses during the three months ended March 31, 1999. Net cash used in investing activities was $427,000 in 1996, $93,000 in 1997, $442,000 in 1998 and $950,000 for the three months ended March 31, 1999. These investing activities consisted of purchases of property and equipment. During 1998, we entered into capital leases of $328,000.

As of March 31, 1999, we had a net working capital deficit of $1.4 million. We have a short-term bank line of credit agreement with a bank, collateralized by all our assets and share capital, allowing us to borrow up to $1.3 million. The short-term bank line of credit was repaid in April 1999. Interest under the terms of the short-term bank line of credit agreement was a combination of warrants for ordinary shares at an exercise price equal to the par value, calculated based on the outstanding utilized line of credit, and an additional annual interest payment at a rate of LIBOR plus 3% (LIBOR plus 8% for overdrawn amounts). Through March 31, 1999, we issued to the bank warrants to purchase 96,340 ordinary shares.

In the first quarter of 1999, we issued Series C Convertible Preferred Shares to investors resulting in net proceeds of $5.3 million. In April 1999, we issued to investors Convertible Promissory Notes convertible into Series D Convertible Preferred Shares upon the obtaining of Israeli governmental approvals, resulting in net proceeds of approximately $13.2 million. All of our convertible preferred shares will automatically convert into ordinary shares upon the closing of an initial public offering.

We believe that the net proceeds from this offering, together with existing cash balances and financing arrangements, will provide us with sufficient funds to finance operations and make the necessary capital expenditures to support growth through the next 12 months.

YEAR 2000 ISSUE

The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could

27

result in system failures or miscalculations, causing disruptions of operations for any company using such computer programs or hardware, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid Year 2000 issues.

We are a comparatively new enterprise, and, accordingly, the majority of the software and hardware we use to manage our business has been purchased or developed by us within the last 24 months. While this fact does not uniformly protect us against Year 2000 exposure, we believe we gain some mitigation from the fact that the information technology (IT) we use to manage our business is not based upon "legacy system" hardware and software. "Legacy system" is a term often used to describe hardware and software systems which were developed in previous decades when there was less awareness of Year 2000 issues. Generally, hardware and software design in this decade and the past several years in particular has given greater consideration to Year 2000 issues. All of the software code we have internally developed to manage our network traffic, for example, uses four digits to define the applicable year.

We are in the process of testing our internal IT and non-IT systems. To date, we have only completed preliminary testing of our internally developed IT and non-IT systems. All of the testing we have completed has been performed by our own personnel; to date, we have not retained any outside service or consultants to test or review our systems for Year 2000 compliance. Based on the testing we have performed, we believe that such software is Year 2000 compliant; however, we intend to complete more extensive testing by mid-1999.

In addition to our internally developed software, we utilize software and hardware developed by third parties for both our network and internal information systems. To date, we have not done any testing of such third-party software or hardware to determine Year 2000 compliance. We have, however, obtained certifications from our key suppliers of hardware and networking equipment for our data centers that such hardware and networking equipment is Year 2000 compliant. Additionally, we have received assurances from the providers of key software applications for our internal operations that their software is Year 2000 compliant. Based upon an initial evaluation of our broader list of software and hardware providers, we believe that all of these providers are reviewing and implementing their own Year 2000 compliance programs, and we will work with these providers to address the Year 2000 issue and continue to seek assurances from them that their products are Year 2000 compliant.

In addition, we rely on third party network infrastructure providers to gain access to the Internet. If such providers experience business interruptions as a result of their failure to achieve Year 2000 compliance, our ability to provide Internet connectivity could be impaired, which could have a material adverse effect on our business, results of operations and financial condition.

Our customers' success in maintaining Year 2000 compliance is also significant to our ability to generate revenues and execute our business plan. We currently derive revenue by charging a fixed fee per month for each mailbox we host, by charging a service fee plus advertising sharing or by sharing advertising revenues with our customers. In either case, interruptions in our customers' services and online activities caused by Year 2000 problems could have a material, adverse effect on our revenues to the extent that such interruptions limit or delay our customers' ability to expand their base of email users.

We have not incurred any significant expenses to date, and we do not anticipate that the total costs associated with our Year 2000 remediation efforts, including both expenses already incurred and any to be incurred in the future, will exceed $100,000. However, if we, our customers, our providers of hardware and software, or our third party network providers fail to remedy any Year 2000 issues, our service could be interrupted and we could experience a material loss of revenues that could have a material adverse effect on our business, results of operations, and financial condition. We would consider such an interruption to be the most reasonably likely unfavorable result of any failure by us, the third parties upon whom we rely, to achieve Year 2000 compliance. Presently, we believe we are unable to reasonably estimate the duration and extent of any such interruption, or quantify the effect it may have on our future revenues. We have yet to develop a comprehensive contingency plan to address the issues which could result from such an

28

event. We are prepared to develop such a plan if our ongoing assessment leads us to conclude we have significant exposure based upon the likelihood of such an event.

EFFECTIVE CORPORATE TAX RATES

Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S. income and the Israeli tax rate discussed below. We expect that most of our taxable income will be generated in Israel. Israeli companies are generally subject to corporate tax at the rate of 36% of taxable income. The majority of our income, however, is derived from our company's capital investment program with Approved Enterprise status under the Law for the Encouragement of Capital Investments in two separate plans, and is therefore eligible for certain tax benefits. Pursuant to these benefits, we will enjoy a tax exemption on income derived during the first two years in which such investment plans produce taxable income (provided that we do not distribute such income as a dividend) and a reduced tax rate of 10% to 25% for an additional period of eight years depending on the level of foreign investment in CommTouch. All of these tax benefits are subject to various conditions and restrictions. There can be no assurance that we will obtain approval for additional Approved Enterprise programs, or that the provisions of the law will not change. Moreover, notwithstanding these tax benefits, to the extent we receive income from countries other than Israel, such income may be subject to withholding tax.

Since we have incurred tax losses through December 31, 1998, we have not yet used the tax benefits for which we are eligible.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

Most of our sales are in dollars. However, a large portion of our costs relates to our operations in Israel. A substantial portion of our operating expenses, primarily our research and development expenses, is denominated in NIS. For the purposes of our financial statements, costs not effectively denominated in dollars are translated to dollars when recorded, at prevailing exchange rates and will increase if the rate of inflation in Israel exceeds the devaluation of the NIS as compared to the dollar or if the timing of such devaluations lags considerably behind inflation. Consequently, we are and will be affected by changes in the prevailing NIS/dollar exchange rate. We might also be affected by the dollar exchange rate to the major European and Asian currencies, due to the fact that we derive revenues from business partners in Europe and Asia.

In recent years (until 1997), inflation in Israel exceeded the devaluation of the NIS against the dollar and the Company experienced increases in the dollar cost of its operations in Israel. For example, in 1995 and 1996, the rate of inflation in Israel was 8.1% and 10.6%, and the devaluation of the NIS against the dollar was 3.9% and 3.7%. This trend was reversed during 1997 and 1998 (when the rate of inflation was 7.0% and 8.6%, and the rate of devaluation was 8.8% and 17.6%). The reversal experienced in 1997 and 1998 may not continue and we may be materially adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind increases in inflation in Israel.

Because exchange rates between the NIS and the dollar fluctuate continuously (albeit with a historically declining trend in the value of the NIS), exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency remeasurements are reported in the Consolidated Financial Statements in current operations. In the fourth quarter of 1998 the rate of exchange between the NIS and the dollar fluctuated more significantly than in prior periods.

The representative exchange rate, as reported by the Bank of Israel, was NIS 4.034 for one dollar on March 31, 1999 (NIS 4.160 on December 31, 1998, NIS 3.536 on December 31, 1997 and NIS 3.251 on December 31, 1996).

29

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We develop our technology in Israel and provide our services in North America, India, Europe and the Far East. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most of our sales are currently made in U.S. dollars, a strengthening of the dollar could make our services less competitive in foreign markets. Our interest expense on our capital lease obligations with a U.S. leasing company is sensitive to changes in the general level of U.S. interest rates. Due to the nature and level of our debts, we have concluded that there is currently no material market risk exposure. Therefore, no quantitative tabular disclosures are required.

30

BUSINESS

COMPANY OVERVIEW

We are a leading global provider of email and other messaging solutions. Our flexible and highly customizable solutions enable us to satisfy the unique email and messaging needs of a wide range of business partners, including websites of all sizes and businesses worldwide. As of May 16, 1999, we had over 100 business partners offering our Web-based email from their sites. Our business partners include Excite, LookSmart, FortuneCity, Talk City and Nippon Telephone and Telegraph. Through our business partners' sites we serve approximately 4.5 million emailboxes. In November 1998, we launched our ZapZone Network service, which enables sites to provide email to their end users at no cost. As of May 16, 1999, we had registered approximately 75,000 sites through the ZapZone Network service, and were serving approximately 480,000 ZapZone Network emailboxes.

INDUSTRY BACKGROUND

GROWTH OF THE INTERNET WORLDWIDE AND PROLIFERATION OF EMAIL

The Internet has become a vitally important global medium for communication, commerce, content distribution and advertising. International Data Corporation, or IDC, estimates that as of December 1998, there were over 28 million Web users in the United States and over 83 million users worldwide. IDC projects that, by the end of 2002, these numbers will increase to over 90 million Web users in the United States and over 282 million users worldwide. This growth in the global usage of the Web provides significant opportunities for emerging Web-based businesses and other companies developing an online presence.

Email is one of the most widely used applications on the Internet and has become a primary platform for business and personal communication. According to Forrester Research, over 80 percent of Internet users access their email while online, making this activity the most popular use of the Internet. IDC projects that email traffic in the United States will increase from 1.2 billion messages per day in 1997 to 8.0 billion messages per day in 2002.

EMERGENCE OF WEB-BASED EMAIL

Until recently, most email systems were provided by employers, Internet service providers (ISPs) or universities to individuals or closed groups of end users through software applications located on the users' desktops or local area networks. Such email systems, however, only permit access through the computer or network on which the email software resides or through cumbersome remote access systems. The recent emergence of email systems that use Internet browsers as the application for sending and receiving email has resulted in tremendous advances in email access, functionality and ease of use. This new email standard is commonly referred to as "Web-based email."

Web-based email offers the following benefits over traditional closed systems:

- anytime, anywhere (universal) access to both business and personal email accounts;

- advanced integrated communication services over the Web, such as unified messaging (receiving faxes and voicemail via email) and integrated calendars and directories; and

- easy to use registration, set-up and administration.

With the dramatic growth of international Internet usage, businesses worldwide are seeking to differentiate themselves online. Email is an optimal solution to address this business need because it increases brand

31

awareness, builds and reinforces a loyal, connected member base and facilitates commerce in the following ways:

- Companies embracing Web-based email can enhance their brand identity by controlling the look and feel of their Web-based email interface and also by providing end users with distinctive branded email addresses such as user@companyname.com.

- Web-based email significantly enhances the frequency and duration of website visits, commonly referred to as the website's "stickiness". The personalized nature of email and the ability to bundle it with additional services, such as calendaring, scheduling and unified messaging, establishes an important one-to-one relationship with email users.

- Email is emerging as an effective application for direct marketing online, as email users provide important demographic data when they register for and use email services. This information can be used to create highly targeted marketing campaigns with minimal distribution costs.

THE OPPORTUNITY TO PROVIDE OUTSOURCED WEB-BASED EMAIL SERVICES

While many organizations worldwide recognize the advantages of Web-based email services, they often lack the infrastructure, expertise and resources to fully realize these benefits through internal development. Due to the growing complexity of in-house email systems and the increasing levels of infrastructure investment and management resources needed to provide comprehensive email services, organizations around the world are seeking to outsource email services. Businesses worldwide seek to partner with a dedicated provider of Web-based email to provide high quality, feature-rich email services without having to invest internally in email management and systems. Small websites, such as affinity sites and personal homepages, seek free, easy to implement email services for their end users.

THE COMMTOUCH SOLUTION

We are a leading global provider of email and other messaging services. Our flexible and highly customizable solutions enable us to satisfy the different email and messaging needs of a wide range of customers worldwide, including websites of all sizes and businesses of all types.

BENEFITS OF THE COMMTOUCH SOLUTION

Extensive Email Features. Our core solution is easy to use and provides a broad range of industry-standard functionality. This includes the ability for end users to collect email from other email accounts, to create folders, to attach electronic documents, to store messages, to maintain a contact center, to create distribution lists and to establish user profiles and signatures. Our core service uses IMAP4, an advanced email protocol, which allows email folders to be accessed from multiple email environments.

The value of our solution is increased by our provision of premium services, which allow end users to send and receive faxes, voicemail and pages from the emailbox; access the Web-based emailbox from an off-line client (such as Microsoft Outlook); and have email forwarded to other addresses. We believe that, by providing a single platform which integrates multiple communication services and devices, the Web-based emailbox we provide has the potential to become our end users' primary online communications center.

Ability to Support Hundreds of Millions of Emailboxes. Our modular technology architecture enables the rapid set up of full-service hosting facilities and enables us to rapidly and easily expand our system as our user base grows. In addition, we utilize redundant servers and server load balancing to re-direct traffic to prevent service interruptions. Our system architecture and software platform have been designed to provide high quality service to hundreds of millions of emailboxes across millions of domains. We believe that our robust and flexible technology platform enables us to maintain one of the highest service performance levels in the industry.

Customization. Our solutions enable our business partners to leverage their email as a brand building tool. Business partners offer our email and messaging services to their end users with the partner's domain

32

name. For example, a business partner can provide email at its website with an address such as: user@companyname.com. This repeated visibility of the partner's name on every email message promotes brand awareness and customer loyalty. In addition, our business partners can use our proprietary customization tool to design the look and feel of their Web-based email interface so that it reflects their own brand image.

Increased Website Usage. Our solutions increase the potential for our partners to generate revenue by increasing the stickiness of their websites. We believe that traffic to our partners' websites increases as end users frequently visit the website to check their email. Thus, business partners may have many opportunities to expose their end users to repeated and/or fresh content every time they send or receive email. The benefits of increased website stickiness include more frequent communication with end users, enhanced customer loyalty and the opportunity to generate revenues from advertising, direct marketing and ecommerce transactions.

Online Marketing Capabilities. Our business partners can leverage our email solutions along with the demographic information of their end users to conduct one-to-one marketing and targeted advertising campaigns. We collect demographic information from end users when they register for their emailbox. We believe this information provides a powerful platform on which to design targeted marketing campaigns. To enhance our business partners' marketing capabilities, we provide our MailTarget tool which enables them to select and deliver tailored messages to targeted segments of their user population.

Rapidly Deployable and Cost-Effective Solutions. Our solutions for business partners can be implemented in as little as several days, while solutions for small websites can be implemented in a matter of minutes. We believe that this rapid time to market is critical to our business partners, who desire to realize the benefits of Web-based email as quickly as possible. Our flexible technology and economies of scale enable us to provide email solutions in a cost-effective manner, allowing businesses to achieve significant economic advantages. We also provide comprehensive maintenance and administration of our email service, which eliminates the need for our business partners to undertake the significant burden of developing and maintaining an in-house email system.

Extensive Language Capabilities. We provide email services in the following 14 languages: English, Chinese, Japanese, Spanish, French, German, Portuguese, Dutch, Finnish, Danish, Norwegian, Swedish, Russian and Italian. Additionally, we can support multiple languages on the same site for any of our business partners and offer spell-checking in many of these languages. Our multi-lingual capabilities enable us to serve the needs of businesses worldwide as well as multinational organizations.

COMMTOUCH STRATEGY

Our objective is to be the leading global provider of integrated email and other messaging services. We plan to achieve this goal by pursuing the following key strategies:

EXPAND USER BASE BY ADDING BUSINESS PARTNERS

We are building our base of email users by partnering with companies worldwide that want to offer their online customers a branded email service. As of May 16, 1999, we had over 100 business partners offering our Web-based email from their sites. Through these business partners, we host approximately 4.5 million emailboxes worldwide. These partners include Web-based companies, such as Excite, Talk City, LookSmart, FortuneCity and Nippon Telephone and Telegraph. We plan to continue to recruit top-tier partners and to position ourselves as a leading provider of state-of-the-art email services that are critical to our partners' online business strategy. We believe recruiting more business partners and end users will provide us with greater revenue opportunities from service fees, advertising, premium services and direct e-marketing possibilities as well as greater brand recognition.

EXTEND INTERNATIONAL LEADERSHIP

We plan to continue to aggressively market our solutions to business partners worldwide. We have focused on marketing our international email services in countries which we believe will experience the largest

33

growth in Web users. We have developed multiple language interfaces for our email services to be used in the world's most widely used non-English languages, such as Chinese, Japanese, Russian, French, Spanish and German. We have also established a marketing group in Israel, because of its proximity to both Europe and Asia, and a marketing group in the United States to market to North America, Canada and Latin America. We believe that we have a strong advantage in providing Web-based email services in many major foreign markets.

EXPAND OUR EMAIL SERVICE FOR SMALL WEBSITES THROUGH THE ZAPZONE NETWORK SERVICE

Small websites, online affinity groups and personal homepages represent a significant and growing segment of the market for Web-based email communications. We recognized that this market was under-served, and as a result we developed our ZapZone Network service solution, which we launched in November 1998. By May 16, 1999, we had registered approximately 75,000 sites through this service, and are currently hosting approximately 480,000 ZapZone Network service emailboxes. Our objective is to make the ZapZone Network service the premier brand of choice for small sites. Every email sent and received contains the ZapZone Network domain name, and the "powered by CommTouch" logo. We believe that this produces a powerful viral marketing effect and promotes the ZapZone Network brand quickly, efficiently and at a low cost. We plan to generate revenues from our ZapZone Network service by selling premium and direct marketing services to end users and also by selling advertising and sponsorship packages to third parties.

EXPLOIT PRICE-PER-EMAILBOX OFFERING TO BUSINESSES

We believe that as more businesses seek to outsource their email services and develop a need for creative messaging solutions, there is an opportunity for us to provide our price-per-emailbox outsourcing solutions. We intend to aggressively market our outsourcing solution by increasing our direct sales and marketing personnel and resources in this market segment. Additionally, we intend to partner with businesses that have traditionally offered goods and services to the small office/home office (SOHO) market to offer the price-per-emailbox option to that market.

DRIVE MULTIPLE REVENUE STREAMS

We plan to continue to generate multiple revenue streams from our email and messaging services. We are currently focused on the following revenue sources:

- Service fees. We plan to continue to charge service fees for delivering outsourced email solutions to business partners.

- Advertising. We plan to continue to sell advertising and sponsorships on our global email network to both business partners and third party vendors.

- Premium services. We plan to continue to market and upsell premium services to end users.

- Direct online marketing. We plan to continue to offer business partners and other third parties the opportunity to send targeted messages to select segments of our business partners' user base and our ZapZone Network user base, and share in the revenue that these parties generate from online selling.

EXTEND TECHNOLOGY LEADERSHIP IN EMAIL SERVICES

We intend to leverage our core technology, software platform and expertise in developing and managing a comprehensive Web-based email service to deliver industry-leading functionality and advanced messaging services. We are currently planning to add new services that we believe end users and webmasters desire, including calendar integration, webmaster administration tools, message boards and list server features, HTML editing and email message language translation. We intend to continue to work closely with our business partners to identify new trends and functionality that will be popular with end users.

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LEVERAGE OUR COST-EFFECTIVE TECHNOLOGY PLATFORM

Our open, scalable architecture gives us the flexibility to use servers that provide us with the best cost-quality combination and to leverage third-party hosting providers. This enables us to achieve a low service cost-per-emailbox while maintaining a high level of service quality. This combination of economic advantage and service quality enables us to price our services attractively to our business partners and end users. We believe that the price performance of our solution enables us to compete aggressively, expand market share and build our brand name.

SERVICES

We provide outsourced email and messaging services to customers of all sizes. Our solutions enable these organizations to attract, retain, communicate and conduct ecommerce with their end users.

We provide our email and messaging solutions through a variety of licensing arrangements. These arrangements typically consist of one of the following:

- a minimum annual service fee plus advertising revenue sharing;

- advertising revenue sharing only; or

- price-per-emailbox.

For our ZapZone Network service members, we provide our core email and messaging services free of charge. We currently derive revenue from this network through advertising and we plan to upsell our premium services to users in the ZapZone Network.

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CORE SERVICE

Our core service provides the following features:

-----------------------------------------------------------------------------------------------------
FEATURE                                          DESCRIPTION
-----------------------------------------------------------------------------------------------------
  ELECTRONIC MAILBOX                             Includes a full range of industry-standard
                                                 functionality, such as the ability for end users to
                                                 create folders, attach electronic documents, store
                                                 messages, maintain a contact center, distribute
                                                 lists, establish user profiles and signatures.
-----------------------------------------------------------------------------------------------------
  PARTNER-BRANDED ELECTRONIC MAIL INTERFACE      Business partners offer our email services to their
                                                 end users with the business partner's name included
                                                 in the domain address. This repeated visibility of
                                                 the business partner's name promotes brand awareness
                                                 and customer loyalty. Additionally, our business
                                                 partners can design the look and feel of their
                                                 Web-based email interface with our proprietary
                                                 customization wizard tool.
-----------------------------------------------------------------------------------------------------
  ENHANCED MANAGEMENT FEATURES                   Includes advanced email functionality such as the
                                                 ability to collect email from other email accounts,
                                                 sort email and access a sent messages folder. Also
                                                 includes a draft folder option, message notification
                                                 upon login and IMAP4 support, which allows email
                                                 folders to be accessed from multiple email
                                                 environments.
-----------------------------------------------------------------------------------------------------
  CONTACT CENTER                                 Enhanced address book functionality that includes
                                                 integrated third-party instant messaging and chat.
-----------------------------------------------------------------------------------------------------
  SPAM PROTECTION                                Advanced anti-spamming controls and email filtering.
-----------------------------------------------------------------------------------------------------
  MULTIPLE LANGUAGE CAPABILITY                   Our email services are provided in 14 languages:
                                                 English, Chinese, Japanese, Spanish, French, German,
                                                 Portuguese, Dutch, Finnish, Danish, Norwegian,
                                                 Swedish, Russian and Italian. Additionally, we
                                                 provide spell-checking in many of these languages
                                                 and can support more than one language on any of our
                                                 customer websites.
-----------------------------------------------------------------------------------------------------
  KIDS' EMAIL                                    An email option that enables parents to control who
                                                 may correspond electronically with their children.
-----------------------------------------------------------------------------------------------------

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PREMIUM SERVICES

We introduced our premium services in March 1999. These services are designed to transform the end user's emailbox into an integrated primary communications center. We currently offer the following premium services to end users for a fee:

-----------------------------------------------------------------------------------------------------
FEATURE                                          DESCRIPTION
-----------------------------------------------------------------------------------------------------
  OFF-LINE EMAIL CLIENT ACCESS                   End users can access their emailbox using either a
                                                 Web browser or their off-line client software, such
                                                 as Microsoft Outlook.
-----------------------------------------------------------------------------------------------------
  UNIFIED MESSAGING                              This service enables the emailbox to become an
                                                 integrated communications platform through which the
                                                 user can access email and send and receive voicemail
                                                 messages, faxes, and pages.
-----------------------------------------------------------------------------------------------------
  ADDITIONAL DISK SPACE STORAGE                  End users can increase their storage capacity up to
                                                 an additional ten megabytes of disk space to
                                                 maintain more folders and messages in their
                                                 emailbox.
-----------------------------------------------------------------------------------------------------
  AUTOMATED, USER-DEFINED EMAIL FORWARDING       Incoming emails can be automatically forwarded to an
                                                 alternate emailbox based on the end user's pre-set
                                                 criteria.
-----------------------------------------------------------------------------------------------------
  AUTOMATED, RULES-BASED PAGER NOTIFICATION      Incoming emails can be automatically forwarded to
                                                 the end user's pager based on the end user's pre-set
                                                 criteria.
-----------------------------------------------------------------------------------------------------
  EMAIL-BY-PHONE                                 End users can call to have their email messages read
                                                 to them using text-to-speech technology. End users
                                                 have the option to reply with a voicemail message
                                                 that is sent as a voice attachment, fax the email or
                                                 can delete the message.
-----------------------------------------------------------------------------------------------------
  INTERNET PROTOCOL (IP) TELEPHONY ACCESS        Enables voice communication over the Internet that
                                                 is integrated with the end user's emailbox.
-----------------------------------------------------------------------------------------------------

The unified messaging, email-by-phone and IP telephony premium services integrate third party technology.

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PLANNED SERVICES

We are developing new messaging services to complement our existing services. We actively monitor the email and communication needs of our business partners and end users and work to develop new features and enhancements to meet their evolving requirements. The following services are currently in, or planned for, development:

-----------------------------------------------------------------------------------------------------
FEATURE                                          DESCRIPTION
-----------------------------------------------------------------------------------------------------
  CALENDAR INTEGRATION                           Online calendars and group scheduling will be
                                                 integrated with the end user's email interface and
                                                 contact center, as well as to applications such as
                                                 Microsoft Outlook and Palm Pilot software.
                                                 (Anticipated in the third quarter of 1999).
-----------------------------------------------------------------------------------------------------
  ENHANCED EMAIL SECURITY                        Support for SSL encryption and technologies with
                                                 enhanced anti-virus and anti-vandal security
                                                 measures. (Anticipated in the third quarter of
                                                 1999).
-----------------------------------------------------------------------------------------------------
  WEBMASTER ADMINISTRATION TOOLS                 Provides webmasters with enhanced website
                                                 administration functionality, including opening and
                                                 deleting accounts online, enhanced tracking and
                                                 reporting features, and Lightweight Directory
                                                 Application Protocol (LDAP) support, which provides
                                                 remote enhanced administrative and control
                                                 capabilities. (Anticipated in the third quarter of
                                                 1999).
-----------------------------------------------------------------------------------------------------
  COMMUNITY-BUILDING APPLICATIONS                Additional functionality such as message boards and
                                                 list servers, which enable frequent communication
                                                 among end users. (Anticipated in the third quarter
                                                 of 1999).
-----------------------------------------------------------------------------------------------------
  EMAILBOX ENHANCEMENT                           Enhancements such as message search features, HTML
                                                 editing and enhanced secure login interface.
                                                 (Anticipated in the third quarter of 1999).
-----------------------------------------------------------------------------------------------------
  EMAIL MESSAGE LANGUAGE TRANSLATION             Email messages will be automatically translated
                                                 between languages according to pre-defined user
                                                 preferences. (Anticipated in the fourth quarter of
                                                 1999).
-----------------------------------------------------------------------------------------------------

Direct online marketing services. We have a large and growing network of end users. As of May 16, 1999, through our business partners we host approximately 4.5 million emailboxes and through our ZapZone Network service, which has over 75,000 sites registered, we host approximately 480,000 emailboxes. This extensive user network, along with our advanced technologies and strategic relationships, will allow us to offer value-added direct marketing services to our business partners and third parties. We are currently planning the following services:

Deal Me In (also known as Opt-in). Users can elect to receive promotions from third-party vendors for pre-selected product categories such as books, music, toys, computers and gifts. Whenever end users choose to purchase one of these items, we would earn a percentage of the revenue generated from the transaction.

MailTarget. We provide our business partners with a Web-based tool which enables webmasters to select and send tailored messages to targeted segments of their end user base. We would earn revenues by charging business partners a fee for each message sent with this tool.

38

Third-party marketing programs. In addition to our own internal opt-in program, we also provide other third-party direct marketing companies with the opportunity to leverage our extensive user base to market their products. We would earn revenues by charging third-party direct marketing companies a fee for each message sent.

The statements in this prospectus regarding planned service offerings and anticipated features of such offerings are forward-looking statements. Actual service offerings and benefits could differ materially from those projected. We provide some of our features and services by integrating our technology with what we believe to be best of breed, third-party providers.

THE ZAPZONE NETWORK EMAIL SERVICE

Our ZapZone Network service delivers email messaging solutions to small websites and homepages, which we believe represent a large and growing market of end users. Our ZapZone Network service enables individuals and website administrators to set up Web-based email online, often in under ten minutes. ZapZone Network-enabled sites are able to provide our core Web-based email services to their end users in multiple languages. Our ZapZone Network service enables websites to collect valuable user demographic information, which facilitates their ability to conduct targeted marketing campaigns with their members. Webmasters can then communicate with and market to those users. In addition, we plan to sell premium services to these end users in the near future.

PRONTOMAIL

We provide a Web-based email service directly to end users under the name ProntoMail. Individuals can register for this service through our corporate website. We use ProntoMail for beta testing of new service offerings and have no plans to actively market this service.

CUSTOMERS

BUSINESS PARTNERS

We offer email and messaging communications services to over 100 global business partners. The following is a list of companies with which we have email service agreements and which have the greatest number of mailboxes within their respective categories:

COMMUNITY SITE:

TALK CITY (CHAT ROOMS)

FORTUNECITY (GENERAL)

LOOKSMART (PORTAL)

COLLEGES.COM (STUDENT INFORMATION)

DESERET (MORMON COMMUNITY SITE)

INTERNATIONAL SITE:

EXCITE (PORTAL)

GOO (NIPPON TELEPHONE AND TELEGRAPH)

YUPI (SPANISH PORTAL)

SOHU (CHINESE PORTAL)

MONCOURRIER (FRENCH CANADIAN PORTAL)

DIGITAL MEDIA COMPANY:

PRIMEDIA (SEVENTEEN.COM)

DISCOVERY CHANNEL ONLINE

PROLAUNCH (PERSONAL MEDIA)

MEDSCAPE (MEDICAL)

ZD NET (ONLINE MEDIA)

39

ENTERTAINMENT SITE:

WARNER BROS. (ACMECITY.COM)

JOKES.COM

GARFIELD.COM (CARTOON SITE)

MUSIC.COM

HEADBONE.COM (KIDS SITE)

NEWSPAPERS/PUBLISHING:

CANOE (CANADIAN NEWS)

THE IRISH TIMES

HOLLINGER GROUP (JERUSALEM POST)

THE TIMES OF INDIA

NEWS CORP. (CHINABYTE)

ZAPZONE NETWORK MEMBERS

We meet the email and messaging needs of small websites and home pages through our ZapZone Network (ZZN). This service enables our members to offer Web-based email and messaging to their end users and allows us to increase our membership base. The following is a sampling of ZapZone Network member sites:

---------------------------------------------------------------------------------------------------
  ZZN MEMBER                             SITE DESCRIPTION
---------------------------------------------------------------------------------------------------
  Baby.com (baby.zzn.com)                Community site that aggregates parenting information and
                                         sells baby-related products.
---------------------------------------------------------------------------------------------------
  Bboy.com (bboy.zzn.com)                Music-oriented website that aggregates "hip hop"
                                         information.
---------------------------------------------------------------------------------------------------
  Citrus Cool Kids                       Children's portal that offers book reviews, a newsletter,
  (citruscoolkids.zzn.com)               and information about games and the Internet.
---------------------------------------------------------------------------------------------------
  Diabetes.com (diabetes.zzn.com)        Health-oriented site for diabetes information.
---------------------------------------------------------------------------------------------------
  OilLink (oillink.zzn.com)              Oil industry news site.
---------------------------------------------------------------------------------------------------
  Oxford Online                          Community site for people who live in Oxford, England.
  (oxfordonline.zzn.com)
---------------------------------------------------------------------------------------------------
  Soccer Club (soccerclub.zzn.com)       Website for soccer fans around the world.
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  The Tom Green Show                     Fan club for the MTV talk show host Tom Green.
  (tomgreenshow.zzn.com)
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SALES AND MARKETING

SALES STRATEGY

Our flexible and highly customizable solutions enable us to satisfy the email and messaging needs of a wide range of customers worldwide, from Web-based companies to small websites and businesses. Our sales strategy is to target these market segments through a combination of direct, indirect and online selling initiatives. Our direct sales force is responsible for targeting large companies, online businesses and hosting sites throughout the world. While our salespeople are responsible for selling our solutions in a geographic area, they often collaborate to recruit new business partners, particularly when dealing with

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multinational organizations. Our sales offices are located in Santa Clara, California, and Ein Vered, Israel. We plan to extend our sales force into Europe and Asia within the next 12 months. As our sales force grows, it will focus not only on acquiring new partners worldwide, but also on continuing to sell premium and direct e-marketing services to existing clients.

We also plan to enter into agreements with select third parties, who will package our messaging solution as part of a comprehensive service offering that they will sell to their business customers. We expect to share revenues and/or receive fees from these third parties.

We will continue to actively promote our ZapZone Network service to small websites and businesses. A key part of our ZapZone Network strategy will be for us to mobilize our direct and indirect sales forces to sell premium and direct online marketing services to ZapZone Network members.

MARKETING STRATEGY

Our marketing strategy is focused on increasing global awareness of our solution and building our brand as a leading international provider of email and messaging services. We plan to market our solution primarily through a mix of print advertising, direct marketing, public relations and online initiatives. We plan to aggressively promote our premium services to our business partners and their end users and our direct e-marketing services to our business partners and third parties. We intend to leverage our direct sales force and develop co-branding and marketing opportunities with other online organizations to augment our marketing efforts. Our ZapZone Network service logo is featured on every ZapZone Network service member homepage and we believe that as more members join the ZapZone Network service and use zzn.com as their email suffix, its brand will be strengthened.

BUSINESS PARTNER SUPPORT

CommTouch provides its business partners rapid callback technical support 24 hours a day, seven days a week. We have also developed a proprietary software tool that provides end users with immediate online support without intervention from customer service representatives or technical staff. We believe that this technical support model enables us to provide high quality and cost effective support service to our business partners and end users.

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TECHNOLOGY

We leverage our eight years of email and technology experience to create world-class, robust, full-featured, reliable email solutions. We believe we possess three major advantages over other Web-based email solutions:

SCALABLE AND MODULAR SYSTEM ARCHITECTURE

Our Web-based email system is designed to provide maximum flexibility. We have developed a system architecture consisting of three main components: Web servers, mail servers and database servers. Web servers are responsible for the front-end email application, mail servers are responsible for the storage and transmittal of email messages and database servers are responsible for storing all other important end user and partner information. These servers interact through standard communications protocols such as HTTP, IMAP4, POP3 and SMTP and ODBC.
LOGO

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The modularity of our network architecture provides several key technological advantages:

- Rapidly deployable and cost-effective. The design of our system enables us to significantly reduce our deployment time as well as costs to support each mailbox.

- We outsource server hosting and Internet backbone access to third party providers because they are able to offer such services at bulk rates. In addition, there are numerous third-party providers from whom we can obtain these services, so our capacity is not limited and we are able to obtain favorable rates. This significantly reduces our Internet connectivity and server maintenance costs.

- The modularity of our system architecture allows us to choose from among a broad range of industry-standard mail servers, and select the servers with optimal price/performance characteristics. Again, we are able to obtain these servers from a number of vendors, so our capacity is not limited.

- The outsourcing of our server needs enables us to focus on the rapid deployment of applications for our clients rather than on the costly and time-consuming maintenance and development of an internal hardware infrastructure.

- Because third-party mail servers are constantly upgraded with the most advanced features (LDAP support, HTML messaging, etc.), we are able to reduce our development time by leveraging existing off-the-shelf technology and immediately integrating these features into our service offerings.

- Scalable and reliable. Our modular technology architecture enables the rapid setup of full-service email hosting facilities and enables us to quickly and seamlessly expand our system as our user base grows. In addition, we utilize redundant servers and server load balancing capabilities to re-direct traffic if a server malfunctions. Our system architecture and software platform have been designed to provide excellent service to hundreds of millions of emailboxes across millions of domains. We believe that our robust and flexible technology platform enables us to maintain one of the highest service performance levels in the industry.

- Portable. As the market for outsourced email systems evolves, some organizations may demand their own in-house hosting facility. The highly modular nature of our system architecture provides us with the ability to duplicate a system in another location within a period of several days. As a result, we are well-equipped to rapidly deploy email services to this growing subset of the outsourced email systems market.

PROPRIETARY DEVELOPMENT LANGUAGE

We have custom-built a proprietary software development language called Application Dynamic Markup Language (ADML) in order to maximize the flexibility and minimize the development time of our email solutions.

The ADML environment encapsulates the functionality and layout of a generic Web-based email interface, while allowing our developers to rapidly customize a business partner's email system with specific features. All external resources, such as text strings, images and site-dependent parameters are stored in various databases. When a new site is built, the ADML code is compiled into ASP (Microsoft's Active Server Pages technology) code which runs on the web servers and translates the ADML code into HTML. This enables the developer to build an email interface for a business partner without having to write a single line of HTML code. This provides us with a competitive advantage for several reasons:

- we can add new functionality and features (languages, premium and direct marketing services, etc.) to any business partner's existing email system in as little as a few hours;

- we can simultaneously upgrade more than one email system (for example, immediately making additional languages available to any end user of a ZapZone Network service email site); and

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- we can offer automated email customization tools to our end users. For example, the ZapZone Network service takes advantage of the flexibility provided by ADML to allow webmasters to build, customize and deploy ready-to-use email sites in very little time.

ADML FLOW CHART
[ADML FLOW CHART]

ADVANCED PROPRIETARY TECHNOLOGIES

We have developed the following proprietary technologies:

- Complex Foreign Language Support. Currently, our system is fully double-byte-enabled to handle intricate character languages such as Chinese and Japanese. We are currently in the final stages of developing the technology to enable right-to-left reading/writing capabilities to support languages like Hebrew, Arabic and Urdu.

- Integrated Open Platform Interface. We have developed an integrated platform and series of application programming interfaces that enable us to rapidly and fully integrate additional communications features and functionality into our service offering.

- Automated Customer Service. We have developed a proprietary software tool that allows us to field most end users' technical questions with an automated email feedback system.

- Advanced Direct Marketing Technology. Our MailTarget service is a Web-based tool which provides business partners with a user-friendly method of selecting and delivering tailored messages to a targeted segment of their user population.

- Customization Wizard Tool. We have developed a proprietary technology tool which enables customers to design the look and feel of their Web-based email interface so that it is consistent with their own brand images.

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COMPETITION

The market for email and messaging services is intensely competitive and we expect it to be increasingly competitive. In addition to competing with companies that develop and maintain in-house email solutions, we directly compete with Web-based email service providers, including USA.NET, Mail.com and Critical Path. We also compete with software companies that provide email, including Microsoft, Software.com and Lotus Development Corporation. Microsoft currently offers free Web-based email through its Hotmail website. We face further competition from websites that offer email services, ISPs, including America Online (and its subsidiary, Netscape), Yahoo and Lycos, and other service providers, such as telecommunications companies.

Some of our competitors provide a variety of Web-based services in addition to email, such as Internet access, browser software, homepage design and hosting. The ability of these competitors to offer a broader suite of complementary services may give them a considerable advantage over us. Some of our competitors may offer services at or below cost. Many of our current and potential competitors have longer Web-based email operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more established and better-financed companies.

We believe that our solution has the following competitive advantages:

- highly customizable and flexible;

- rapidly deployable;

- available in 14 languages;

- designed to integrate numerous messaging applications; and

- has the ability to effectively address multiple market needs.

However, despite our competitive positioning, we may not be able to compete successfully against current and future competitors.

INTELLECTUAL PROPERTY

We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. We have the following registered trademarks: COMMTOUCH (registered in the U.S.); PRONTO (U.S. and South Korea); COMMTOUCH SOFTWARE (Australia and New Zealand); PRONTO FAMILY, PRONTO SECURE (Japan); PRONTO MAIL (Japan and New Zealand). We also have the following pending trademark applications: ZAPZONE NETWORK, ZZN (U.S., Israel and other countries) and PRONTO (Canada, Mexico, European Community and India). It may be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or obtain and use information that we regard as proprietary. Certain end user license provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable under the laws of certain jurisdictions and foreign countries. 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. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competing companies will not independently develop similar technology.

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 trademarks and other intellectual property rights of third parties by us and our licensees. Such

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claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

Our ZapZone Network service allows webmasters to select the email service name of their choice. There is, therefore, the possibility that they will select email service names that may infringe the rights of others under U.S. state and/or federal or foreign trademark and/or anti-dilution or similar laws. ZapZone Network service's placement of ZapZone Network service icons and advertisements on ZapZone Network service webmasters' web pages may contribute to our perceived liability for any allegedly infringing acts. We do not audit webmasters' email service name choices for compliance with any intellectual property rights of others. However, in our current webmaster license agreements, we require webmasters to indemnify us for claims resulting from their chosen email service names; we also require users to indemnify us in their license agreements. Furthermore, in our license agreements with webmasters and users, we expressly reserve the right to eliminate their account or to change their email service names, in our sole discretion. We have received complaints from several parties that email service names chosen and registered by ZapZone Network service users are similar or identical to domain names and/or trademarks in which the complainants claim an interest. We responded by referring the complainants to the webmasters who registered those email service names, as it is our policy to do.

We also intend to continue to strategically license certain technology from third parties, including our mail server and SSL encryption technology. In the future, if we add certificate technology to our systems, we may license additional technology from third-party vendors. We cannot be certain that these 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 and services. These third-party in-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 and service development until equivalent technology can be identified, licensed and integrated. Any such delays in services could cause our business, financial condition and operating results to suffer.

GOVERNMENT REGULATION

Although there are currently few laws and regulations directly applicable to the Internet and commercial email services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or commercial email services covering issues such as user privacy, pricing, content, copyright, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online email may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. The adoption of additional laws or regulations may impair the growth of the Internet or commercial online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business, or otherwise have a material adverse effect on our business, operating results and financial condition. 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. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet could have a material adverse effect on our business, operating results and financial condition.

EMPLOYEES

As of March 31, 1999, we had 62 full-time employees. None of our U.S. employees is covered by a collective bargaining agreement. We believe that our relations with our employees are good.

Israeli law and certain provisions of the nationwide collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (the

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Israeli federation of employers' organizations) apply to CommTouch's Israeli employees. These provisions principally concern the maximum length of the work day and the work week, minimum wages, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. Furthermore, pursuant to such provisions, the wages of most of CommTouch's employees are subject to cost of living adjustments, based on changes in the Israeli Consumer Price Index (CPI). The amounts and frequency of such adjustments are modified from time to time. Israeli law generally requires the payment of severance pay upon the retirement or death of an employee or upon termination of employment by the employer or, in certain circumstances, by the employee. CommTouch currently funds its ongoing severance obligations by making monthly payments for insurance policies.

A general practice in Israel followed by CommTouch, although not legally required, is the contribution of funds on behalf of certain employees to an individual insurance policy known as "Managers' Insurance." This policy provides a combination of savings plan, insurance and severance pay benefits to the insured employee. It provides for payments to the employee upon retirement or death and secures a substantial portion of the severance pay, if any, to which the employee is legally entitled upon termination of employment. Each participating employee contributes an amount equal to 5% of such employee's base salary, and the employer contributes between 13.3% and 15.8% of the employee's base salary. Full-time employees who are not insured in this way are entitled to a savings account, to which each of the employee and the employer makes a monthly contribution of 5% of the employee's base salary. CommTouch also provides certain employees with an Education Fund, to which each participating employee contributes an amount equal to 2.5% of such employee's base salary, and the employer contributes 7.5% of the employee's base salary.

OFFICE LOCATION

Our principal executive offices are located at 10 Technology Avenue, Ein Vered 40696, Israel, where our telephone number is 011-972-9-796-3445, and 3945 Freedom Circle, Santa Clara, California 95054, where our telephone number is
(408) 653-4330.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of CommTouch and their ages, as of March 31, 1999, are as follows:

                NAME                   AGE                           POSITION
                ----                   ---                           --------
Gideon Mantel(1).....................  39    Chief Executive Officer and Director
Isabel Maxwell.......................  48    President, CommTouch Software, Inc.
Amir Lev.............................  39    Chief Technology Officer, General Manager and Director
James Collins........................  40    Chief Financial Officer and Secretary
Eran Schindler.......................  33    Vice President, Finance
Robert "Rip" Gerber..................  36    Vice President, Marketing, CommTouch Software, Inc.
Avner Amram..........................  37    Vice President, Operations, CommTouch Software, Inc.
Yael Elish...........................  30    Vice President, Strategic Development, CommTouch
                                             Software, Inc.
Igor Gusak...........................  44    Vice President, Sales, CommTouch Software, Inc.
Yuval Neria..........................  39    Vice President, International Sales
Ronen Rosenblatt.....................  35    Vice President, Research and Development
Allan Barkat(1)(2)...................  39    Chairman of the Board of Directors
Yiftah Atir..........................  49    Director
Yair Safrai..........................  40    Director
Yoseph Sela(1)(2)....................  46    Director
Richard Sorkin(3)....................  37    Director


(1) Member of the Compensation Committee

(2) Member of the Audit Committee

(3) Mr. Sorkin will join the Board of Directors following the closing of the offering.

Gideon Mantel is a co-founder of CommTouch and served as its Chief Financial Officer from its inception in February 1991 until October 1995, when he became CommTouch's Chief Operating Officer. In November 1997, he became CommTouch's Chief Executive Officer. He has also served as a director of CommTouch since inception. Mr. Mantel received a B.A. in Political Science and an M.B.A from Tel Aviv University.

Isabel Maxwell has served as the President of CommTouch Software, Inc. since February 1997. Ms. Maxwell was a co-founder, and from March 1993 to August 1996 served as the Senior Vice President of International Business Development, Corporate Affairs and Investor Relations, of The McKinley Group Inc., an Internet search engine company. From August 1996 to October 1996, Ms. Maxwell was an Executive Vice President of Excite, Inc. Ms. Maxwell received a B.A. and M.A. in History and Modern Languages from Oxford University.

Amir Lev is a co-founder of CommTouch and has served as its Chief Technology Officer and as a director since its inception in 1991. Mr. Lev has also been the General Manager of CommTouch since January 1997. Mr. Lev received a B.A. in Computer Science and Economics from Hebrew University, Jerusalem.

James Collins has served as the Chief Financial Officer of CommTouch since March 1999 and as the Secretary of CommTouch since April 1999. From October 1997 to February 1999, Mr. Collins was a private investor. From March 1992 to December 1996, Mr. Collins served as the Chief Financial Officer and Secretary, and from January 1997 to September 1997 as the Vice President of Operations of Pete's Brewing Company, a specialty brewer. Mr. Collins received a B.S. in Business Administration from the University of the Pacific and is a Certified Public Accountant in the State of California.

Eran Schindler has served as Vice President, Finance of CommTouch since November 1998. From December 1997 to November 1998, Mr. Schindler served as Chief Financial Officer of AutoMedia Ltd., a

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video and postproduction software company. From December 1996 to October 1997, Mr. Schindler served as Chief Executive Officer and from July 1994 to December 1996 as Chief Financial Officer of Hosen Electrical Appliances Ltd., an importer and marketer of electrical appliances. Mr. Schindler received a B.A. from Haifa University.

Robert "Rip" Gerber has served as Vice President, Marketing of CommTouch Software, Inc. since March 1999. Mr. Gerber was the founder of @once, an email direct marketing company, and from February 1998 to February 1999 served as its president. From September 1995 to January 1998, Mr. Gerber served as Managing Director of Pantheon Consulting Group LLC, a marketing and planning services company. From August 1992 to August 1995, Mr. Gerber was a consultant for Deloitte & Touche LLP, a public accounting firm. Mr. Gerber received a B.S. in Chemical Engineering from the University of Virginia and an M.B.A. from Harvard Business School.

Avner Amram has served as Vice President, Operations of CommTouch Software, Inc. since April 1999. Mr. Amram was Director of Operations of CommTouch Software, Inc. from March 1998 to April 1999 and a Software Team Leader from March 1996 to March 1998. Mr. Amram received a B.Sc. in Computer Science from the Technion, Haifa.

Yael Elish has served as the Vice President, Strategic Development of CommTouch Software, Inc. since April 1999. Ms. Elish was CommTouch's Director of Business Development from August 1998 to March 1999 and was CommTouch's Director of Sales from December 1996 to August 1998. From August 1993 to August 1996, Ms. Elish was a Marketing Manager of Widecom Ltd., a provider of Internet integration services and software development. Ms. Elish received a B.A. in International Relations from Hebrew University in Jerusalem.

Igor Gusak has served as the Vice President, Sales of CommTouch Software, Inc. since April 1999. Dr. Gusak was the Director of Sales and Marketing of CommTouch from February 1997 to March 1999 and the Director of Original Equipment Manufacturer Sales for CommTouch from January 1995 to January 1997. Dr. Gusak received a Ph.D. in Mathematics from Urals University, Ekaterinburg, Russia.

Yuval Neria has served as the Vice President, International Sales of CommTouch since April 1999. Mr. Neria was the Director of International Marketing and Sales for CommTouch from March 1997 to April 1999, the Director of Pacific Rim Operations for CommTouch from March 1996 to April 1997, a Product Manager for CommTouch from March 1995 to April 1996, and a Quality Assurance Manager for CommTouch from March 1993 to April 1995. Mr. Neria received a B.A. in Computer Science from the City University of New York.

Ronen Rosenblatt has served as the Vice President, Research and Development of CommTouch since April 1999. Mr. Rosenblatt served as the Director of Research and Development for CommTouch from November 1994 to March 1999. Mr. Rosenblatt received a B.Sc. in Electronics and Computer Engineering from Tel Aviv University.

Yiftah Atir has served as a Director of CommTouch since January 1996. From November 1994 to the present, Mr. Atir has served as Managing Director of Evergreen Venture Capital, a technology focused venture capital fund. Mr. Atir received a B.A. from Haifa University and an M.B.A. from Tel Aviv University.

Allan Barkat has served as a Director of CommTouch since February 1996 and Chairman of the Board of Directors since April 1999. From March 1997 to the present, Mr. Barkat has been a Managing Director of Apax-Leumi Partners, Ltd. the investment advisor to Israel Growth Fund, LP, a technology focused venture capital fund. From January 1995 to March 1997, Mr. Barkat served as an Assistant Director of Apax-Leumi Partners Ltd. From 1992 to 1994, Mr. Barkat served as Vice President of Marketing & Sales of DSP Communications Group, Inc., a wireless semiconductor company. Mr. Barkat has also served as a director of Fundtech Ltd. Mr. Barkat received a B.Sc. from the Technion, Haifa.

Yair Safrai has served as a Director of CommTouch since January 1999. From September 1996 to the present, Mr. Safrai has been the Managing Partner of Concord Ventures, a technology focused venture capital

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fund. From July 1994 to September 1996, Mr. Safrai served as Vice President of Nitzanim, a venture capital fund. Mr. Safrai received a B.A. in Management and Economics from Tel Aviv University, an M.A. from the University of Pennsylvania, and an M.B.A. from the Wharton Business School, University of Pennsylvania.

Yoseph Sela has served as a Director of CommTouch since February 1996. From January 1993 to the present, Mr. Sela has served as Executive Vice President of Gemini Capital Fund Management, a technology focused venture capital fund. Mr. Sela received a B.Sc. from the Technion, Haifa and an M.B.A. from Tel Aviv University.

Richard Sorkin will join the Board immediately following the closing of the offering. Since June 1998 Mr. Sorkin has served as an advisor to several early-stage Internet companies and is a director of several private companies. From June 1998 to April 1999 he was the Chairman of the Board of Directors of ZIP2, an Internet media company which was sold to Compaq. From May 1996 to June 1998, he was Chief Executive Officer of ZIP2 and from May 1993 to May 1996 he held various executive positions with Creative Technology, a leading provider of multi-media hardware. Mr. Sorkin received a B.A. with honors in Economics from Yale University and an MBA from Stanford University.

ELECTION OF DIRECTORS

Directors are elected by shareholders at the annual shareholders meeting and hold office until the next Ordinary General Meeting, which is held at least once in every calendar year, but not more than fifteen months after the last preceding Ordinary General meeting. Directors may be removed and other directors may be elected in their place or to fill vacancies in the Board of Directors at any time by the holders of a majority of the voting power at a general meeting of the shareholders. In the intervals between Ordinary General Meetings, the Board of Directors may appoint new directors temporarily to fill vacancies on the Board of Directors. The Articles of Association of CommTouch authorize nine directors. There are no family relationships among any of the directors, officers or key employees of CommTouch.

ALTERNATE DIRECTORS

The Articles of Association of CommTouch provide that any director may appoint another person to serve as an alternate director and may remove such alternate. Any alternate director possesses all the rights and obligations of the director who appointed him, except that the alternate has no standing at any meeting while the appointing director is present, and the alternate is not entitled to remuneration. Any individual, whether or not a director, may act as an alternate director, and the same person may act as the alternate for several directors and have a corresponding number of votes. Unless the appointing director limits the time or scope of the appointment, the appointment is effective for all purposes until the appointing director ceases to be a director or terminates the appointment. The appointment of an alternate director does not in itself diminish the responsibility of the appointing director as a director.

INDEPENDENT DIRECTORS; AUDIT FUNCTION

Under the requirements for quotation on Nasdaq, CommTouch is required to have at least two independent directors on its Board and to establish an audit committee, at least a majority of whose members are independent of management. Messrs. Barkat and Sela, as independent directors, serve as the members of CommTouch's Audit Committee.

Under Israeli law, "public" Israeli companies are required to appoint at least two directors resident in Israel who meet stringent standards of independence. CommTouch believes that this requirement does not currently apply to companies that are publicly traded only outside of Israel. Nevertheless, CommTouch may be required to appoint such independent directors. Moreover, the new Israeli Companies Law, which will become effective on February 1, 2000, unequivocally extends the independent director requirement to Israeli companies that are publicly traded outside of Israel, such as on Nasdaq.

The new Israeli Companies Law also provides that public companies must appoint an audit committee of the Board of Directors, a certified public accountant to audit the company's financial statements and to

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report any improprieties that the accountant may discover to the Chairman of the Board, and an internal auditor.

OFFICE HOLDERS

Israeli law codifies the duty of care and fiduciary duties that an Office Holder (generally, a director or executive officer) owes to a company. An Office Holder's fiduciary duty includes avoiding any conflict of interest between the Office Holder's position in CommTouch and his personal affairs, avoiding any competition with CommTouch, avoiding exploiting any business opportunity of CommTouch in order to receive personal advantage for himself or others and revealing to CommTouch any information or documents relating to CommTouch's affairs which the Office Holder has received due to his position as an Office Holder.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee, which was established by the Board in January 1996, is responsible for determining salaries, incentives and other forms of compensation for our directors, officers and other employees and for administering various incentive compensation and benefit plans. The Compensation Committee consists of the Chief Executive Officer and two outside directors. Allan Barkat and Yoseph Sela are currently the two outside directors on our Compensation Committee.

COMPENSATION OF OFFICERS AND DIRECTORS

The directors of CommTouch can be remunerated by CommTouch for their services as directors to the extent such remuneration is approved by the CommTouch's shareholders at an annual general meeting. Directors currently do not receive compensation for their services as directors but are reimbursed for their expenses for each Board of Directors meeting attended.

The aggregate direct remuneration paid by CommTouch to all directors and executive officers (11 persons) in 1998 was approximately $500,000. During the same period CommTouch accrued or set aside approximately $66,000 for the same group to provide pension, retirement or similar benefits. As of March 31, 1999, directors and executive officers of CommTouch (15 persons) held stock options to purchase an aggregate of 469,520 ordinary shares.

U.S. STOCK OPTION PLAN

Our 1996 CSI Stock Option Plan, which is the plan for U.S. employees and consultants, is administered by our Compensation Committee. Our Compensation Committee consists of at least two directors who are non-employee directors, as that term is defined in Rule 16b-3. The Board of Directors may amend the option plan as desired without further action by CommTouch's shareholders, except as required by applicable law. The plan will continue in effect until terminated by the Board or until January, 2006.

The consideration for each award under the plan is established by the Compensation Committee, and in no event shall the exercise price for ISOs be less than 100% of the fair market value of the underlying stock on the date of grant. Awards have such terms and are exercisable in such manner and at such times as the Compensation Committee may determine. Typically, an option granted under the plan vests with respect to one-fourth of the shares subject to the option on the first anniversary of the grant date and with respect to 1/36 of the remaining shares vest each month thereafter. However, the Compensation Committee may, in its discretion, permit an optionee to exercise unvested options, provided that such shares are subjected to a right of repurchase in favor of CommTouch Software, Inc. according to the original vesting schedule. Each ISO expires not more than 10 years from the date of grant.

The 1996 CSI Stock Option Plan had originally reserved 1,000,000 shares for issuance under the plan. In April of 1999, the Board of Directors amended the Plan to provide for a pool of 5,000,000 shares which may be issued under the 1996 CSI Stock Option Plan, the 1999 Israeli Share Option Plan, and the Israeli Option Agreements issued to Israeli employees.

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ISRAELI OPTION AGREEMENTS AND 1999 ISRAELI SHARE OPTION PLAN

To date we have granted options to Israeli employees and consultants pursuant to individual option agreements (the "Israeli Option Agreements") rather than pursuant to a stock option plan. Typically, options granted pursuant to the Israeli Option Agreements vest in four equal annual installments and expire no later than ten years from the date of grant. Substantially all of the Israeli Option Agreements provide that only the grantee can exercise options under the Israeli Option Agreements, and the grantee cannot assign or transfer the options. Moreover, if a grantee ceases to be employed by CommTouch on a full time basis, then the grantee will have a limited period from the cessation of employment in which to exercise any vested options. Grantees are responsible for paying all taxes and mandatory payments upon the exercise of options.

In connection with this offering, the Board of Directors has approved the 1999
Section 3(i) Share Option Plan (the "1999 Israeli Share Option Plan"). The 1999 Israeli Share Option Plan will be administered by the Board of Directors, or by a Share Option Committee appointed by the Board of Directors (currently the Compensation Committee). The Board or the committee has full power to designate the persons entitled to receive options and the terms and provisions of the option agreements (including the number and price of shares subject to each grant and the acceleration of the right of an optionee to exercise in whole or in part any previously granted option). Typically, an option granted under the plan vests with respect to one-fourth of the shares subject to the option on the first anniversary of the grant date and with respect to one-36th of the remaining shares each month thereafter. Options are exercisable only during the lifetime of the optionee, and are not transferable other than by will or laws of descent.

As of March 31, 1999, 694,860 stock options had been granted under Israeli Option Agreements and the 1996 CSI Stock Option Plan. Such options have exercise prices ranging from $0.01 to $1.45 per share and a weighted average per share exercise price of $1.25, and were held by 59 persons.

Certain of the option agreements for options granted to employees (pursuant to the Israeli Option Agreements) and to key employees (pursuant to the 1996 CSI Stock Option Plan) provide for acceleration of vesting in a change of control. Pursuant to these agreements, 50 percent of such an employee's unvested options will vest at the closing of the change of control. In such event, the remainder of the unvested options, if granted pursuant to an Israeli Option Agreement, shall be subject to the vesting provisions set forth in the Israeli Option Agreement, and if granted pursuant to the 1996 CSI Stock Option Plan, shall vest on the first anniversary of the change of control.

The total number of shares which can be issued under our 1999 Israeli Share Option Plan, 1996 CSI Stock Option Plan and the Israeli Option Agreements previously issued to Israeli employees is 5,000,000. Of that number, 694,860 shares are subject to be issued pursuant to outstanding Israeli Option Agreements and 662,680 shares have been issued upon the exercise of stock options. The remaining 3,642,460 shares will be allocated from time to time by the Board of Directors to the 1999 Israeli Share Option Plan and the 1996 CSI Stock Option Plan.

EMPLOYEE STOCK PURCHASE PLAN

Our 1999 Employee Stock Purchase Plan, or ESPP, which was adopted by our board of directors on April 18, 1999 and was approved by our shareholders on June 2, 1999, will take effect upon the closing of this offering. The ESPP provides employees with an opportunity to purchase ordinary shares of CommTouch through accumulated payroll deductions. We have reserved 150,000 ordinary shares for issuance under the ESPP, none of which have been issued. The number of ordinary shares reserved shall be increased each January 1 by 110 percent of the number of shares purchased under the ESPP in the previous year. The ESPP is intended to qualify for favorable tax treatment under Section 423 of the Internal Revenue Code. Generally, the ESPP will be implemented through a series of offering periods of 24 months' duration, with new offering periods commencing on the first trading day on or after February 15 and August 15 of each year. However, the first offering period will commence on the first business day on which price quotations for CommTouch's ordinary shares are available on the Nasdaq National Market and will expire on August 14, 2001. Each 24-month Offering Period will contain four six-

52

month Purchase Periods, starting on each February 15 and August 15. However, the first Purchase Period will commence on the first trading day after the closing of the offering and will end on February 14, 2000. Shares may be purchased at the end of each purchase period.

The ESPP will be administered by a plan administrator appointed by our Board of Directors. Each employee of ours or of any majority-owned subsidiary of ours who is customarily employed by us or a majority-owned subsidiary for more than 20 hours per week and more than five months per calendar year will be eligible to participate in the ESPP. No employee shall be permitted to participate in the ESPP:

- if such employee, immediately after his or her election to participate, would own shares possessing five percent or more of the total combined voting power or value of all classes of stock of the Company; or

- if under the terms of the ESPP the right of the employee to purchase shares would accrue at a rate that exceeds $25,000 of the fair market value of such shares for each calendar year for which such right is outstanding.

The ESPP permits an eligible employee to purchase ordinary shares through payroll deductions, which may not exceed 15 percent of his or her base compensation, excluding incentive compensation, commissions and other bonuses. The shares are purchased at a price equal to 85 percent of the lesser of:

- the fair market value of the ordinary shares at the beginning of the offering period (provided, however, in the case of the first offering period, this number shall be the price per share at which the ordinary shares are offered to the public in this offering); or

- the fair market value of the ordinary shares at the end of each purchase period.

Employees may terminate their participation in the ESPP at any time during the offering period; they may change their level of participation in the ESPP only one time during the offering period. Participation in the ESPP terminates automatically on the participant's termination of employment with us.

In the event of a merger, consolidation, dissolution or liquidation of the Company, the ESPP shall terminate unless the plan of merger, consolidation or reorganization provides otherwise. The Board of Directors shall have the right to amend, modify or terminate the ESPP at any time, except in cases where shareholder approval is required by law.

1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN

Our 1999 Nonemployee Directors Stock Option Plan (Directors Plan), which was adopted by our board of directors on April 18, 1999 and was approved by our shareholders on June 2, 1999, will take effect upon the closing of this offering. Under the 1999 Nonemployee Directors Stock Option Plan, nonemployee members of the board of directors will be eligible for automatic option grants. The Directors Plan will continue in effect until terminated by the Board or until the tenth anniversary of its effective date.

A maximum of 250,000 ordinary shares has been authorized for issuance under the Directors Plan. No shares have yet been issued under the Directors Plan. The Board of Directors, or a committee consisting of at least two nonemployee directors, will make all administrative determinations under the Directors Plan.

Each individual who first joins the Board of Directors as a nonemployee director on or after the effective date of this offering will receive at that time an option grant for 10,000 ordinary shares. In addition, on the date of the first board meeting immediately following the annual shareholders meeting, commencing with the annual shareholders meeting held in 2000, the Company shall grant to each nonemployee director then in office (other than nonemployee directors who received their initial 10,000 share grant under the plan on or after the record date for such annual meeting) an option to purchase 10,000 ordinary shares. In 1999, the grant shall be made on the first business day on which price quotations for CommTouch's ordinary shares are available on the Nasdaq National Market, and the fair market value of the ordinary shares on that day shall be the price at which ordinary shares were offered to the public on that day. Each option granted under the Directors Plan shall become exercisable with respect to one fourth of the number of

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shares covered by such option three months after the date of grant and with respect to one third of the remaining shares subject to the option every three months thereafter. Each option will have an exercise price equal to the fair market value of the ordinary shares on the grant date of such option. Each option will have a maximum term of ten years, but will terminate earlier if the optionee ceases to be a member of the Board of Directors. In the event of such earlier termination, an optionee may exercise options held at the date of termination to the extent then exercisable, within three months after such date, but not thereafter; provided, however, the optionee has two years from the date of termination to exercise vested options if such termination is due to death or disability. Each option will vest automatically upon a change in control.

401(K) PLAN

In May 1999, the Company adopted the CommTouch Software, Inc. 401(k) Savings Plan (the "401(k) Plan"), which is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. All employees of CommTouch Software, Inc. are eligible to participate in the 401(k) Plan at any time after their date of hire. Participants may make pre-tax contributions to the 401(k) Plan of up to 20% of their gross wages, subject to a statutory prescribed annual limit. Each participant is fully vested in his or her contributions. The Company may make matching contributions on a discretionary basis to fund the 401(k) Plan. Any employer contributions would be vested under a 6-year graded schedule. Contributions by the Company, if any, are generally deductible by the Company when made. The Company has not made any contributions as of June 2, 1999. Contributions by the participants or the Company to the 401(k) Plan and the income earned on such contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives.

APPROVAL OF CERTAIN TRANSACTIONS

Israeli law requires that transactions between a company and its Office Holders (or that benefit its Office Holders) be approved as provided for in the company's articles of association. Approval by a majority of the disinterested members of the audit committee and of the board of directors is generally required, and in certain circumstances shareholder approval may also be required.

Israeli law requires that an Office Holder of a company first promptly disclose any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. Once the Office Holder complies with these disclosure requirements, the company may approve the transaction in accordance with the provisions of its articles of association. If the transaction is with a third party in which the Office Holder has a personal interest, the approval must confirm that the transaction is not adverse to the company's interest. Furthermore, if the transaction is an extraordinary transaction (that is, a transaction other than in the ordinary course of business, otherwise than on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities), then, in addition to any approval stipulated by the articles of association, it also must be approved by the company's audit committee and then by its board of directors. Under certain circumstances, shareholder approval is required. For example, shareholders must approve all compensation paid to directors in whatever capacity. An Office Holder with a personal interest in any matter may not be present at any audit committee or Board of Directors meeting where such matter is being approved, and may not vote. For information concerning the direct and indirect personal interests of certain Office Holders and principal shareholders of CommTouch in certain transactions with CommTouch, see "Certain Transactions."

The new Israeli Companies Law, which will become effective on February 1, 2000, extends the disclosure requirements applicable to an Office Holder to a shareholder that holds 25% or more of the voting rights in a public company, including an Israeli company that is publicly traded outside of Israel such as on Nasdaq. Certain transactions between a public company and a 25% shareholder, or transactions in which a 25% shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the Board of Directors and of the shareholders. Moreover, an extraordinary transaction with a 25% shareholder or the terms of compensation of a 25% shareholder must

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be approved by the audit committee, the Board of Directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting; the transaction can be approved by shareholders without this one third approval, if the total share holdings of those who vote against the transaction do not represent more than one percent of the voting rights in the company.

INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY

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 monetary liability in connection with his activities as an Office Holder.

The Articles of Association of CommTouch allow CommTouch to insure and indemnify Office Holders to the fullest extent permitted by law.

Certain members of our management team are officers of our subsidiary, CommTouch Software, Inc. a California corporation, or reside in California. The Articles of Incorporation of CommTouch Software, Inc. provide that the liability of the directors of the corporation CommTouch Software, Inc. for monetary damages shall be eliminated to the fullest extent permissible under California law and that 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 that 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 with indemnification if permitted by
Section 317, a corporation is obligated by Section 317 to indemnify such person against expenses actually and reasonably incurred by him in connection with the proceeding.

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CERTAIN TRANSACTIONS

ORDINARY SHARE FINANCINGS

Mr. Yiftah Atir, a director of CommTouch, is a Managing Director of Evergreen Canada Management Ltd., the general partner of Harbour Vest-Evergreen L.P. Pursuant to several Share Purchase Agreements we issued and sold ordinary shares to Evergreen Canada Israel Investments and Company Ltd., Yarok Ad Fund Investment Partnership L.P. and Gmul Investment Company Ltd (the "Evergreen Investors"). These shares were subsequently converted into Series A Convertible Preferred Shares and certain of these shares were transferred to HarbourVest-Evergreen L.P.

PREFERRED SHARE FINANCINGS

Series B Convertible Preferred Shares. Mr. Yoseph Sela, a director of CommTouch, is an Executive Vice President of Gemini Capital Fund Management, which manages Gemini Israel Fund L.P. ("GIF"), and Mr. Allan Barkat, also a director of CommTouch, is a Managing Director of Apax-Leumi Partners, which is the investment advisor to Israel Growth Fund L.P. ("IGF"). Pursuant to a Preferred Share Purchase Agreement entered into in January 1996, we issued and sold 51,085 Series B Convertible Preferred Shares and 13,873 warrants for Series B Convertible Preferred Shares to IGF, GIF, Dr. Ed Mlavsky, Mr. Yosef Sela, and certain of the Evergreen Investors for a total investment of approximately $2,250,000. The Evergreen Investors subsequently transferred their shares to HarbourVest Evergreen L.P.

Series C Convertible Preferred Shares. Mr. Yair Safrai, a director of CommTouch, is a Managing Partner of Concord Ventures, which manages the Concord Funds (as defined below). Pursuant to Preferred Share Letter Agreements entered into in December 1998 and February 1999, we issued and sold (i) 41,570 Series C Convertible Preferred Shares to k.t. Concord Venture Fund (Cayman) L.P., k.t. Concord Venture Fund (Israel) L.P., k.t. Concord Venture Advisors (Cayman) L.P. and k.t. Concord Venture Advisors (Israel) L.P., (the "Concord Funds") for a total investment of approximately $3,000,000; (ii) 16,249 Series C Convertible Preferred Shares to IGF for a total investment of approximately $1,173,000; and
(iii) 12,779 Series C Convertible Preferred Shares to GIF for approximately $922,000.

OPTION EXERCISES AND PURCHASES OF SHARES SUBJECT TO REPURCHASE BY CERTAIN OFFICERS

Gideon Mantel is the Chief Executive Officer and a Director of CommTouch. On March 17, 1999, Mr. Mantel exercised certain options granted to him by CommTouch. In consideration for the Ordinary Shares purchased pursuant to the exercise of the options, he provided CommTouch with a full-recourse promissory note dated March 17, 1999 in the original principal amount of $341,272. The promissory note bears interest at 4.83%, with payments of interest only due on December 31 of each year and with the balance due and payable on the fourth anniversary of the date of the promissory note. This loan was used by Mr. Mantel to purchase 286,120 ordinary shares of CommTouch at a weighted average purchase price of $1.19 per share. The promissory note is secured by a pledge of the stock purchased.

Isabel Maxwell is the President of CommTouch Software, Inc. On March 17, 1999, Ms. Maxwell exercised certain options granted to her by CommTouch. As consideration for the Ordinary Shares purchased pursuant to the exercise of the options, she provided CommTouch with a full-recourse promissory note dated March 17, 1999 in the original principal amount of $295,858. The promissory note bears interest at 4.83%, with payments of interest only due on December 31 of each year and with the balance due and payable on the fourth anniversary of the date of the promissory note. This loan was used by Ms. Maxwell to purchase 204,040 Ordinary Shares of CommTouch at a purchase price of $1.45 per share. The promissory note is secured by a pledge of the stock purchased.

James Collins is the Chief Financial Officer of CommTouch. On March 17, 1999, Mr. Collins exercised certain options granted to him by CommTouch. As consideration for the Ordinary Shares purchased pursuant to the exercise of the options, Mr. Collins provided CommTouch with a full-recourse promissory note dated March 17, 1999 in the original principal amount of $137,112. The promissory note bears interest at 4.83% with payments of interest only due on December 31 of each year and with the balance

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due and payable on the fourth anniversary of the date of the promissory note. This loan was used by Mr. Collins to purchase 94,560 ordinary shares of CommTouch at a purchase price of $1.45 per share. The promissory note is secured by a pledge of the stock purchased.

Robert "Rip" Gerber is the Vice President of Marketing of CommTouch Software, Inc. On March 17, 1999, Mr. Gerber exercised certain options granted to him by CommTouch. As consideration for the Ordinary Shares purchased pursuant to the exercise of the options, Mr. Gerber provided CommTouch with a promissory note dated March 17, 1999 in the original principal amount of $103,617. The full-recourse promissory note bears interest at 4.83% with payments of interest only due on December 31 of each year and with the balance due and payable on the fourth anniversary of the date of the promissory note. This loan was used by Mr. Gerber to purchase 71,460 ordinary shares of CommTouch at a purchase price of $1.45 per share. The promissory note is secured by a pledge of the stock purchased.

LOAN TO DR. NAHUM SHARFMAN AND RELATIONSHIP AMONG COMMTOUCH AND DEALTIME.COM LTD., DR. NAHUM SHARFMAN AND AMIR ASHKENAZI

Dr. Nahum Sharfman was a co-founder of CommTouch and served as a director and Chairman of the Board of Directors of CommTouch from inception until January 1999. Dr. Sharfman also served as the Chief Executive Officer of CommTouch until March 31, 1998. On December 31, 1995, CommTouch made a loan of approximately $58,000 to Dr. Sharfman. The loan plus linkage to the Israeli Consumer Price Index was to have been repaid within three years, or within 30 days of the termination of Dr. Sharfman's employment, if earlier. At December 31, 1998 the outstanding balance of this loan was approximately $55,000, payable in NIS.

In 1997 Dr. Sharfman established DealTime.com Ltd. (formerly known as Papricom), together with Mr. Amir Ashkenazi, a former employee of CommTouch.

During an interim period in which CommTouch and DealTime.com Ltd. were negotiating a technology exchange agreement, which ultimately was not signed, CommTouch provided DealTime.com Ltd. with certain services (office and secretarial services, computers and other facilities including, without limitation, all payments made for or on behalf of DealTime.com Ltd.) and access to certain of CommTouch's technology. At the request of DealTime.com Ltd., CommTouch also entered into a Product Distribution Agreement (the "Stock Alert Agreement") with News Alert Inc. DealTime.com has provided technical support and services to News Alert Inc. in connection with the Stock Alert Agreement. CommTouch has entered into three agreements to clarify the rights and obligations of CommTouch, DealTime.com, Dr. Sharfman and Mr. Amir Ashkenazi.

Under the first agreement, Dr. Sharfman and Mr. Ashkenazi acknowledge that CommTouch is the sole owner of all of their inventions invented during their employment with CommTouch and for two years following the termination of their employment, which inventions relate to CommTouch's business and research activities as of April 1, 1998 (except in the field of commerce). They also acknowledge CommTouch's rights to inventions that result from work that they performed for CommTouch at any time, or which are the subject matter of a specified patent application. Dr. Sharfman and Mr. Ashkenazi also agreed not to compete with CommTouch's actual business and research activities as they were on April 1, 1998 (except in the field of ecommerce), through March 31, 2000.

The second agreement, which is between CommTouch and DealTime.com Ltd., confirms that DealTime.com Ltd. shall be solely responsible for all obligations of CommTouch under the Stock Alert Agreement. DealTime.com Ltd. also acknowledges that CommTouch is the sole owner of the Multimedia Desktop Software Technology that CommTouch developed and that was licensed to News Alert Inc., and CommTouch grants DealTime.com Ltd. a royalty-free, non-exclusive, limited license to use that technology to provide support services under the Stock Alert Agreement. DealTime.com Ltd. also agreed to pay $50,000 to CommTouch for all of the services rendered by CommTouch and for the license fees that DealTime.com Ltd. received under the Stock Alert Agreement, and to divide any future revenues and license fees received under the Stock Alert Agreement equally with CommTouch. CommTouch, for its part, waived any claim to an equity interest in DealTime.com Ltd., and agreed that it does not own

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intellectual property developed by DealTime.com Ltd. other than in breach of the agreements with DealTime.com Ltd. and Messrs. Sharfman and Ashkenazi.

Finally, CommTouch and Dr. Sharfman entered into a Termination of Employment Agreement requiring the repayment by Dr. Sharfman of CommTouch's loan to him by December 31, 1999 and the release to Dr. Sharfman of funded and unfunded severance pay within 20 days of the date of approval of the Termination of Employment Agreement by our shareholders and containing a waiver by Dr. Sharfman of any rights under stock options that were granted to him.

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PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial ownership of ordinary shares as of March 31, 1999, on a pro forma basis to reflect (1) the conversion into ordinary shares of the Series D Convertible Preferred Shares issuable upon conversion of Convertible Promissory Notes issued in April 1999 and (2) the automatic conversion upon completion of this offering of all outstanding preferred shares into ordinary shares by:

- each person or entity known to CommTouch to own beneficially more than five percent of CommTouch's ordinary shares,

- each of our directors and officers known to CommTouch to own beneficially more than one percent of CommTouch's ordinary shares, and

- all executive officers and directors as a group.

                                                                                     PERCENTAGE OF
                                                                                   ORDINARY SHARES(1)
                                                                                  --------------------
                                                             TOTAL SHARES          BEFORE      AFTER
         NAME AND ADDRESS OF BENEFICIAL OWNER            BENEFICIALLY OWNED(1)    OFFERING    OFFERING
         ------------------------------------            ---------------------    --------    --------
Yiftah Atir............................................        1,429,040            15.4%       11.7%
  HarbourVest-Evergreen L.P.(2)
  55 St. Claire Avenue West, Suite 225
  Toronto, Ontario M4V 247
Allan Barkat...........................................        1,211,260            13.1%        9.9%
  Israel Growth Fund L.P.(3)
  c/o Apax-Leumi Inc.
  15 Portland Place
  London, England
Yoseph Sela............................................          838,780             9.0%        6.8%
  Entities affiliated with Gemini Israel Fund L.P.(4)
  11 Galgaley Haplada St. Bldg. 3
  P.O. Box 12226, Herzelia
  46733 Israel
Yair Safrai............................................          831,400             9.0%        6.8%
  Entities affiliated with Concord Group(5)
  11 Galgaley Haplada St. Bldg. 3
  P.O. Box 12226, Herzelia
  46733 Israel
Nahum Sharfman.........................................          788,420             8.5%        6.4%
  22 Hameyasdim St., Karkur
  37064 Israel
Gideon Mantel(6).......................................          501,140             5.4%        4.1%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
Amir Lev(7)............................................          407,120             4.3%        3.3%
  c/o CommTouch Software Ltd.
  10 Technology Avenue
  Ein Vered 40696, Israel
Isabel Maxwell(8)......................................          204,040             2.2%        1.7%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
James Collins(9).......................................           94,560             1.0%        0.8%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
All directors and executive officers as a group (15            5,571,960            58.6%       44.5%
  persons).............................................

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(1) Assumes no exercise of the underwriters' over-allotment option. Applicable percentage ownership is based on 9,258,120 ordinary shares outstanding as of March 31, 1999 and 12,258,120 shares outstanding immediately following completion of this offering. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. Includes shares subject to options exercisable within 60 days after March 31, 1999 as if such shares were outstanding on March 31, 1999 and assumes that no other person has exercised any outstanding options. Except as pursuant to applicable community property laws, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name.

(2) Represents 1,429,040 ordinary shares owned by HarbourVest-Evergreen L.P. Mr. Atir, a director of the Company, is the Managing Director of Evergreen Canada Management Ltd., the general partner of HarbourVest-Evergreen L.P. and, as such, may be deemed to beneficially own such ordinary shares. Mr. Atir disclaims beneficial ownership of all such ordinary shares except to the extent of his proportional interest therein.

(3) Represents 1,211,260 ordinary shares owned by Israel Growth Fund, L.P., which is advised by Apax-Leumi Partners, its investment advisor. Mr. Barkat, a director of the Company, is the Managing Director of Apax-Leumi Partners and, as such, may be deemed to beneficially own such ordinary shares. Mr. Barkat disclaims beneficial ownership of all such ordinary shares except to the extent of his proportional interest therein.

(4) Represents 660,420 ordinary shares owned by Gemini Israel Fund L.P. ("GIF"), 166,280 ordinary shares owned by Gemini Israel II Parallel Fund L.P. ("GIPF"), 6,040 ordinary shares owned by Yoseph Sela and 6,040 ordinary shares owned by Dr. Ed Mlavsky, the President of Gemini Capital Fund Management, which manages GIF and GIPF. Mr. Sela, a director of the Company, is the Executive Vice President of Gemini Capital Fund Management, and, as such, may be deemed to beneficially own such ordinary shares. Mr. Sela disclaims beneficial ownership of all of Dr. Mlavsky's ordinary shares and of all of the ordinary shares owned by GIF and GIPF except to the extent of his proportional interests therein.

(5) Includes 687,280 ordinary shares owned by k.t. Concord Venture Fund (Cayman), L.P. ("CVF"), 137,400 ordinary shares owned by k.t. Concord Venture Fund (Israel), L.P. ("CVF Israel"), 5,620 ordinary shares owned by
k.t. Concord Venture Advisors (Cayman), L.P. ("CVA"), and 1,100 ordinary shares owned by k.t. Concord Venture Advisors (Israel), L.P. ("CVA Israel"). Mr. Safrai, a director of the Company, is the Managing Partner of Concord Ventures, which manages CVF, CVF Israel, CVA and CVA Israel, and, as such, may be deemed to beneficially own such ordinary shares. Mr. Safrai disclaims beneficial ownership of all such ordinary shares except to the extent of his proportional interest therein.

(6) Certain of such shares are subject to a right of repurchase in favor of CommTouch Software, Inc. Does not include 80,000 ordinary shares subject to an option granted to Mr. Mantel under the 1996 CSI Stock Option Plan on April 23, 1999, with an exercise price of $15.75 per share. The option will vest with respect to one-fourth of the shares on April 23, 2000, and with respect to 1/36 of the remaining shares each month thereafter.

(7) Does not include 50,000 ordinary shares subject to an option granted to Mr. Lev under an Israeli Option Agreement on April 23, 1999, with an exercise price of $15.75 per share. The option will vest with respect to one-fourth of the shares on April 23, 2000, and with respect to 1/36 of the remaining shares each month thereafter.

(8) Certain of such shares are subject to a right of repurchase in favor of CommTouch Software, Inc. Does not include 5,000 ordinary shares subject to an option granted to Ms. Maxwell under the 1996 CSI Stock Option Plan on April 23, 1999, with an exercise price of $15.75 per share. The option will vest with respect to one-fourth of the shares on April 23, 2000, and with respect to 1/36 of the remaining shares each month thereafter.

(9) Certain of such shares are subject to a right of repurchase in favor of CommTouch Software, Inc. Does not include 10,000 ordinary shares subject to an option granted to Mr. Collins under the 1996 CSI Stock Option Plan on April 23, 1999, with an exercise price of $15.75 per share. The option will vest with respect to one-fourth of the shares on April 23, 2000, and with respect to 1/36 of the remaining shares each month thereafter.

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DESCRIPTION OF SHARE CAPITAL

DESCRIPTION OF SHARES

Set forth below is a summary of the material provisions governing our share capital. This summary is not complete and should be read together with our Memorandum of Association and Articles of Association, copies of which have been filed as exhibits to the Registration Statement of which this prospectus forms a part.

As of March 31, 1999, our authorized share capital consisted of 10,683,600 ordinary shares, NIS 0.05 par value and 200,000 Series A Convertible Preferred Shares, 200,000 Series B Convertible Preferred Shares and 165,820 Series C Convertible Preferred Shares, (collectively, the Convertible Preferred Shares), NIS 1.0 par value. As of March 31, 1999, there were 2,148,320 ordinary shares, 97,878 Series A Convertible Preferred Shares, (convertible into 1,957,560 ordinary shares) 62,438 Series B Convertible Preferred Shares (convertible into 1,248,760 ordinary shares) and 153,093 Series C Convertible Preferred Shares (convertible into 3,061,860 ordinary shares) issued and outstanding. In April 1999 we issued $13.2 million worth of Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals. Each preferred share will convert automatically into twenty ordinary shares upon the closing of the offering. In connection with this offering our shareholders have approved an increase in our authorized share capital, and the number of ordinary shares authorized has been increased to 20,000,000. At the closing of the offering, 12,258,120 ordinary shares will be issued and outstanding (12,708,120 ordinary shares if the Underwriters' over-allotment option is exercised in full). No preferred shares will be outstanding after the Offering.

DESCRIPTION OF ORDINARY SHARES

All issued and outstanding ordinary shares of CommTouch are, and the ordinary shares offered hereby when issued and paid for will be, duly authorized and validly issued, fully paid and nonassessable. The ordinary shares do not have preemptive rights. Neither the Memorandum of Association or Articles of Association of CommTouch nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents of Israel, except with respect to subjects of countries which are in a state of war with Israel.

DIVIDEND AND LIQUIDATION RIGHTS

The ordinary shares offered by this prospectus, when issued, will be entitled to their full proportionate of any cash or share dividend declared from the date of the consummation of the offering.

Subject to the rights of the holders of shares with preferential or other special rights that may be authorized, the holders of ordinary shares are entitled to receive dividends in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective holdings of the shares in respect of which the dividend is being paid (without taking into account the premium paid up on the shares) out of assets legally available therefor and, in the event of our winding up, to share ratably in all assets remaining after payment of liabilities in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made, subject to applicable law. Our Board of Directors may declare interim dividends and recommend a final annual dividend only out of profits and in such amounts as the Board of Directors may determine. Declaration of the final annual dividend requires shareholder approval at a general meeting, which may reduce but not increase such dividend from the amount recommended by the Board of Directors. See "Dividend Policy."

In case of a stock dividend, holders of shares can receive shares of a class whether such class existed prior thereto or was created therefor or shares of the same class that conferred upon the holders the right to receive such dividend.

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VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS

Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such rights may be affected by the future grant of any special voting rights to the holders of a class of shares with preferential rights. As of the closing of this offering, all of the outstanding preferred shares will convert into ordinary shares, and there will be no authorized but unissued shares with preferential rights over the ordinary shares. Any change in the registered capital of CommTouch, including the creation of a new class of shares with rights superior or inferior to existing classes of shares may be adopted by a "special resolution" (the resolution of the holders of 75 percent or more of the shares participating in a general meeting). Once the creation of a class of shares with preference rights has been approved, the Board of Directors may issue preferred shares, unless the Board is limited from doing so by the Articles of Association or a contractual provision.

An annual general meeting must be held once every calendar year at such time (not more than 15 months after the last preceding annual general meeting) and at such place, either within or outside the State of Israel, as may be determined by the Board of Directors. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy and holding, or representing, more than one-third of the voting rights of the issued share capital. A meeting adjourned for lack of a quorum may be adjourned to the same day in the next week at the same time and place, or to such time and place as the Chairman may determine with the consent of the holders of a majority of the shares present in person or by proxy and voting on the question of adjournment. At such reconvened meeting any two shareholders present in person or by proxy (and not in default under the articles) will constitute a quorum.

Most shareholder resolutions, including resolutions for the election of directors, the declaration of dividends, the appointment of auditors or the approval of transactions with Office Holders as required by the Companies Ordinance (See "Management -- Approval of Certain Transactions"), will be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting, in person or by proxy, and voting thereon. Certain corporate actions such as:

- amending the Articles of Association;

- amending the Memorandum of Association;

- changing our name;

- making changes in the capital structure of CommTouch, such as a reduction of capital, increase of capital or share split;

- merger or consolidation;

- voluntary winding up; and

- authorizing a new class of shares or changing special rights of a class of shares

must be approved by a "special resolution" and will be deemed adopted only if approved by the holders of not less than 75 percent of the voting power represented in person or by proxy at the meeting and voting thereon, and in some cases 75 percent of the voting power of the affected class of shares.

Upon completion of this offering, our executive officers, directors and five percent or greater shareholders will own beneficially an aggregate of approximately 44.5 percent of the Company's outstanding ordinary shares (approximately 43.8 percent if the underwriters' over-allotment option is exercised in full). See "Principal Shareholders."

TRANSFER OF SHARES AND NOTICES

Fully paid ordinary shares are issued in registered form and may be transferred freely. Each shareholder of record is entitled to receive at least seven days' prior notice of shareholder meetings. A special resolution can be adopted only if shareholders are given 21 days' prior notice of the meeting at which such resolution

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will be voted on (unless all shareholders entitled to vote agree that the meeting may be held on a shorter notice period). For purposes of determining the shareholders entitled to notice and to vote at such meeting, the Board of Directors may fix the record date not exceeding less than 24 days prior to the date of any general meeting.

MODIFICATION OF CLASS RIGHTS

If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by our Articles of Association) may be modified or abrogated by CommTouch by a special resolution subject to the consent in writing of the holders of the issued shares of the class, or by the adoption of a special resolution passed at a separate general meeting of the holders of the shares of such class.

DESCRIPTION OF WARRANTS

As of March 31, 1999, CommTouch has outstanding warrants to purchase 13,873 Series B Convertible Preferred Shares held by investors at a weighted average exercise price of $44.04, which warrants expire at the closing of an initial public offering. We also have outstanding warrants to purchase 568 Series B Convertible Preferred Shares issued to Imperial Bank and Imperial Bancorp and warrants to purchase a total of 350 Series B Convertible Preferred Shares issued to various consultants, which warrants expire on various dates in 2002. We also have outstanding warrants to issue 346 Series C Convertible Preferred Shares issued to Imperial Bank and Imperial Bancorp, and warrants to purchase a total of 543 Series C Convertible Preferred Shares issued to various consultants, of which 300 warrants expire on December 2002 and 243 warrants expire on July 2005. We granted Bank Lepituach Ha Taasia warrants, exercisable for three years at the nominal price of NIS 0.05 for each share, with the number of warrants linked to the amount of the credit made available by the bank under this warrant. As of March 31, 1999, Bank Lepituach Ha Taasia had warrants to purchase 96,340 ordinary shares. In April 1999 CommTouch paid in full the outstanding balance under its line of credit with Bank Lepituach Ha Taasia and does not intend to draw on this line of credit in the future.

REGISTRATION RIGHTS

The holders of convertible preferred shares convertible into 7,109,800 ordinary shares (the "Registrable Securities") have certain rights to register those shares under the Securities Act. If requested by holders of a majority of the Registrable Securities after the second anniversary of the date of this offering, CommTouch must file a registration statement under the Securities Act covering all Registrable Securities requested to be included by all holders of such Registrable Securities. CommTouch may be required to effect up to two such registrations. CommTouch has the right to delay any such registration for up to 120 days under certain circumstances, but not more than once during any 12-month period.

In addition, if CommTouch proposes to register any of its ordinary shares under the Securities Act other than in connection with a company employee benefit plan or a corporate reorganization pursuant to Rule 145 under the Securities Act, or a registration on any registration form that does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the holders of Registrable Securities may require CommTouch to include all or a portion of their shares in such registration, although the managing underwriter of any such offering has certain rights to limit the number of shares in such registration.

Further, a majority of the holders of Registrable Securities may require CommTouch to register all or any portion of their Registrable Securities on Form F-3 when such form becomes available to CommTouch, subject to certain conditions and limitations. All expenses incurred in connection with all registrations (other than fees, expenses and disbursements of counsel retained by the holders of the Registrable Shares, and underwriters' and brokers' discounts and commissions) will be borne by CommTouch.

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The registration rights described in the preceding three paragraphs expire five years after the closing date of this Offering.

All of the holders of Registrable Securities have agreed that they will not exercise any right with respect to any registration for a period of 180 days after the date of this prospectus, without the prior written consent of US Bancorp Piper Jaffray.

ACCESS TO INFORMATION

We file reports with the Israeli Registrar of Companies regarding our registered address, our registered capital, our shareholders of record and the number of shares held by each, the identity of the directors and details regarding security interests on our assets. In addition, CommTouch must file with the Registrar of Companies its Articles of Association and a copy of any special resolution adopted by a general meeting of shareholders. The information filed with the Registrar of Companies is available to the public. In addition to the information available to the public, our shareholders are entitled, upon request, to review and receive copies of all minutes of meetings of our shareholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our ordinary shares is Norwest Bank Minnesota, N.A.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, CommTouch will have outstanding 12,258,120 ordinary shares based upon shares outstanding at April 22, 1999, assuming no exercise of the underwriters' over-allotment option and assuming conversion of the convertible preferred shares into 7,109,800 ordinary shares upon the closing of this offering. Excluding the 3,000,000 ordinary shares offered hereby and assuming no exercise of the underwriters' over-allotment option, as of the effective date of the registration statement, there will be 9,258,120 ordinary shares outstanding, all of which are "restricted" shares under the Securities Act. All restricted shares are subject to lock-up agreements with the underwriters pursuant to which the holders of the restricted shares have agreed not to sell, pledge or otherwise dispose of such shares for a period of 180 days after the date of this prospectus. U.S. Bancorp Piper Jaffray may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, U.S. Bancorp Piper Jaffray has no current plans to do so.

The following table indicates approximately when the 9,258,120 ordinary shares of CommTouch that are not being sold in the offering but which will be outstanding at the time the offering is complete will be eligible for sale into the public market:

ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET

At effective Date...............................             0
180 days after Effective Date...................     7,825,360
After 180 days post-effective date..............     2,530,440
                                                     ---------

Most of the restricted shares that will become available for sale in the public market beginning 180 days after the effective date will be subject to certain volume and other resale restrictions pursuant to Rule 144 because the holders are affiliates of CommTouch. The general provisions of Rule 144 are described below.

In general, under Rule 144, an affiliate of CommTouch, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of

- 1% of the then outstanding ordinary shares (approximately 122,581 shares immediately after this offering) or

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

Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about CommTouch. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of CommTouch any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. 1,728,040 of the restricted shares may be resold under Rule 144(k) beginning 180 days after the effective date of the offering.

The holders of convertible preferred shares convertible into 7,109,800 ordinary shares have certain rights to register those shares under the Securities Act, pursuant to registration rights agreements entered into between CommTouch and those holders.

In addition to the restriction imposed by the securities laws, 436,680 of the restricted shares were issued to certain officers and directors of CommTouch pursuant to restricted stock agreements. Pursuant to the provisions of these agreements, CommTouch Software, Inc. has a repurchase option on any unvested shares. CommTouch Software, Inc.'s repurchase option with respect to such shares lapses ratably over

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time. At the 180th day after the effective date, approximately 420,600 of those shares will remain subject to the repurchase option.

As of April 22, 1999, 5,000,000 shares were reserved for issuance under our stock option plans, of which options to purchase 694,860 shares were then outstanding. Beginning 180 days after the effective date, approximately 268,700 shares issuable upon the exercise of vested options will become eligible for sale.

In June 1999, our shareholders approved:

- an increase of 4,000,000 shares in the number of ordinary shares reserved under the stock option plans,

- a reserve of 250,000 shares for options under the Directors Plan and

- a reserve of 150,000 shares under the ESPP

We intend to file, within 180 days after the date of this prospectus, a Form S-8 registration statement under the Securities Act to register shares issued in connection with option exercises and shares reserved for issuance under all stock plans. Ordinary shares issued upon exercise of options after the effective date of the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and to lock-up agreements.

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U.S. TAX CONSIDERATIONS REGARDING ORDINARY SHARES
ACQUIRED BY U.S. TAXPAYERS

The following discussion summarizes the material U.S. federal income tax consequences arising from the purchase, ownership and sale of the ordinary shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. CommTouch will not seek a ruling from the Internal Revenue Service with regard to the United States federal income tax treatment relating to investment in the ordinary shares and, therefore, no assurance exists that the Internal Revenue Service will agree with the conclusions set forth below. The summary below does not purport to address all federal income tax consequences that may be relevant to particular investors. This summary does not address the consequences that may be applicable to particular classes of taxpayers, including investors that hold ordinary shares as part of a hedge, straddle or conversion transaction, insurance companies, banks or other financial institutions, broker-dealers, tax-exempt organizations and investors who own (directly, indirectly or through attribution) 10% or more of CommTouch's outstanding voting stock. Further, it does not address the alternative minimum tax consequences of an investment in ordinary shares or the indirect consequences to U.S. Holders, as defined below, of equity interests in investors in ordinary shares. This summary is addressed only to holders that hold ordinary shares as a capital asset within the meaning of Section 1221 of the Code, are U.S. citizens, individuals resident in the United States for purposes of U.S. federal income tax, domestic corporations or partnerships and estates or trusts treated as "United States persons" under
Section 7701 of the Code ("U.S. Holders").

EACH INVESTOR SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.

TAX BASIS OF ORDINARY SHARES

A U.S. Holder's tax basis in his or her ordinary shares will be the purchase price paid therefor by such U.S. Holder. The holding period of each ordinary share owned by a U.S. Holder will commence on the day following the date of the U.S. Holder's purchase of such ordinary share and will include the day on which the ordinary share is sold by such U.S. Holder.

SALE OR EXCHANGE OF ORDINARY SHARES

A U.S. Holder's sale or exchange of ordinary shares will result in the recognition of gain or loss by such U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's basis in the ordinary shares sold. Subject to the following discussion of the consequences of CommTouch being treated as a Passive Foreign Investment Company or a Foreign Investment Company, such gain or loss will be capital gain or loss if such ordinary shares are a capital asset in the hands of the U.S. Holder. Gain or loss realized on the sale of ordinary shares will be long-term capital gain or loss if the ordinary shares sold had been held for more than one year at the time of their sale. Long-term capital gains recognized by certain taxpayers generally are subject to a reduced rate of federal tax (currently a maximum of 20%). If the U.S. Holder's holding period on the date of the sale or exchange was one year or less, such gain or loss will be short-term capital gain or loss. Short-term capital gains generally are subject to tax at the same rates as ordinary income. In general, any capital gain recognized by a U.S. Holder upon the sale or exchange of ordinary shares will be treated as U.S.-source income for U.S. foreign tax credit purposes.

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See discussion under "Israeli Taxation and Investment Programs -- Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders" for a discussion of taxation by Israel of capital gains realized on sales of capital assets.

TREATMENT OF DIVIDEND DISTRIBUTIONS

For U.S. federal income tax purposes, gross dividends (including the amount of any Israeli taxes withheld therefrom) paid to a U.S. Holder with respect to his or her ordinary shares will be included in his or her ordinary income to the extent made out of current or accumulated earnings and profits of CommTouch, as determined based on U.S. tax principles, at the time the dividends are received and will be treated as foreign source dividend income for purposes of the foreign tax credit limitation described below. Such dividends will not be eligible for the dividends received deduction allowed to U.S. corporations under
Section 243 of the Code. Dividend distributions in excess of CommTouch's current and accumulated earnings and profits will be treated first as a non-taxable return of the U.S. Holder's tax basis in his or her ordinary shares to the extent thereof and then as a gain from the sale of ordinary shares. Dividends paid in NIS will be includible in income in a U.S. dollar amount based on the exchange rate at the time of their receipt, and any gain or loss resulting from currency fluctuations during the period from the date a dividend is paid to the date such payment is converted into U.S. dollars generally will be treated as ordinary income or loss.

Any Israeli withholding tax imposed on dividends paid to a U.S. Holder will be a foreign income tax eligible for credit against such U.S. Holder's U.S. federal income tax liability subject to certain limitations. Alternatively, a U.S. Holder may claim a deduction for such amount, but only for a year in which a U.S. Holder elects to do so with respect to all foreign income taxes. The overall limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends distributed by CommTouch with respect to ordinary shares will generally constitute "passive income". Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a general prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90% and an allowance of foreign tax credits for alternative minimum tax purposes only to the extent of foreign-source alternative minimum taxable income. See "Israeli Taxation and Investment Programs -- Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders."

INFORMATION REPORTING AND BACKUP WITHHOLDING

Any dividends paid on, or proceeds derived from a sale of, the ordinary shares to, or by, U.S. Holders may be subject to U.S. information reporting requirements and the 31% U.S. backup withholding tax unless the holder (i) is a corporation or other exempt recipient or (ii) provides a United States taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with any applicable withholding requirements. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder's U.S. federal income tax, provided the required information is furnished to the U.S. Internal Revenue Service.

TAX STATUS OF COMMTOUCH FOR U.S. FEDERAL INCOME TAX PURPOSES

Passive Foreign Investment Company. If CommTouch were deemed to be a passive foreign investment company (a "PFIC") for U.S. federal income tax purposes, any gain recognized by a U.S. Holder upon the sale of ordinary shares (or the receipt of certain distributions) generally would be treated as ordinary income, such income would be allocated over such U.S. Holder's holding period for such ordinary shares and an interest charge would be imposed on the amount of deferred tax on such income which is allocated to prior taxable years. Generally, CommTouch will be treated as a PFIC for any tax year if, in such tax

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year or any prior tax year, either (i) 75% or more of its gross income is passive in nature, or (ii) on average, 50% or more of its assets (by value or, if CommTouch elects or if CommTouch is treated as a "controlled foreign corporation" under the Code, by their adjusted basis for computing earnings and profits) produce or are held for the production of passive income. CommTouch does not believe it satisfies either of the tests for PFIC status for any tax year to date and, although CommTouch is acquiring substantial cash in connection with this Offering, it expects that the majority of its assets will continue to generate sufficient levels of income to avoid PFIC treatment for U.S. federal income tax purposes. However, since the determination whether CommTouch is a PFIC will be made annually based on facts and circumstances that, to some extent, may be beyond CommTouch's control, there can be no assurance that CommTouch will not become a PFIC at some time in the future. If CommTouch were determined to be a PFIC, however, a U.S. Holder could elect to treat his or her ordinary shares as an interest in a qualified electing fund (a "QEF Election"), in which case, the U.S. Holder would be required to include in income currently his or her proportionate share of CommTouch's earnings and profits in years in which CommTouch is a PFIC whether or not distributions of such earnings and profits are actually made to such U.S. Holder, but any gain subsequently recognized upon the sale by such U.S. Holder of his or her ordinary shares generally would be taxed as a capital gain. Alternatively, a U.S. Holder may elect to mark the ordinary shares to market annually, recognizing ordinary income or loss (subject to certain limitations) equal to the difference between the fair market value of its ordinary shares and the adjusted basis of such stock. See "U.S. Consequences Regarding ordinary shares Acquired by U.S. Taxpayers--Sale or Exchange of Ordinary Shares" above. U.S. Holders should consult with their own tax advisers regarding the eligibility, manner and advisability of making a QEF Election if CommTouch is treated as a PFIC.

Controlled Foreign Corporations. Sections 951 through 964 and Section 1248 of the Code relate to controlled foreign corporations ("CFC"). The CFC provisions may impute some portion of such a corporation's undistributed income to certain U.S. shareholders on a current basis and convert into dividend income some portion of gains on dispositions of stock which would otherwise qualify for capital gains treatment. In general, the CFC provisions will apply to CommTouch only if U.S. shareholders, who are U.S. Holders and who own, directly or indirectly, 10% or more of the total combined voting power of all classes of voting stock own in the aggregate (or are deemed to own after application of complex attribution rules) more than 50% (measured by voting power or value) of the outstanding stock of CommTouch. CommTouch does not believe that it will be a CFC after this Offering. It is possible that CommTouch could become a CFC in the future. Even if CommTouch were classified as a CFC in a future year, however, the CFC rules referred to above would apply only with respect to U.S. shareholders, who are U.S. Holders and who own, directly or indirectly, 10% or more of the total combined voting power of all classes of voting stock of CommTouch.

Personal Holding Company/Foreign Personal Holding Company/Foreign Investment Company. A corporation will be classified as a personal holding company, or a PHC, if (i) five or fewer individuals at any time during the last half of a tax year (without regard to their citizenship or residence) directly or indirectly or by attribution own more than 50% in value of the corporation's stock and (ii) at least 60% of its ordinary gross income for the taxable year, as specially adjusted, consists of personal holding company income (defined generally to include dividends, interest, royalties, rents and certain other types of passive income). A PHC is subject to a United States federal income tax of 39.6% on its undistributed personal holding company income (generally limited, in the case of a foreign corporation, to United States source income).

A corporation will be classified as a foreign personal holding company, or an FPHC and not a PHC if at any time during a tax year (i) five or fewer individual United States citizens or residents directly or indirectly or by attribution own more than 50% of the total combined voting power or value of the corporation's stock and (ii) at least 60% of its gross income consists of (50% for years following the first year it becomes a FPHC) FPHC income (defined generally to include dividends, interest, royalties, rents and certain other types of passive income). Each United States shareholder in an FPHC is required to include in gross income, as a dividend, an allocable share of the FPHC's undistributed foreign personal holding company income (generally the taxable income of the FPHC, as specially adjusted).

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A corporation will be classified as a foreign investment company, or an FIC if for any taxable year it (i) is registered under the Investment Company Act of 1940, as amended, as a management company or unit investment trust or is engaged primarily in the business of investing or trading in securities or commodities (or any interest therein) and (ii) 50% or more of the total value or the total combined voting power of all classes of the corporation's stock is owned directly or indirectly (including stock owned through the application of attribution rules) by United States persons. In general, unless an FIC elects to distribute 90% or more of its taxable income (determined under United States tax principles as specially adjusted) to its shareholders, any gain on the sale or exchange of stock in a foreign corporation, which was a FIC at any time during the period during which a taxpayer held such stock, is treated as ordinary income (rather than capital gain) to the extent of such shareholder's ratable share of the corporation's accumulated earnings and profits.

CommTouch believes that it is not and will not be a PFIC, PHC, FPHC or FIC after this Offering. However, no assurance can be given as to CommTouch's future status.

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ISRAELI TAXATION AND INVESTMENT PROGRAMS

The following discussion summarizes the material current tax laws of the State of Israel as they relate to CommTouch, its shareholders and ownership and disposition of its ordinary shares. This summary does not discuss all aspects of Israeli tax law that may be relevant to a particular investor in light of his personal investment circumstances or to certain types of investors subject to special treatment under Israeli law (for example, traders in securities or persons that own, directly or indirectly, 10% or more of CommTouch's outstanding voting shares). The following also includes a discussion of certain Israeli government programs benefiting various Israeli businesses such as CommTouch. To the extent that the discussion is based on new legislation yet to be subject to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion does not cover all possible tax consequences or situations, and investors should consult their tax advisors regarding the tax consequences unique to their situation.

GENERAL CORPORATE TAX STRUCTURE

CommTouch is subject to corporate tax in Israel. Commencing in the tax year 1993 through and including 1996, the regular rate of corporate tax to which Israeli companies are subject decreased each year, i.e. from 39% in 1993 down to 36% in 1996 and thereafter. However, the effective rate payable by a company which derives income from an Approved Enterprise (as further discussed below) may be considerably less. See "Law for the Encouragement of Capital Investments, 1959."

Our tax loss carryforwards were approximately $10.4 million as of December 31, 1998. The amount of our tax loss carryforwards will be reduced by any future income of CommTouch that would be fully tax exempt.

TAXATION UNDER INFLATIONARY CONDITIONS

The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for Inflation Law") attempts to overcome some of the problems experienced in a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the Adjustment for Inflation Law was enacted. Generally, the Adjustment for Inflation Law was designed to neutralize for Israeli tax purposes the erosion of capital investments in businesses and to prevent unintended tax benefits resulting from the deduction of inflationary financing expenses. The Adjustment for Inflation Law applies a supplementary set of inflationary adjustments to a normal taxable profit computed according to regular historical cost principles.

The Adjustment for Inflation Law introduced a special adjustment for the preservation of equity for the tax purpose based on changes in the Israeli CPI, whereby corporate assets are classified broadly into fixed (inflation resistant) assets and non-fixed assets. Where shareholders' equity, as defined in the Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a corporate tax deduction which takes into account the effect of inflationary change on such excess is allowed (up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on an inflation-linked basis with no ceiling). If the depreciated cost of fixed assets exceeds shareholders' equity, then such excess multiplied by the annual rate of inflation is added to taxable income.

In addition, subject to certain limitations, depreciation on fixed assets and loss carried forwards are adjusted for inflation based on changes in the Israeli CPI. The net effect of the Adjustment for Inflation Law on CommTouch might be that CommTouch's taxable income, as determined for Israeli corporate tax purposes, will be different from CommTouch's U.S. dollar income, as reflected in its financial statements, due to the difference between the annual changes in the CPI and in the NIS exchange rate with respect to the U.S. Dollar, causing changes in the actual tax rate.

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LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

CommTouch currently qualifies as an "Industrial Company" within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the "Industry Encouragement Law"). According to the Industry Encouragement Law, an "Industrial Company" is a company resident in Israel, at least 90% of the income of which in any tax year, determined in Israeli currency (exclusive of income from defense loans, capital gains, interest and dividends) is derived from an "Industrial Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as an enterprise whose major activity in a given tax year is industrial production activity.

Included among the tax benefits for an Industrial Company are deductions of 12.5% per annum of the purchase price of a patent or of know-how, an election under certain conditions to file a consolidated return and accelerated depreciation rates on equipment and buildings.

Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that CommTouch will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

The Law for the Encouragement of Capital Investments, 1959, as amended (the "Investment Law"), provides that a capital investment in production facilities (or other eligible facilities) may, upon application to the Israel Investment Center, be designated as an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific capital investment program delineated both by its financial scope, including its capital sources, and its physical characteristics, i.e. the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise.

CommTouch's investment plans have been granted the status of an Approved Enterprise under the Investment Law, in two separate investment programs. These programs provide CommTouch with certain tax benefits as described below; with regard to the first program, CommTouch also received long-term loans guaranteed by the State of Israel. Under the terms of CommTouch's Approved Enterprise programs, income earned by CommTouch from its Approved Enterprises will be tax exempt for a period of two years, commencing with the year in which it first earns taxable income, and subject to a reduced corporate tax rate of 10% to 25% for an additional period of five to eight years (provided that the total period of tax benefits will not extend past (i) 12 years from the year of commencement of production or (ii) 14 years from the year of approval of approved enterprise status). The reduced corporate tax rate, to which CommTouch's Approved Enterprise program will be subject is dependent on the level of foreign investment in CommTouch. In the event a company operates under more than one approval or only part of its capital investments are approved (a "Mixed Enterprise"), its effective corporate tax rate is the result of a weighted combination of the various applicable rates. Notwithstanding these tax benefits, to the extent CommTouch receives income from countries other than Israel, such income may be subject to withholding tax.

The implementation of the investments under the first plan was finalized by CommTouch in 1995. The implementation of the second plan is expected to be finalized in 1999.

If dividends are distributed out of tax-exempt profit from CommTouch's Approved Enterprises, CommTouch will be liable for corporate tax at the rate which would have been applied if it had not chosen the alternative tax benefits (currently 25% for an Approved Enterprise). Therefore, income derived from CommTouch's Approved Enterprises would be subject to tax if distributed to shareholders as a dividend. See Note 8 to the Consolidated Financial Statements.

The dividend recipient will be taxed at the reduced rate applicable to dividends from Approved Enterprises (currently 15%), if the dividend is distributed during the tax exemption period or within a specified period

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thereafter, or for an unlimited period in the case of a "Foreign Investors' Company" -- a company more than 25% foreign owned with an Approved Enterprise. This tax must be withheld by the company at source regardless of whether the dividend is converted into foreign currency. See "-- Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders." Subject to certain provisions concerning income eligible for exemption if retained, all dividends are considered to be attributable to the entire enterprise, and the effective tax rate is the result of a weighted combination of the various applicable tax rates.

The Investment Law also provides that a company with an Approved Enterprise is entitled to accelerated depreciation on its property and equipment included in an approved investment program.

Future applications to the Investment Center will be reviewed separately, and decisions as to whether or not to approve such applications will be based, among other things, on the then prevailing criteria set forth in the Investment Law, on the specific objectives of the applicant company set forth in such applications and on certain financial criteria of the applicant company. Accordingly, there can be no assurance that any such applications will be approved. In addition, the benefits available to an Approved Enterprise are conditional upon the fulfillment of certain conditions stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that these conditions are violated, in whole or in part, the Company would be required to refund the amount of tax benefits, with the addition of the CPI linkage adjustment and interest.

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS

Under existing regulations any capital gain realized by an individual shareholder with respect to the Ordinary Shares acquired on or after the listing of such shares for trading will be exempt from Israeli capital gains tax if the Ordinary Shares are listed on an approved foreign securities market (which includes Nasdaq in the United States), provided that the company continues to qualify as an Industrial Company under Israeli law and provide the individual does not hold such shares for business purposes.

If we do not maintain our status as an Industrial Company, then subject to any applicable tax treaty the Israeli capital gains tax rates would be up to 50% for non-Israeli resident individuals and 36% for companies.

Upon a distribution of dividends other than bonus shares (stock dividends), income tax is generally withheld at source at the rate of 25% (or the lower rate payable with respect to Approved Enterprises), unless a double taxation treaty is in effect between Israel and the shareholder's country of residence that provides for a lower tax rate in Israel on dividends.

A tax treaty between the United States and Israel (the "Treaty"), provides for a maximum tax of 25% on dividends paid to a resident of the United States (as defined in the Treaty). Dividends distributed by an Israeli company and derived from the income of an approved enterprise are subject to a 15% dividend withholding tax. The Treaty further provides that a 12.5% Israeli dividend withholding tax applies to dividends paid to a United States corporation owning 10% or more of an Israeli company's voting shares throughout the current year to the date the dividend is paid and the preceding taxable year (as applicable). The 12.5% rate applies only on dividends from a company that does not have an Approved Enterprise in the applicable period.

If for any reason shareholders do not receive the above exemption for a sale of shares in an Industrial Company, the Treaty provides U.S. resident investors with an exemption from Israeli capital gains tax in certain circumstances (there may still be U.S. taxes) upon a disposition of shares in CommTouch if they held under 10% of the Company's voting stock throughout the 12 months before the share disposition. If Israeli capital gains tax is payable, it can be credited against U.S. federal tax under the circumstances specified in the Treaty.

A non-resident of Israel who has had dividend income derived or accrued in Israel from which the applicable tax was withheld at source is currently exempt from the duty to file an annual Israeli tax return

73

with respect to such income, provided such income was not derived from a business carried on in Israel by such non-resident and that such non-resident does not derive other non-passive income from sources in Israel.

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

Israeli tax law allows under certain conditions a tax deduction in the year incurred for expenditures (including depreciation on capital expenditures but excluding depreciable capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise. Expenditures not so approved are deductible over a three-year period. However, expenditures made out of the proceeds of government grants are not deductible, i.e. CommTouch will be able to deduct the unfunded portion of the research and development expenditures and not the gross amount.

LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984

Under the Law for the Encouragement of Industrial Research and Development, 1984 (the "Research Law") and the Instructions of the Director General of the Ministry of Industry and Trade, research and development programs and the plans for the intermediate stage between research and development, and manufacturing and sales approved by a governmental committee of the Office of Chief Scientist (OCS)(the "Research Committee") are eligible for grants of up to 50% of the project's expenditure if they meet certain criteria. These grants are issued in return for the payment of royalties from the sale of the product developed in accordance with the program as follows: 3% of revenues during the first three years, 4% of revenues during the following three years, and 5% of revenues in the seventh year and thereafter, with the total royalties not to exceed 100% of the dollar value of the OCS grant (or in some cases up to 300%). Following the full payment of such royalties, there is no further liability for payment.

The Israeli government further requires that products developed with government grants be manufactured in Israel. However, in the event that any portion of the manufacturing is not conducted in Israel, if approval is received from the OCS, the Company would be required to pay royalties that are adjusted in proportion to manufacturing outside of Israel as follows: when the manufacturing is performed outside of Israel by the Company or an affiliate company, the royalties are to be paid as described above with the addition of 1%, and when the manufacturing outside of Israel is not performed by the Company or an affiliate the royalties paid shall be equal to the ratio of the amount of grant received from the OCS divided by the amount of grant received from the OCS and the investment(s) made by the Company in the project. The payback will also be adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing that is performed outside of Israel is up to 50%, between 50% and 90%, or more than 90%, respectively. The technology developed pursuant to the terms of these grants may not be transferred to third parties without the prior approval of the Research Committee. Such approval is not required for the export of any products resulting from such research or development. Approval of the transfer of technology may be granted only if the recipient abides by all the provisions of the Research Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased.

In order to meet certain conditions in connection with the grants and programs of the OCS, the Company has made certain representations to the Israel government about the Company's future plans for its Israeli operations. From time to time the extent of the Company's Israeli operations has differed and may in the future differ, from the Company's representations. If, after receiving grants under certain of such programs, the Company fails to meet certain conditions to those benefits, including, with respect to grants received from the OCS, the maintenance of a material preserve in Israel, or if there is any material deviation from the representations made by the Company to the Israeli government, the Company could be required to refund to the State of Israel tax or other benefits previously received (including interest and CPI linkage

74

difference) and would likely be denied receipt of such grants or benefits, and participation of such programs, thereafter.

The Company participates in programs sponsored by the OCS for the support of research and development activities. Through December 31, 1998, the Company had recorded grants from OCS aggregating $653,000 for certain of the Company's research and development projects. The Company is obligated to pay royalties to the OCS of 3% to 5% of the sales of the products and other related revenues developed from such projects, up to an amount equal to 100% of the grants received. Through March 31, 1999, the Company has accrued and paid royalties to the OCS in the aggregate amount of $253,000. At March 31, 1999, the aggregate OCS contingent liability was $400,000.

Each application to the OCS is reviewed separately, and grants are based on the program approved by the Research Committee. Expenditures supported under other incentive programs of the State of Israel are not eligible for OCS grants. As a result, there can be no assurance that applications to the OCS will be approved or, if approved, what the amounts of the grants will be.

FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES

The Company has received grants relating to its overseas marketing expenses from the Marketing Fund. These grants are awarded for specific expenses incurred by the Company for overseas marketing and are based upon the expenses reported by the Company to the Marketing Fund. All marketing grants recorded from the Marketing Fund until 1997 are linked to the dollar and are repayable as royalties at the rate of 3% of the amount of increases in export sales realized by the Company from the Marketing Fund. Grants recorded beginning January 1, 1998 bear royalties of 4% plus interest at LIBOR rates. The Company will face royalty obligations on grants from the Marketing Fund only to the extent it actually achieves increases in export sales. The proceeds of these grants are presented in the Company's consolidated Financial Statements as offsets to marketing expenses. Through December 31, 1998, the Company had received grants from the Marketing Fund in the amount of approximately $279,000. At March 31, 1999 the aggregate contingent liability was approximately $110,000.

75

CONDITIONS IN ISRAEL

CommTouch is incorporated under the laws of the State of Israel, and substantially all of our research and development and significant executive facilities are located in Israel. Accordingly, CommTouch is directly affected by political, economic and military conditions in Israel. Our operations would be materially adversely affected if major hostilities involving Israel should occur or if trade between Israel and its present trading partners should be curtailed.

POLITICAL CONDITIONS

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. However, a peace agreement between Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan was signed in 1994 and, since 1993, several agreements between Israel and Palestinian representatives have been signed. In addition, Israel and several Arab States have announced their intention to establish trade and other relations and are discussing certain projects. Israel has not entered into any peace agreement with Syria or Lebanon, and there have been difficulties in the negotiations with the Palestinians. We cannot be certain as to how the peace process will develop or what effect it may have upon CommTouch.

Despite the progress towards peace between Israel and its Arab neighbors and the Palestinians, certain countries, companies and organizations continue to participate in a boycott of Israeli firms. CommTouch does not believe that the boycott has had a material adverse effect on CommTouch, but restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on the expansion of CommTouch's business.

Generally, all male adult citizens and permanent residents of Israel under the age of 51 are obligated to perform up to 39 days, or longer under certain circumstances, of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Currently, a majority of our officers and employees are obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, no assessment can be made as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion or reduction of such obligations.

ECONOMIC CONDITIONS

Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli government has, for these and other reasons, intervened in various sectors of the economy, employing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and controls of wages, prices and foreign currency exchange rates. The current Israeli government elected in 1996 has expressed its intention to reduce government involvement in the economy by various means, including relaxation of foreign currency controls and certain budgetary restraints, and privatization of certain government-owned companies. The Israeli government has periodically changed its policies in all these areas.

Until May 1998, Israel imposed restrictions on transactions in foreign currency. These restrictions affected our operations in various ways, and also affected the right of non-residents of Israel to convert into foreign currency amounts they received in Israeli currency, such as the proceeds of a judgment enforced in Israel. Despite these restrictions, foreign investors who purchased shares with foreign currency were able to repatriate in foreign currency both dividends (after deduction of withholding tax) and the proceeds from the sale of the shares. There are currently no Israeli currency control restrictions on remittances of

76

dividends on the ordinary shares or the proceeds from the sale of the shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

TRADE AGREEMENTS

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is also a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs.

Israel has entered into preferential trade agreements with the European Union, the United States and the European Free Trade Association. In recent years, Israel has established commercial and trade relations with a number of the other nations, including Russia, China and India, with which Israel had not previously had such relations.

ASSISTANCE FROM THE UNITED STATES

Israel receives significant amounts of economic and military assistance from the United States, averaging approximately $3 billion annually over the last several years. In addition, in 1992, the United States approved the issuance of up to $10 billion of loan guarantees during U.S. fiscal years 1993 to 1998 to help Israel absorb a large influx of new immigrants, primarily from the republics of the former Soviet Union. Under the loan guarantee program, Israel may issue up to $2 billion in principal amount of guaranteed loans each year, subject to reduction in certain circumstances. There is no assurance that foreign aid from the United States will continue at or near amounts received in the past. If the grants for economic and military assistance or the United States loan guarantees are eliminated or reduced significantly, the Israeli economy could suffer material adverse consequences.

77

UNDERWRITING

The underwriters named below, for whom U.S. Bancorp Piper Jaffray, Prudential Securities Incorporated and Warburg Dillon Read LLC, a subsidiary of UBS AG, are acting as representatives, have agreed to buy, subject to the terms of the underwriting agreement, the number of shares listed opposite their names below. The underwriters are committed to purchase and pay for all of the shares if any are purchased, other than those shares covered by the over-allotment option described below.

                        UNDERWRITER                           NUMBER OF SHARES
                        -----------                           ----------------
U.S. Bancorp Piper Jaffray Inc. ............................
Prudential Securities Incorporated..........................
Warburg Dillon Read LLC, a subsidiary of UBS AG.............
                                                                  --------

          Total.............................................

The underwriters have advised us that they propose to offer the shares to the public at $ per share. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $ per share. The underwriters may allow and the dealers may reallow a concession of not more than $ per share on sales to certain other brokers and dealers. After the offering, these figures may be changed by the representatives.

Of the 3,000,000 ordinary shares offered by us, up to 150,000 shares will be reserved for sale to persons designated by us. Shares not sold to these persons will be reoffered immediately by the underwriters to the public at the initial public offering price. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority.

We have granted to the underwriters an option to purchase up to an additional 450,000 ordinary shares from us at the same price to the public, and with the same underwriting discount, as set forth above. The underwriters may exercise this option any time during the 30-day period after the date of this prospectus, but only to cover over-allotments, if any. To the extent the underwriters exercise the option, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares as it was obligated to purchase under the underwriting agreement.

The following table shows the underwriting fees to be paid by us to the underwriters and the expenses to be paid by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.

                                                                      TOTAL
                                                           ---------------------------
                                               PER SHARE   NO EXERCISE   FULL EXERCISE
                                               ---------   -----------   -------------
Underwriting discounts and commissions.......   $            $              $
Expenses.....................................   $   --       $              $

We have agreed to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

We and each of our directors, executive officers, principal shareholders and optionholders have agreed to certain restrictions on our ability to sell additional ordinary shares for a period of 180 days after the date of this prospectus. We have agreed not to directly or indirectly offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option to sell, or otherwise transfer or dispose of, directly or indirectly, any ordinary shares, or any securities convertible into, or exercisable or exchangeable

78

for, ordinary shares, without the prior written consent of U.S. Bancorp Piper Jaffray. The agreements provide exceptions for our sales in connection with the exercise of options granted and the granting of options to purchase shares under our existing stock option plans and certain other exceptions. However, U.S. Bancorp Piper Jaffray may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. As of the date of this prospectus, there are no agreements between the representatives and any of our shareholders providing consent by the representatives to the sales of ordinary shares prior to the expiration of the lock-up period.

Prior to the offering, there has been no established trading market for the ordinary shares. The initial public offering price for the ordinary shares offered by this prospectus was negotiated by us and the underwriters. The factors considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, our past and present operations, our historical results of operations, our prospects for future earnings, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the offering and other relevant factors. There can be no assurance that the initial public offering price of the ordinary shares will correspond to the price at which the ordinary shares will trade in the public market subsequent to this offering or that an active public market for the ordinary shares will develop and continue after this offering.

To facilitate the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the ordinary shares during and after the offering. Specifically, the underwriters may over-allot or otherwise create a short position in the ordinary shares for their own account by selling more ordinary shares than have been sold to them by us. The underwriters may elect to cover any such short position by purchasing ordinary shares in the open market or by exercising the over-allotment option granted to the underwriters. In addition, the underwriters may stabilize or maintain the price of the ordinary shares by bidding for or purchasing ordinary shares in the open market and may impose penalty bids. If penalty bids are imposed, selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if ordinary shares previously distributed in the offering are repurchased, whether in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the ordinary shares at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also effect the price of the ordinary shares to the extent that it discourages resales of the ordinary shares. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

LEGAL MATTERS

Certain legal matters with respect to United States law are being passed upon for CommTouch by McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto, California. The validity of the ordinary shares offered hereby is being passed upon for CommTouch by Naschitz, Brandes & Co., Tel-Aviv, Israel. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, with respect to United States law, and by Yigal Arnon & Co., Tel-Aviv, Israel, with respect to Israeli law. The partners of McCutchen, Doyle, Brown & Enersen, LLP, beneficially own an aggregate of 13,840 ordinary shares.

EXPERTS

The consolidated financial statements of CommTouch Software Ltd. as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 appearing in this prospectus and Registration Statement have been audited by Kost, Forer & Gabbay, a member of Ernst & Young International, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of such firm as experts in auditing and accounting.

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ISA EXEMPTION

The Israel Securities Authority has granted CommTouch an exemption from the obligation to publish this prospectus in the manner required pursuant to the prevailing laws of the State of Israel, and from the obligation to file periodic reports with the Israel Securities Authority. CommTouch will make a copy of each report filed in accordance with United States law available for public review at its principal office in Israel.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form F-1 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. When we complete this offering, we will also be required to file annual, quarterly 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, 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. 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, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Our SEC filings are also available at the office of the Nasdaq National Market. For further information on obtaining copies of our public filings at the Nasdaq National Market, you should call (212) 656-5060. Information contained on the CommTouch websites does not constitute part of this prospectus.

After the offering, we will become subject to certain of the informational requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). We, as a "foreign private issuer," 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 annual, quarterly 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 for the first three quarters of each fiscal year, within 60 days after the end of each such quarter.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in Israel, and most 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 Software 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

80

sale of securities. We have not given consent for this agent to accept service of process in connection with any other claim.

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

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

- the judgment is no longer appealable,

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

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

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

81

COMMTOUCH SOFTWARE LTD.

CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999
IN U.S. DOLLARS

INDEX

                                                              PAGE
                                                              ----
Report of Independent Auditors..............................  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statement of Changes in Shareholders' Equity
  (Deficit).................................................  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7

F-1

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
COMMTOUCH SOFTWARE LTD.

We have audited the accompanying consolidated balance sheets of CommTouch Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and the related consolidated statements of operations, changes in shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards, in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the consolidated financial position of CommTouch Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and the consolidated results of their operations, and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles in the United States.

Tel-Aviv, Israel
March 15, 1999

(Except for Note 11, as to which the date is )

The foregoing report is in the form that will be signed upon the completion of the recapitalization described in Note 11 of the consolidated financial statements.

Tel-Aviv, Israel                                                        KOST, FORER & GABBAY
                                                              A member of Ernst & Young International

F-2

COMMTOUCH SOFTWARE LTD.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                                            PRO FORMA
                                                                                          SHAREHOLDERS'
                                                         DECEMBER 31,                     EQUITY AS OF
                                                       -----------------    MARCH 31,       MARCH 31,
                                                        1997      1998         1999           1999
                                                       ------   --------   ------------   -------------
                                                                                   (UNAUDITED)
ASSETS
Current Assets:
  Cash and cash equivalents..........................  $  324   $    834     $  3,226
  Trade receivables..................................      49        133          321
  Prepaid expenses...................................      13         96          375
  Government authorities.............................      38         45           61
  Other accounts receivable..........................      29        103           93
                                                       ------   --------     --------
          Total current assets.......................     453      1,211        4,076
Severance Pay Fund...................................     214        223          240
Property and Equipment, net..........................     398        932        1,709
                                                       ------   --------     --------
                                                       $1,065   $  2,366     $  6,025
                                                       ======   ========     ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Short-term bank line of credit.....................  $  733   $  1,328     $  1,086
  Current portion of bank loans and capital leases...      66        112          118
  Trade payables.....................................     355        446          464
  Employees and payroll accruals.....................     252        313          303
  Government authorities.............................     232        246          274
  Deferred revenue...................................      --         74          132
  Other liabilities..................................      79        132          281
                                                       ------   --------     --------
          Total current liabilities..................   1,717      2,651        2,658
                                                       ------   --------     --------
Long-term Portion of Bank Loans and Capital Leases...      28        164          133
Accrued Severance Pay................................     338        366          427
                                                       ------   --------     --------
                                                          366        530          560
                                                       ------   --------     --------
Commitments and Contingent Liabilities...............
Shareholders' Equity (Deficit)
  Convertible Preferred shares --
     Series A, B and C Convertible Preferred
       Shares -- Authorized: 565,820 shares of NIS 1
       par value; Issued and outstanding: 183,637,
       221,265 and 313,409 shares as of December 31,
       1997, 1998 and March 31, 1999, respectively;
       Aggregate liquidation preference of
       approximately $13,200 and $23,200 as of
       December 31, 1998 and March 31, 1999
       (unaudited), respectively; Issued and
       outstanding pro forma: no shares as of March
       31, 1999......................................      63         74           96             --
  Ordinary Shares --
     Authorized: 12,000,000, 11,515,000 and
       10,683,600 shares of NIS 0.05 par value as of
       December 31, 1997 and 1998 and March 31, 1999,
       respectively; Issued and outstanding:
       1,450,040 shares as of December 31, 1997, 1998
       and 2,148,320 shares as of March 31, 1999,
       respectively; Issued and outstanding pro
       forma: 8,416,500 shares as of March 31,
       1999..........................................      27         27           35            131
Additional Paid-in Capital...........................   6,295     11,256       24,910         24,910
Stock-Based Employee Deferred Compensation...........      --       (418)      (7,282)        (7,282)
Notes Receivable from Shareholders...................     (77)       (77)        (964)          (964)
Accumulated Deficit..................................  (7,326)   (11,677)     (13,988)       (13,988)
                                                       ------   --------     --------       --------
          Total Shareholders' Equity (Deficit).......  (1,018)      (815)       2,807       $  2,807
                                                       ------   --------     --------       --------
                                                       $1,065   $  2,366     $  6,025
                                                       ======   ========     ========

The accompanying notes are an integral part of these consolidated financial statements.

F-3

COMMTOUCH SOFTWARE LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                               THREE MONTHS ENDED
                                                  YEAR ENDED DECEMBER 31,           MARCH 31,
                                                ---------------------------    -------------------
                                                 1996      1997      1998       1998        1999
                                                -------   -------   -------    -------    --------
                                                                                   (UNAUDITED)
Revenues:
  Email Services..............................  $    --   $    --   $   389    $   32     $   346
  Software licenses...........................    2,641       711        --        --          --
  Software maintenance and services...........      493       188        --        --          --
                                                -------   -------   -------    ------     -------
          Total revenue.......................    3,134       899       389        32         346
                                                -------   -------   -------    ------     -------
Cost of revenues:
  Email Services..............................       --        --       569        59         405
  Software licenses...........................       79        21        --        --          --
  Software maintenance and services...........      384       144        --        --          --
                                                -------   -------   -------    ------     -------
          Total cost of revenues..............      463       165       569        59         405
                                                -------   -------   -------    ------     -------
Gross profit (loss)...........................    2,671       734      (180)      (27)        (59)
                                                -------   -------   -------    ------     -------
Operating expenses:
  Research and development, net...............    1,479     1,108     1,149       266         307
  Sales and marketing.........................    1,965     2,202     2,001       459         481
  General and administrative..................      465       829       604       138         807
  Amortization of stock-based employee
     deferred compensation....................       --        --        91         2         386
                                                -------   -------   -------    ------     -------
          Total operating expenses............    3,908     4,139     3,845       865       1,981
                                                -------   -------   -------    ------     -------
Operating loss................................   (1,237)   (3,405)   (4,025)     (892)     (2,040)
Interest expense and other, net...............      (45)      (68)     (326)      (27)       (271)
                                                -------   -------   -------    ------     -------
Net loss......................................  $(1,282)  $(3,473)  $(4,351)   $ (919)    $(2,311)
                                                =======   =======   =======    ======     =======
Basic and diluted net loss per share..........  $ (0.66)  $ (2.40)  $ (3.00)   $(0.63)    $ (1.50)
                                                =======   =======   =======    ======     =======
Weighted average number of shares used in
  computing basic and diluted net loss per
  share.......................................    1,934     1,450     1,450     1,450       1,546
                                                =======   =======   =======    ======     =======
Pro forma basic and diluted net loss per share
  (unaudited).................................                      $ (0.78)              $ (0.32)
                                                                    =======               =======
Weighted average number of shares used in
  computing pro forma basic and diluted net
  loss per share (unaudited)..................                        5,594                 7,313
                                                                    =======               =======

The accompanying notes are an integral part of these consolidated financial statements.

F-4

COMMTOUCH SOFTWARE LTD.

CONSOLIDATED STATEMENT OF

CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE DATA)

                                            CONVERTIBLE                                         STOCK-BASED
                                          PREFERRED SHARES     ORDINARY SHARES     ADDITIONAL     EMPLOYEE
                                          ----------------   -------------------    PAID-IN       DEFERRED       NOTES
                                          SHARES    AMOUNT     SHARES     AMOUNT    CAPITAL     COMPENSATION   RECEIVABLE
                                          -------   ------   ----------   ------   ----------   ------------   ----------
Balance as of January 1, 1996...........       --    $--      3,372,760    $ 63     $ 1,935       $    --        $ (77)
  Conversion of Ordinary shares into
    Convertible Preferred shares........   97,878     36     (1,922,720)    (36)         --            --           --
  Issuance of shares....................   62,438     20             --      --       2,689            --           --
  Net loss..............................       --     --             --      --          --            --           --
                                          -------    ---     ----------    ----     -------       -------        -----
Balance as of December 31, 1996.........  160,316     56      1,450,040      27       4,624            --          (77)
  Issuance of shares....................   23,321      7             --      --       1,625            --           --
  Warrants issued for services received
    and bank line of credit.............       --     --             --      --          46            --           --
  Net loss..............................       --     --             --      --          --            --           --
                                          -------    ---     ----------    ----     -------       -------        -----
Balance as of December 31, 1997.........  183,637     63      1,450,040      27       6,295            --          (77)
  Issuance of shares....................   37,628     11             --      --       4,061            --           --
  Warrants issued for services received
    and bank line of credit.............       --     --             --      --         391            --           --
  Deferred compensation related to
    options issued to employees.........       --     --             --      --         509          (509)          --
  Amortization of deferred
    compensation........................       --     --             --      --          --            91           --
  Net loss..............................       --     --             --      --          --            --           --
                                          -------    ---     ----------    ----     -------       -------        -----
Balance as of December 31, 1998.........  221,265     74      1,450,040      27      11,256          (418)         (77)
                                          -------    ---     ----------    ----     -------       -------        -----
  Issuance of shares (unaudited)........   92,144     22             --      --       5,270            --           --
  Issuance of shares upon exercise of
    warrants (unaudited)................       --     --         35,600       *          --            --           --
  Ordinary shares issued for notes
    receivable (unaudited)..............       --     --        662,680       8         879            --         (887)
  Warrants issued for services and bank
    line of credit (unaudited)..........       --     --             --      --         255            --           --
  Deferred compensation related to
    options issued to employees
    (unaudited).........................       --     --             --      --       7,250        (7,250)          --
  Amortization of deferred
    compensation........................       --     --             --      --          --           386           --
  Net loss (unaudited)..................       --     --             --      --          --            --           --
                                          -------    ---     ----------    ----     -------       -------        -----
Balance as of March 31, 1999
  (unaudited)...........................  313,409    $96      2,148,320    $ 35     $24,910       $(7,282)       $(964)
                                          =======    ===     ==========    ====     =======       =======        =====


                                          ACCUMULATED
                                            DEFICIT      TOTAL
                                          -----------   -------
Balance as of January 1, 1996...........   $ (2,571)    $  (650)
  Conversion of Ordinary shares into
    Convertible Preferred shares........         --          --
  Issuance of shares....................         --       2,709
  Net loss..............................     (1,282)     (1,282)
                                           --------     -------
Balance as of December 31, 1996.........     (3,853)        777
  Issuance of shares....................         --       1,632
  Warrants issued for services received
    and bank line of credit.............         --          46
  Net loss..............................     (3,473)     (3,473)
                                           --------     -------
Balance as of December 31, 1997.........     (7,326)     (1,018)
  Issuance of shares....................         --       4,072
  Warrants issued for services received
    and bank line of credit.............         --         391
  Deferred compensation related to
    options issued to employees.........         --          --
  Amortization of deferred
    compensation........................         --          91
  Net loss..............................     (4,351)     (4,351)
                                           --------     -------
Balance as of December 31, 1998.........    (11,677)       (815)
                                           --------     -------
  Issuance of shares (unaudited)........         --       5,292
  Issuance of shares upon exercise of
    warrants (unaudited)................          *          --
  Ordinary shares issued for notes
    receivable (unaudited)..............         --          --
  Warrants issued for services and bank
    line of credit (unaudited)..........         --         255
  Deferred compensation related to
    options issued to employees
    (unaudited).........................         --          --
  Amortization of deferred
    compensation........................         --         386
  Net loss (unaudited)..................   $ (2,311)    $(2,311)
                                           --------     -------
Balance as of March 31, 1999
  (unaudited)...........................   $(13,988)    $ 2,807
                                           ========     =======


* Represents amount less than one thousand dollars

The accompanying notes are an integral part of these consolidated financial statements.

F-5

COMMTOUCH SOFTWARE LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

                                                                                    THREE MONTHS
                                                                                        ENDED
                                                       YEAR ENDED DECEMBER 31,        MARCH 31,
                                                     ---------------------------   ---------------
                                                      1996      1997      1998     1998     1999
                                                     -------   -------   -------   -----   -------
                                                                                     (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss.........................................  $(1,282)  $(3,473)  $(4,351)  $(918)  $(2,311)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
     Depreciation and amortization.................      303       206       236      44       173
     Amortization of stock-based employee deferred
       compensation and warrants issued for service
       received and bank line of credit............       --        46       482      34       641
     Decrease (increase) in trade receivables......     (509)      738       (84)    (16)     (188)
     Decrease (increase) in other accounts
       receivable and prepaid expenses.............      (61)       14      (164)    (27)     (285)
     Increase (decrease) in trade payables.........      181        99        91    (176)       18
     Increase (decrease) in other liabilities......       27      (147)      128      42       167
     Increase in deferred revenue..................       --        --        74      25        58
     Increase (decrease) in accrued severance pay,
       net.........................................       28       (54)       19      (3)       44
     Other.........................................        8        --        --      --        --
                                                     -------   -------   -------   -----   -------
       Net cash used in operating activities.......   (1,305)   (2,571)   (3,569)   (995)   (1,683)
                                                     -------   -------   -------   -----   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment...............     (427)      (93)     (442)    (57)     (950)
                                                     -------   -------   -------   -----   -------
       Net cash used in investing activities.......     (427)      (93)     (442)    (57)     (950)
                                                     -------   -------   -------   -----   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term bank line of credit, net..............     (157)      733       595      78      (242)
  Short-term shareholders' loans...................     (121)       --        --      --        --
  Principal payment of bank loans..................      (63)      (67)      (94)    (12)       --
  Payment of capital lease.........................       --        --       (52)     --       (25)
  Proceeds from issuance of shares.................    2,709     1,632     4,072     760     5,292
                                                     -------   -------   -------   -----   -------
       Net cash provided by financing activities...    2,368     2,298     4,521     826     5,025
                                                     -------   -------   -------   -----   -------
Increase (decrease) in cash and cash equivalents...      636      (366)      510    (226)    2,392
  Cash and cash equivalents at the beginning of the
     period........................................       54       690       324     324       834
                                                     -------   -------   -------   -----   -------
Cash and cash equivalents at the end of the
  period...........................................  $   690   $   324   $   834   $  98   $ 3,226
                                                     =======   =======   =======   =====   =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITY:
Cash paid during the year:
Interest...........................................  $    10   $    48   $    97   $   5   $    33
                                                     =======   =======   =======   =====   =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Capital lease obligations........................  $    --   $    --   $   328   $  --   $    --
                                                     =======   =======   =======   =====   =======
  Ordinary shares issued for notes receivable from
     shareholders..................................  $    --   $    --   $    --   $  --   $   887
                                                     =======   =======   =======   =====   =======

The accompanying notes are an integral part of these consolidated financial statements.

F-6

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CommTouch Software Ltd. (the "Company" or "CommTouch") was incorporated under the laws of Israel in 1991. The Company, together with its United States subsidiary, CommTouch Software Inc., ("CSI") a California corporation, is a provider of Web-based email and communications solutions to business partners (customers) who in turn offer those solutions to their end-users. From inception through 1997, the Company generated revenues primarily from sale maintenance and service of stand-alone email client software products for both mainframe and personal computers. From 1998, the Company began to generate revenues by providing email services to its business partners. Email service revenues are derived from contracts that provide for a minimum service commitment fee, revenue sharing from advertising, direct marketing and communications services, and a per emailbox fee.

Revenues derived from the Company's largest business partner represent 54% of the Company's revenues in 1998.

In 1998, a majority of the Company's sales were made in Europe, the Far East and North America.

The consolidated financial statements have been prepared in accordance with generally accepted accounting policies in the United States, and include the accounts of the Company and its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated.

The majority of the Company's sales are made in U.S. dollars ("dollars"). In addition, a substantial portion of the Company's costs are incurred in dollars. Since the dollar is the primary currency of the economic environment in which the Company operates, the dollar is its functional and reporting currency. Non dollar transactions and balances have been remeasured using the foreign exchange rate at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in the statements of operations.

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.

Cash and Cash Equivalents:

The Company considers all highly liquid investments originally purchased with maturities of three months or less to be cash equivalents.

Property and Equipment:

Property and equipment are stated at cost and depreciated using the straight line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized on a straight line basis over the lease term.

The Company periodically assesses the recoverability of the carrying amount of property and equipment and provides for any possible impairment loss based upon the difference between the carrying amount and fair value of such assets. As of December 31, 1998, no impairment losses have been identified.

F-7

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Research and Development:

Research and development costs are charged to the statement of operations as incurred. Statement of Financial Accounting Standards Board No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

Based on the Company's product development process, technological feasibility is established upon completion of a working model. The Company does not incur any costs between the completion of the working model and the point at which the product is ready for general release. Therefore, through December 31, 1998, the Company has charged all software development costs to research and development expense in the period incurred.

Revenue Recognition:

Commencing 1998, the Company derives its revenues from providing web-based email services. Revenues from contracts that are not dependent upon the number of mailboxes and provide non-refundable fixed payments are recognized ratably over the contract term. Revenues from contracts specifying a contractual rate per mailbox per month are recognized monthly for mailboxes covered by the respective contracts. Revenues from contracts based on a share of advertising revenues earned by business partners are recognized when such revenues are earned. Revenues from set up and installation fees are recognized upon installation. Amounts billed or received in advance of service delivery are recorded as deferred revenue.

Revenues from software products sales which occurred through 1997 were recognized upon delivery of the software master for reproduction and distribution, provided no significant vendor obligations remained, and collection of the related receivable was probable in accordance with Statement of Position 91-1.

Royalty-Bearing Grants:

Royalty-bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company is entitled to such grants, when expenses under such approved projects are incurred. Development grants amounted to none in 1996, $288,000 in 1997 and none in 1998.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables and cash equivalents. The majority of the Company's cash and cash equivalents are invested in dollar and dollar linked investments and are deposited in major banks in Israel and in the United States. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

The Company's trade receivables are derived from sales to customers located primarily in Europe, the Far East and North America. The Company performs ongoing credit evaluations of its customers. In 1997, the Company wrote off approximately $170,000 of account receivables uncollectible.

F-8

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accounting for Stock-Based Compensation:

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

In accounting for warrants granted to other than employees, the provisions of Statement of Financial Accounting Standard Board ("SFAS") No. 123, "Accounting for Stock based Compensation" were applied.

Basic and Diluted Loss Per Share:

Basic and diluted net loss per share are presented in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented.

Basic net loss per share has been computed using the weighted-average number of ordinary shares outstanding during the period. Diluted net loss per share is computed based on the weighted average number of ordinary shares outstanding during each year, plus the weighted average number of dilutive potential ordinary shares considered outstanding during the year. Basic and diluted pro forma net loss per share, as presented in the statements of operations, have been computed as described above and also give effect to the automatic conversion of the Convertible Preferred shares that will convert upon the closing of an initial public offering (using the as-if converted method from original date of issuance).

All convertible preferred shares, outstanding stock options, and warrants have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive for all periods presented. The total number of shares related to the outstanding options and warrants excluded from the calculations of diluted net loss per share were 734,980, 911,680 and 1,236,100 for the years ended December 31, 1996, 1997 and 1998.

Unaudited Pro Forma Shareholders' Equity (Deficit)

If the offering contemplated by this Prospectus is consummated, all of the convertible preferred stock outstanding will automatically be converted into ordinary shares. Unaudited pro forma shareholders' equity at March 31, 1999, as adjusted for the assumed conversion of those shares outstanding at March 31, 1999 is disclosed on the balance sheet.

Comprehensive Income:

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income ("SFAS 130")." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components, however, the adoption of this Statement had no impact on the financial statements, as the Company had no items of other comprehensive income in any period presented.

Severance Pay:

The Company's liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof.

F-9

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's liability for all of its employees, is fully provided by monthly deposits with severance pay funds insurance policies and by an accrual.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds are based on the cash surrendered value of these policies, and include immaterial profits.

Fair Value of Financial Instruments:

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents -- The carrying amounts of these items approximate their fair value due to the short-term maturity of such instruments.

Short-term bank credit, long-term bank loans and capital leases -- The carrying amounts of the Company's borrowing arrangements approximate their fair value. Fair values were estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements.

Impact of Recently Issued Accounting Standards:

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Company is required to adopt SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities. Because the Company currently holds no derivative financial instruments as defined by SFAS 133 and does not currently engage in hedging activities, adoption of SFAS 133 is expected to have no material effect on the Company's financial condition and results of operations.

Unaudited Information:

The financial statements include the unaudited consolidated balance sheets and the related consolidated statements of operations, changes in shareholders equity (deficit) and cash flows for the three months ended March 31, 1999. This unaudited information has been prepared by the Company on the same basis as the audited consolidated financial statements and, in management's opinion, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information, in accordance with generally accepted accounting principles, for the period presented. Results for interim periods are not necessarily indicative of the results to be expected for the entire year.

F-10

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. PROPERTY AND EQUIPMENT

                                                               DECEMBER 31,
                                                              --------------
                                                              1997     1998
                                                              ----    ------
                                                              (IN THOUSANDS)
Cost:
  Computers and peripheral equipment........................  $518    $1,260
  Office furniture and equipment............................    85        90
  Motor vehicles............................................   103       118
  Leasehold improvements....................................   129       137
                                                              ----    ------
                                                               835     1,605
Less accumulated depreciation...............................   437       673
                                                              ----    ------
                                                              $398    $  932
                                                              ====    ======

Computers and peripheral equipment under various capital lease agreements amounted to approximately $328,000 and their accumulated depreciation amounted to approximately $38,000 as of December 31, 1998.

Depreciation expenses amounted to approximately $137,000, $145,000, and $236,000 for the years ended December 31, 1996, 1997 and 1998, respectively.

3. SHORT-TERM BANK LINE OF CREDIT

As of December 31, 1998, the Company has an authorized line of credit in the amount of $1,300,000 which was fully utilized. The credit line bears interest at an annual rate of LIBOR + 3%. For overdrawn amounts in excess of the Company's authorized line of credit, the Company is subject to an annual interest rate of LIBOR + 8%.

Weighted average interest for 1997 and 1998 was LIBOR +3%.

In consideration of the line of credit, the bank is entitled to receive warrants for ordinary shares at an exercise price equal to the par value subject to the outstanding utilized line of credit per month (see Note 9).

As collateral for all the Company's liabilities to the bank, a floating charge
(security interest on all assets of the Company as they exist from time to time)
has been placed on all assets of the Company, and the Company's authorized share capital, goodwill and insurance rights are pledged at fixed charges.

F-11

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LONG-TERM BANK LOANS AND CAPITAL LEASES

                                                               DECEMBER 31,
                                                              ---------------
                                                              1997      1998
                                                              -----    ------
                                                              (IN THOUSANDS)
Bank loans -- Israeli CPI, interest rates range from
  5.3% - 6.3%...............................................  $ 64     $  --
Bank loans -- U.S. Dollar, interest rates range from
  8.3% - 9.7%...............................................    30        --
Capital leases..............................................    --       276
                                                              ----     -----
                                                                94       276
Less current portion........................................    66       112
                                                              ----     -----
                                                              $ 28     $ 164
                                                              ====     =====

In 1998, the Company has repaid its Bank loans.

CSI has leased computers and peripheral equipment under various capital lease agreements, with an option to purchase the equipment upon the expiration of the initial lease term, for the fair market value prevailing at that time, not to exceed 10% of the original cost of the equipment. The annual interest rate of such capital leases ranges between 19.5% and 21.9%.

Future minimum lease commitments for the years ending December 31, are as follows, in thousands:

1999........................................    $158
2000........................................     136
2001........................................      23
2002........................................      23
2003........................................      17
                                                ----
                                                 357
Less amount representing interest...........      81
                                                ----
                                                $276
                                                ====

5. ACCRUED SEVERANCE PAY

The Company's liability for severance pay, pursuant to Israeli law, is fully provided. Part of the liability is funded through insurance policies which are designated only for severance payments. The value of these policies is recorded as an asset in the Company's balance sheet. Severance expenses for the years ended December 31, 1996, 1997, and 1998, were approximately $105,000, $73,000 and $62,000, respectively.

6. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases:

The facilities of the Company and CSI are leased under operating leases for periods ending in 2005.

F-12

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease commitments under non-cancelable operating leases for the years ending December 31, are as follows, in thousands:

1999..........................................  $197
2000..........................................   170
2001..........................................   154
2002..........................................    89
2003..........................................    53
                                                ----
                                                $663
                                                ====

Rent expenses for the years ended December 31, 1996, 1997 and 1998 were approximately $49,000, $55,000 and $56,000, respectively. CSI expanded its facilities by entering into an additional office lease starting 1999, for which the commitment is reflected above.

Royalties:

The Company is required to pay royalties on grants received from the Government of Israel for research and development projects and marketing activities at the rate of 3% - 5% of total revenues, up to an amount equal to 100% to 150% of the original amount received linked to the dollar.

As of December 31, 1998, the Company had an outstanding contingent obligation to pay royalties in the aggregate amount of $532,000.

7. RELATED PARTIES

During 1995, the Company issued ordinary shares to three of its directors in exchange for notes receivables. The notes are linked to the Israeli CPI with no additional interest and at December 31, 1998, the total amount outstanding was approximately $77,000 to be repaid by December 31, 1999. These notes are recorded as an offset to additional paid-in capital. The Company believes that the terms under which these notes have been provided by the Company are as favorable to those that could be agreed upon with an unaffiliated party.

8. INCOME TAXES

Israeli Income Tax:

The Company has been granted "Approved Enterprise" status in two separate investment programs approved in 1993 and 1995 by the Israeli Government under the Law for Encouragement of Capital Investments, 1959 ("the Law").

Undistributed Israeli income derived from each of its "Approved Enterprise" programs entitle the Company to tax-exemption for a period of two years commencing the first year it will earn taxable income (not commenced yet) and to a reduced tax rate of 10% - 25% for an additional period of eight years (depending on the level of foreign-investment in the Company). These tax benefits, are subject to a limitation of the earlier of twelve years from commencement of operation, or fourteen years from receipt of approval. Thereafter, the Company's income will be subject to the regular income tax rate of 36%.

The Company's first investment program commenced operation in 1995, while the second program has not yet been completed.

F-13

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tax exempt income attributable to the "Approved Enterprise" can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. The Company's board of directors has determined that such tax exempt income will not be distributed as dividends.

Income from sources other than the "Approved Enterprise," during the benefit period, will be subject to tax at regular corporate tax rates of 36%.

The Company is an "industrial company" under the Law for the Encouragement of Industry (Taxation), 1969 and as such is entitled to certain tax benefits, including accelerated rate of depreciation and deduction of public offering expenses.

As of December 31, 1998, Israeli net operating loss carryforwards amounted to approximately $5,700,000. Such net operating loss may be carried forward indefinitely and offset against future taxable income. The Company expects that during the period in which these tax losses are utilized its income would be substantially tax exempt. Accordingly there will be no tax benefit available from such losses and no deferred income taxes have been included in these financial statements.

U.S. Income Tax:

As of December 31, 1998, CSI has U.S. federal net operating loss carryforwards of approximately $4,700,000. The net operating loss expires in various amounts between the years 2010 and 2016.

Utilization of U.S. net operating losses may be subject to the substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

Deferred Taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:

                                                               DECEMBER 31,
                                                              ---------------
                                                               1997     1998
                                                              ------   ------
                                                              (IN THOUSANDS)
Deferred tax assets:
U.S. operating loss carryforwards...........................  $1,052   $1,656
Reserves and allowances not currently deductible............       6       15
                                                              ------   ------
Net deferred tax asset before valuation allowance...........   1,058    1,671
Valuation allowance.........................................  (1,058)  (1,671)
                                                              ------   ------
Net deferred tax asset......................................  $   --   $   --
                                                              ======   ======

For the year ended December 31, 1998 the valuation allowance increased by approximately $613,000. No utilization of CSI's tax losses carryforwards is expected in the foreseeable future, because of its history of operating losses. In 1996, 1997 and 1998, the Company provided a 100% valuation allowance against the deferred tax assets in respect of these tax loss carryforward and other temporary differences because of the uncertainty of realizing these deferred tax assets.

F-14

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pretax loss:

                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1996     1997     1998
                                                              ------   ------   ------
                                                                   (IN THOUSANDS)
Domestic....................................................  $  809   $1,602   $2,497
Foreign.....................................................     473    1,871    1,854
                                                              ------   ------   ------
                                                              $1,282   $3,473   $4,351
                                                              ======   ======   ======

9. SHARE CAPITAL

Convertible Preferred Shares:

                                                                   NUMBER OF SHARES
                                    ------------------------------------------------------------------------------
                                       DECEMBER 31, 1997          DECEMBER 31, 1998            MARCH 31, 1999
                         ORIGINAL   ------------------------   ------------------------   ------------------------
                         ISSUANCE                ISSUED AND                 ISSUED AND                 ISSUED AND
                          PRICE     AUTHORIZED   OUTSTANDING   AUTHORIZED   OUTSTANDING   AUTHORIZED   OUTSTANDING
                         --------   ----------   -----------   ----------   -----------   ----------   -----------
                                                                                                (UNAUDITED)
Series A...............   $17.02     200,000        97,878      200,000        97,878        200,000       97,878
Series B...............   $44.04     200,000        62,438      200,000        62,438        200,000       62,438
Series C...............   $72.17     100,000        23,321      124,250        60,949        165,820      153,093
                                     -------       -------      -------       -------     ----------    ---------
                                     500,000       183,637      524,250       221,265        565,820      313,409
                                     =======       =======      =======       =======     ==========    =========

Conversion

Each share of Series A, B and C Convertible Preferred share is convertible into ordinary shares on a twenty-to-one basis (reflecting the April 1999 stock split and subject to adjustment for stock splits, stock dividends and alike).

All Convertible Preferred shares shall be automatically converted immediately prior to the consummation of an initial public offering ("IPO") in which the proceeds to the Company are not less than $10,000,000 and in which the Company's valuation is not less than $30,000,000.

The pro forma shareholders' deficit gives effect to the conversion of all outstanding Convertible Preferred shares as if such conversion occurred on December 31, 1998.

Voting Rights

The holders of Convertible Preferred shares are entitled to vote on all matters submitted to the shareholders with such number of votes which is equal to the number of ordinary shares into which such Preferred shares could be converted.

Liquidation Preference

The Convertible Preferred shares have preference over the Ordinary shares, in the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary. The liquidation preference is equal to the greater of the full amount originally paid multiplied by 1.5, together with declared but unpaid dividends in respect thereof or the pro rata amount that would have been received had all of the Convertible Preferred shares been converted into ordinary shares immediately prior to such distribution.

F-15

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Dividends

The holders of any series of the convertible preferred shares shall be entitled to receive dividends as and when declared for the holders of ordinary shares, pari passu, calculated on the basis of the number of Ordinary shares into which such Convertible Preferred shares could then be converted, out of any assets legally available.

In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash dividends in the foreseeable future.

Warrants Issued for Services Received and Bank Lines of Credit:

In 1997, 1998 and in the three months ended March 31, 1999, the Company granted warrants in connection with a bank line of credit, loans, and consulting services received. Warrants outstanding at March 31, 1999:

                                                     WARRANTS FOR
                                              ---------------------------   EXERCISE
                              IN CONNECTION   ORDINARY     CONVERTIBLE      PRICE PER   EXERCISABLE
         ISSUE DATE               WITH         SHARES    PREFERRED SHARES     SHARE       THROUGH
         ----------           -------------   --------   ----------------   ---------  -------------
December 1997                  bank line       59,060                       par value  December 2000
  through October 1998         of credit
November 1998 through March    bank line       30,160                       par value  October 2001
  1999                         of credit
December 1997                  bank loan                 346 Series C       $72.17     December 2002
June 1997                      bank loan                 568 Series B       $44.04     June 2002
September 1997                 consulting                300 Series C       par value  (1)
                                services
April 1998                     consulting                350 Series B       par value  (l)
                                services
July 1998                        lease                   243 Series C       $72.17     July 2005
                               commitment
                                               ------     --------------
                                               89,220    1,807
                                              --------   -------
                                              --------   -------

(1) The earlier of December 2002 or an IPO with net proceeds to the Company of $10,000,000, or a merger or an acquisition.

In addition, in February 1998, in consideration of consulting services received, the Company issued warrants for 35,600 ordinary shares at $0.36 per share. The warrants were exercised in October 1998, with the ordinary shares issued in the first quarter of 1999 (see Note 11).

In connection with the amounts of the warrants:

The Company recorded $17,000, $264,000 and $255,000 as compensation expense in 1997, 1998 and the three months ended March 31, 1999, that were included in interest expense, and $21,000 and $135,000 in 1997 and 1998 that were included for operating expenses.

F-16

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Warrants to Investors:

The Company issued to certain Series B Convertible Preferred shares investors 13,873 warrants to Series B Convertible Preferred shares in consideration of their investment in the Company. The warrants have an exercise price of $44.04 per share and are exercisable through the earlier of the consummation of an IPO with net proceeds to the Company of at least $10,000,000 or the consummation of the sale of all or substantially all of the assets or shares of the Company. The warrants may be exercised for cash or on a net exercise basis.

Issuance of Ordinary Shares against Promissory Notes:

On March 17, 1999, several employees and officers exercised 662,680 options granted to them by CommTouch. In consideration for the ordinary shares purchased pursuant to the exercise of the options, they provided CommTouch with full recourse Promissory Notes dated March 17, 1999 in the original principal amount of approximately $887,000. The Promissory Notes bear interest at 4.83%, with payments of interest due on December 31 of each year and with the balance due and payable on the fourth anniversary of the date of the promissory notes. The shares purchased are restricted shares, and are subject to a right of repurchase in favor of CommTouch according to the original vesting schedule of the options exercised, generally four years.

Stock Options:

The Company issued options to purchase ordinary shares to its Israeli employees pursuant to individual agreements. In 1996, the Company adopted the 1996 CSI Stock Option Plan for granting options to its U.S. employees to purchase ordinary shares of the Company. As of December 31, 1998 the Company has reserved 2,000,000 ordinary shares. Options granted under such plan and agreements expire generally after 10 years from the date of grant and terminate upon termination of the optionee's employment or other relationship with the Company. The options vest generally ratably over a 4 year period. The exercise price of the options granted under the individual agreements may not be less than the nominal value of the shares into which such options are exercisable or in the case of the subsidiary's plan it may not be less than fair market value. Any options which are canceled or not exercised within the options period become available for future grant.

F-17

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the Company's stock option activity, and related information is as follows:

                                                                                         WEIGHTED AVERAGE
                                               NUMBER OF SHARES                           EXERCISE PRICE
                                  ------------------------------------------   ------------------------------------
                                          YEARS ENDED           THREE MONTHS                           THREE MONTHS
                                         DECEMBER 31,              ENDED            YEARS ENDED           ENDED
                                  ---------------------------    MARCH 31,     ---------------------    MARCH 31,
                                   1996      1997      1998         1999       1996    1997    1998        1999
                                  -------   -------   -------   ------------   -----   -----   -----   ------------
                                                                (UNAUDITED)                            (UNAUDITED)
                                                                ------------                           ------------
Outstanding at beginning of
  period........................   31,000   457,520   607,040      849,520     $1.45   $0.99   $1.10      $1.20
  Granted.......................  426,520   213,820   251,900      508,020      0.96    1.45    1.45       1.45
  Exercised.....................       --        --        --     (662,680)       --      --      --       1.34
  Forfeited.....................       --   (64,300)   (9,420)          --        --    1.45    1.45         --
                                  -------   -------   -------    ---------     -----   -----   -----      -----
Outstanding at end of period....  457,520   607,040   849,520      694,860     $0.99   $1.10   $1.20      $1.25
                                  =======   =======   =======    =========     =====   =====   =====      =====
Exercisable at end of period....    7,760   165,480   375,580      403,880     $1.45   $1.45   $1.45      $1.45
                                  =======   =======   =======    =========     =====   =====   =====      =====
Deemed fair value of options
  granted at an exercise price
  of:
  -- Less than fair value at
     date of grant..............  $    --   $    --   $  2.46
                                  =======   =======   =======
  -- Equals to fair market value
     at date of grant...........  $  0.45   $  0.61   $    --
                                  =======   =======   =======
  -- Exceeds fair value at date
    of grant....................  $  0.23   $    --   $    --
                                  =======   =======   =======

The options outstanding as of December 31, 1998, have been separated into ranges of exercise price, as follows:

                                                        WEIGHTED
                                    OPTIONS             AVERAGE             WEIGHTED
                               OUTSTANDING AS OF       REMAINING        AVERAGE EXERCISE
       EXERCISE PRICE          DECEMBER 31, 1998    CONTRACTUAL LIFE         PRICE
       --------------          -----------------    ----------------    ----------------
$0.01                               101,520               7.20               $0.01
$1.10 - $1.45                       676,480               8.67               $1.27
$2.20                                71,520               7.58               $2.20
------------                        =======               ====               =====
------------
$0.01 - $2.20                       849,520               8.40               $1.20

Under SFAS 123, pro forma information regarding net income and earnings per share is required (for grants issued after December 1994), and has been determined as if the Company had accounted for its employee stock option under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes Option Pricing Model with the following weighted-average assumptions for 1996, 1997 and 1998: risk-free interest rates of approximately 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 0.5 for 1996, 1997 and 1998 and an expected life of the option of 3.5 years, 2.5 years and 1.5 years after the option is vested for 1996,1997 and 1998, respectively, but not sooner than December 1999.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

F-18

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pro forma information under SFAS 123:

                                                                      DECEMBER 31,
                                                              -----------------------------
                                                               1996       1997       1998
                                                              -------    -------    -------
                                                                     (IN THOUSANDS)
Net loss as reported........................................  $(1,282)   $(3,473)   $(4,351)
                                                              =======    =======    =======
Pro forma net loss..........................................  $(1,368)   $(3,600)   $(4,402)
                                                              =======    =======    =======
Pro forma basic and diluted net loss per share..............  $ (0.71)   $ (2.48)   $ (3.04)
                                                              =======    =======    =======

The Company recorded deferred compensation representing the difference between the exercise price and the deemed fair value of the Company's ordinary share at the date of grant. Such amount is being amortized based on an accelerated vesting method over the vesting period of the options, generally 4 years.

                                                                 DEFERRED
                                                               COMPENSATION
                                                              --------------
                                                              (IN THOUSANDS)
Balance as of January 1, 1998...............................       $ --
Deferred compensation related to options issued to
  employees.................................................        509
Less amortization of deferred compensation..................         91
                                                                   ----
Balance as of December 31, 1998.............................       $418
                                                                   ====

10. SELECTED STATEMENTS OF OPERATIONS DATA

Geographic information:

The Company manages its business on the basis of one reportable segment and attributes revenues based on the customers' location, as follows:

                                                                     REVENUES
                                                              ----------------------
                                                               1996     1997    1998
                                                              ------    ----    ----
                                                                  (IN THOUSANDS)
Israel......................................................  $  522    $  1    $ --
U.S.A.......................................................   2,072     543     109
Europe......................................................      19      28     130
Japan.......................................................     380     282     103
Other.......................................................     141      45      47
                                                              ------    ----    ----
                                                              $3,134    $899    $389
                                                              ======    ====    ====

The Company's long-lived assets are as of December 31, are as follows:

                                                               1996     1997    1998
                                                              ------    ----    ----
                                                                  (IN THOUSANDS)
Israel......................................................  $  434    $365    $291
U.S.A.......................................................      48      33     641
                                                              ------    ----    ----
                                                              $  482    $398    $932
                                                              ======    ====    ====

11. SUBSEQUENT EVENTS

Series C Convertible Preferred Shares Financing and Exercise of Warrants to Ordinary Shares

In the first quarter of 1999, the Company issued 92,144 Series C Convertible Preferred Shares of NIS 1.0 par value and 35,000 ordinary shares in connection with the exercise of warrants in consideration of approximately

F-19

COMMTOUCH SOFTWARE, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$6,596,000 in net proceeds to the Company. An aggregate amount of $1,304,000 was received in October and December 1998 in respect of those shares and was recorded in additional paid in capital.

Convertible Notes Financing

In April 1999, the Company issued convertible promissory Notes (the "Notes") to investors resulting in estimated net cash proceeds of approximately $13,237,000. The Notes will convert into 42,081 Series D Convertible Preferred Shares upon obtaining of certain governmental approvals, and will further convert into 841,620 ordinary shares upon the completion of the IPO. If the Company does not consummate an IPO or a sale of more than 50% of the shares of the Company within twelve months of the closing of the Series D Convertible Preferred Shares, a ratchet provision will come into effect, providing the shareholders with 42,081 additional Series D Convertible Preferred Shares with no additional consideration.

In April 1999, subsequent to the Convertible Notes financing, the Company fully repaid its short-term bank line of credit.

Proposed Public Offering and Related Matters:

The Board of Directors has authorized the Company to file a registration statement with the United States Securities and Exchange Commission for an IPO of its ordinary shares.

In April 1999, the Board of Directors approved a twenty for one ordinary stock split. The stock split will be effected prior to the effective date of the IPO. All Ordinary share numbers, ordinary share option and warrant numbers and Convertible Preferred Shares Conversion ratios have been retroactively adjusted to reflect the stock split. In connection with the IPO, all of CommTouch's Convertible Preferred Shares outstanding will be converted into Ordinary Shares.

Employee Stock Purchase Plan

The CommTouch 1999 Employee Stock Purchase Plan was adopted by the Board of Directors on April 18, 1999 to be effective upon the completion of CommTouch's IPO of its ordinary shares, subject to shareholders' approval. CommTouch has reserved a total of 150,000 shares for issuance under the plan. Eligible employees may purchase Ordinary Shares at 85% of the lesser of the market value of CommTouch's ordinary shares on the first day of the applicable offering period or the last day of the applicable purchase period.

Non-Employee Directors Stock Option Plan

The CommTouch 1999 Non-Employee Director Stock Option Plan was adopted, subject to shareholder approval, by the Board of Directors on April 18, 1999 to be effective upon the completion of a CommTouch IPO. CommTouch has reserved a total of 250,000 shares for issuance under this plan. Each individual who first joins the Board of Directors as a nonemployee director on or after the effective date of this offering will receive an option grant for 10,000 ordinary shares. Each option granted under the Non-Employee Directors Plan shall become exercisable with respect to one-fourth of the number of shares covered by such option three months after the date of grant and with respect to one-third of the remaining shares subject to the option every three months thereafter. Each option will have an exercise price equal to the fair market value of the ordinary shares on the grant date of such option. Each option will have a maximum term of ten years, but will terminate earlier if the optionee ceases to be a member of the Board of Directors.

F-20

[DESCRIPTION OF COVER GRAPHICS]

DESCRIPTION OF INSIDE FRONT FLAP GRAPHIC

The inside front flap consists of a box in the upper right-hand corner that contains seven smaller boxes with checks inside each box. Next to each of the boxes is a short phrase. These phrases are: "customized branded email, 14 languages, integrated unified messaging, turnkey e-marketing, scalable to millions of users, cost effective, rapid deployment." Running down the left-hand side of the page from the top to the middle in large type is the phrase "For all email and messaging needs . . ." Beneath this box is an arrow pointing towards an envelope. Extending to the right of the envelope is an arrow pointing to the right-hand side of the page. Within this arrow is the company logo (the word "commtouch" with the second "m" tilted and encircled).

DESCRIPTION OF INSIDE FRONT COVER GRAPHIC

The inside front cover consists of a two-page spread. In the middle of the spread on the right-hand side, and aligned to the right in large type, are the words: ". . . I need CommTouch." There are several images and text paragraphs on the spread. Starting from the upper left corner of the spread and working clockwise, there is an image of a mailbox. To the right of this image is a heading in large bold text that reads "Customized Branded Email." Below the heading is italicized text that reads "Email is one of the most widely used applications on the Internet. A company can build its brand online with CommTouch's highly customized solutions. CommTouch can put that brand name on millions of emails each day." Continuing clockwise is a heading in large bold text that reads "Integrated Unified Messaging." Below the heading is italicized text that reads "Our technology delivers a fully integrated email solution -- a platform for unified messaging that includes email, voice, fax, and pager communications, all synchronized with today's offline client applications, with integrated features such as calendaring and encryption on the way." To the right of this text is an image of a laptop computer. In the upper right-hand corner and proceeding down the length of the page on the right side are eleven logos representing some of the company's customers. These logos are: BusinessWeek, Talk City, Medscape, Excite, Sohu, ZDNet, First USA, NTT, VerticalNet, LookSmart and Grolier. To the left of this list there is a heading in large bold text that reads "Powerful Partnerships." Below the heading is italicized text that reads, "Some of the largest and best-known brands, web-based companies, and Internet businesses across the globe have turned to CommTouch for their messaging needs. Our technology delivers solutions to companies online, from small businesses to multinational corporations. You're in good company with CommTouch." In the middle of the right page is a heading in large bold text that reads "Secure Scalable Technology." Below the heading is italicized text that reads "With over eight years of email application development behind us, we provide one of the most scalable and flexible email hosting platforms available. Our modular environment and proprietary programming code deliver superior performance levels in email service." To the left of this text is an image of a Greek structure. At the bottom of the right page is a wheelbarrow full of dollar bills. Above and to the left of this image is a heading in large bold text that reads "Building Revenues." Below the heading is italicized text that reads "With CommTouch, business partners and webmasters can enable turnkey e-marketing and create e-commerce opportunities immediately. Our Premium Services are designed to help you build lasting, profitable relationships with their customers online. To the left of this is a heading in large bold text that reads "Instant Community." Below the heading is italicized text that reads "Through our ZapZone Network service, membership/affinity websites and personal homepage owners can provide the CommTouch solution to their online users in less than ten minutes. Today, over 70,000 such websites are Powered By CommTouch." To the left of this text is a stopwatch. Beneath this text is the company's logo, and underneath the logo is the company's website address (www.commtouch.com). To the left of the logo in the lower-left hand corner of the page is a partial image of a globe. Above the globe and extending up along the left side of the page are eight country flags. To the right of the flags is a heading in large bold text that reads "The Global Solution." Below it is italicized text that reads "Email in 14 languages, with, more coming online; deployed by customers in over


150 countries worldwide . . . that's CommTouch." Connecting the images in the background are dashed lines.

DESCRIPTION OF INSIDE BACK COVER GRAPHIC

The inside back cover has three screen shots representing examples of the company's email services. Starting from the upper-right hand corner, the upper screen shot shows an image from the website of Excite Japan (www.excite.co.jp), one of the company's business partners. To the left of this image is a large bold heading that reads "Community." Below the heading is text that reads "Excite Japan needed multiple localized email services to build its international online community. CommTouch delivers." Halfway down the page, the middle screen shot shows an image from the website of Talk City (www.talkcity.com), one of the company's business partners. To the right of this image is a large bold heading that reads "Commerce." Below the heading is text that reads "Talk City needed a high level of customization to build its brand with its online audience and help build ecommerce. CommTouch delivers." On the bottom of the page, the lower screen shot shows an image from the website of the company's ZapZone Network service (www.zzn.com). To the right of this image is a large bold heading that reads "Commitment." Below the heading is text that reads "Thousands of webmasters and homepage owners around the world need a turnkey web-based email solution. CommTouch delivers." In the background there is a shaded "m" from the company's logo. At the bottom of the page is the company's logo and website address.

DESCRIPTION OF OUTSIDE BACK COVER GRAPHIC

The outside back cover has the company's logo, the phrase "The global email messaging solution" and the company's website address, www.commtouch.com.

[DESCRIPTION OF INTERIOR GRAPHICS]

On page 32, there is a graphic representing the "CommTouch Solution." At the top, there is text reading "CommTouch Solution." Below the text there are three large arrows pointing down to three boxes. Starting from the left, the first box is labeled "WEB BASED COMPANIES." In this box there is text reading "Companies conducting business on the Internet seeking to offer web-based email to their online customers." Below this text are the names of five CommTouch business partners: EXCITE, TALK CITY, FORTUNE CITY, LOOKSMART, AND MEDSCAPE.

The middle box is labeled "SMALL SITE/AFFINITY GROUPS." In this box there is text reading "Personal home pages and small online communities seeking to offer web-based email to their end users." Below this text are the names of five ZapZone Network service users: OIL LINK, BABY.COM, DIABETES.COM, SOCCER.COM, and OXFORD ONLINE.

The box on the right is labeled "BUSINESSES." In this box there is text reading "Businesses seeking to outsource their internal email systems." Below this text are the names of three businesses with which CommTouch has an email agreement:
WEBFLIER, NIKU, and ESCHOOLHOUSE.

On page 42, there is a graphic labeled "Hardware Infrastructure." Starting from the top, there are cylinders labeled "Database" and "User's Mailboxes." Below these cylinders are pictures of computers labeled SQL Servers, Mail Servers, and Web Servers. The Database cylinder is connected with a line to the SQL Servers, and the User's Mailboxes cylinder is connected with a line to the Mail Servers.

Below the servers, there are lines connecting the servers to icons of computer hardware. Below the SQL Servers is text reading "ODBC Compliant Database," and a line connecting the SQL Servers to an icon labeled "Local Routers." Below the Mail Servers is text reading "IMAP4 Compliant," and a line connecting the Mail Servers to an icon labeled "Router." Below the Web Servers, there is text reading


"Microsoft - IIS," and a line connecting the Web Servers to an icon labeled "DNS." The DNS and Router icons are connected by a line to a cloud labeled "Internet."

On page 44, there is a graphic labeled "ADML Flow Chart." This is a flow chart with five levels. Starting from the left of the top row, there is a cylinder labeled "Languages Resource Database." In the middle of the top row is a rectangle labeled "ADML files." On the right of the top row is a cylinder labeled "Company-Dependent Database." The top row is connected, with lines and an arrow pointing downward, to an oval labeled "ADML CommTouch Compiler." This is connected, with an arrow pointing downward, to a rectangle labeled "ASP files." On the left of this rectangle is a cylinder labeled " User-Dependent Database." These two shapes are connected to each other, and to an arrow pointing down towards an oval labeled "ASP Interpreter." This oval is connected, with an arrow pointing downwards, to a rectangle labeled "HTML files."


3,000,000 ORDINARY SHARES

COMMTOUCH SOFTWARE LTD.

LOGO


PROSPECTUS

Until , 1999, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

U.S. Bancorp Piper Jaffray

Prudential Securities

Warburg Dillon Read LLC

, 1999


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses payable by the Company (the "Registrant") in connection with the offering of the securities being registered, other than the underwriting discounts and commissions. All of the amounts are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market filing fee.

SEC registration fee........................................  $   16,680
NASD filing fee.............................................       6,500
Nasdaq National Market filing fee...........................      48,750
Blue Sky fees and expenses..................................      10,000
Printing and engraving expenses.............................     300,000
Israeli Stamp Duty..........................................     500,000
Legal fees and expenses.....................................     700,000
Accounting fees and expenses................................     300,000
Transfer agent and registrar fees and expenses..............      10,000
Miscellaneous expenses......................................     208,070
                                                              ----------
          Total.............................................  $2,100,000
                                                              ==========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Articles of Association provide that the Registrant will indemnify any Office Holder of the Registrant as defined in the Companies Ordinance out of the assets of the Registrant against all liabilities incurred bona fide by such Office Holder in the line of his duties for the Registrant or related thereto.

Reference is made to Section of the Underwriting Agreement, a copy of which is filed as Exhibit 1.1 hereto, which provides for indemnification of the directors and officers of the Registrant who sign the Registration Statement by the Underwriters against certain liabilities, including those arising under the Securities Act, in certain circumstances.

In addition, the Registrant intends to secure insurance for its directors and officers.

Certain members of our management team are officers of our subsidiary, CommTouch Software Inc., a California Corporation, or reside in California. The Articles of Incorporation of CommTouch Software 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

II-1


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 by him in connection with the proceeding.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since April 1996, we have sold and issued the securities listed below without registering the securities under the Securities Act of 1933, as amended. None of these transactions involved any underwriters underwriting discounts or commissions, or any public offering.

(1) In May 1996, we issued and sold for cash 11,353 Series B Convertible Preferred Shares at a price of $44.04 per share to C.S.K. Venture Capital Co. Ltd. ("C.S.K."). In connection with this issuance, we also issued warrants to purchase 2,522 Series B Convertible Preferred Shares at an exercise price of NIS 1 per share to C.S.K.

(2) Between July 1997 and March 1999, we issued and sold for cash 153,093 Series C Convertible Preferred Shares at a price of $72.17 per share to 22 investors.

(3) In April 1999, we issued Convertible Promissory Notes that will convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain Israeli governmental approvals. The effective price for each Series D Preferred Share was $314.56.

We believe that each transaction listed above was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) of the Securities Act, Regulation D, promulgated under the Securities Act or Rule 701 with respect to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

II-2


ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS

EXHIBIT
NUMBER                      DESCRIPTION OF DOCUMENT
-------                     -----------------------
    1.1   Form of Underwriting Agreement.
    3.1   Memorandum of Association of the Registrant.
    3.2   Articles of Association of the Registrant.
    4.1   Specimen Certificate of Ordinary Shares.
    4.2   Amended and Restated Registration Rights Agreement dated as
          of April 19, 1999.
    4.3   Form of Tag-Along Rights (Right of First Refusal and
          Co-Sale) Agreement dated as of December 23, 1998.
    4.4   Form of Drag-Along Letter dated as of April 15, 1999.
    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.
   10.1   Registrant's 1996 CSI Stock Option Plan and forms of
          agreements thereunder.
   10.2   Registrant's form of Stock Option Agreement for Israeli
          Employees.
   10.3   Registrant's 1999 Stock Option Plan and form of agreement
          thereunder.
   10.4   CommTouch Software Ltd. 1999 Nonemployee Directors Stock
          Option Plan.
   10.5   CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
          and forms thereunder.
   10.6   Sublease between ASCII of America, Inc. and CommTouch for
          CommTouch's offices in Santa Clara, California, dated
          December 16, 1998.
   10.7   Lease between DeAnza Building and CommTouch for CommTouch's
          offices in Sunnyvale, California, dated February 5, 1996, as
          amended.
   21.1   Subsidiaries of the Registrant.
   23.1   Consent of Kost, Forer & Gabbay, independent auditors.
   23.2   Consent of Naschitz, Brandes & Co. (contained in Exhibit
          5.1.)
   23.3   Consent of McCutchen, Doyle, Brown & Enersen, LLP.
  *24.1   Power of Attorney.

* Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES.

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes that:

(1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 297(h) under the Securities Act shall be deemed to be part of this Registration Statement at the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus 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.

The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

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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.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto, state of California, on June 3, 1999.

COMMTOUCH SOFTWARE LTD.

By        /s/ GIDEON MANTEL
  ------------------------------------
             Gideon Mantel
        Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment to the 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    June 3, 1999
------------------------------------------------      (Principal Executive Officer)
                 Gideon Mantel

              /s/ JAMES E. COLLINS                       Chief Financial Officer          June 3, 1999
------------------------------------------------      (Principal Financial Officer)
                James E. Collins

              /s/ MISHAEL MATZRAFI                             Controller                 June 3, 1999
------------------------------------------------
                Mishael Matzrafi

                  /s/ AMIR LEV                                  Director                  June 3, 1999
------------------------------------------------
                    Amir Lev

                /s/ YIFTAH ATIR                                 Director                  June 3, 1999
------------------------------------------------
                  Yiftah Atir

              /s/ ALLAN C. BARKAT                               Director                  June 3, 1999
------------------------------------------------
                Allan C. Barkat

                /s/ YAIR SAFRAI                                 Director                  June 3, 1999
------------------------------------------------
                  Yair Safrai

                /s/ YOSEPH SELA                                 Director                  June 3, 1999
------------------------------------------------
                  Yoseph Sela

              /s/ JAMES E. COLLINS                          Attorney-in-fact              June 3, 1999
------------------------------------------------   and Authorized U.S. Representative
                James E. Collins

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EXHIBIT INDEX

                                                                         SEQUENTIALLY
EXHIBIT                                                                    NUMBERED
NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
-------    ------------------------------------------------------------  ------------
    1.1    Form of Underwriting Agreement.
    3.1    Memorandum of Association of the Registrant.
    3.2    Articles of Association of the Registrant.
    4.1    Specimen Certificate of Ordinary Shares.
    4.2    Amended and Restated Registration Rights Agreement dated as
           of April 19, 1999.
    4.3    Form of Tag-Along Rights (Right of First Refusal and
           Co-Sale) Agreement dated as of December 23, 1998.
    4.4    Form of Drag-Along Letter dated as of April 15, 1999.
    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.
   10.1    Registrant's 1996 CSI Stock Option Plan and forms of
           agreements thereunder.
   10.2    Registrant's form of Stock Option Agreement for Israeli
           Employees.
   10.3    Registrant's 1999 Stock Option Plan and form of agreement
           thereunder.
   10.4    CommTouch Software Ltd. 1999 Nonemployee Directors Stock
           Option Plan.
   10.5    CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
           and forms thereunder.
   10.6    Sublease between ASCII of America, Inc. and CommTouch for
           CommTouch's offices in Santa Clara, California, dated
           December 16, 1998.
   10.7    Lease between DeAnza Building and CommTouch for CommTouch's
           offices in Sunnyvale, California, dated February 5, 1996, as
           amended.
   21.1    Subsidiaries of the Registrant.
   23.1    Consent of Kost, Forer & Gabbay, independent auditors.
   23.2    Consent of Naschitz, Brandes & Co. (contained in Exhibit
           5.1.)
   23.3    Consent of McCutchen, Doyle, Brown & Enersen, LLP.
  *24.1    Power of Attorney.

* Previously filed.


EXHIBIT 1.1

__________ SHARES(1)

COMMTOUCH SOFTWARE LTD.

ORDINARY SHARES

PURCHASE AGREEMENT

_____________________, 1999

U.S. BANCORP PIPER JAFFRAY
Prudential Securities Incorporated
Warburg Dillon Read LLC,
A subsidiary of UBS AG As Representatives of the several Underwriters named in Schedule II hereto c/o U.S. Bancorp Piper Jaffray
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Gentlemen:

CommTouch Software Ltd., a corporation organized under the laws of Israel (the "Company") proposes to sell to the several Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of __________ shares (the "Firm Shares") of the Company's authorized but unissued ordinary shares, nominal value New Israeli Shekels ("NIS") 1.0 per share (herein called "Ordinary Shares"). The Company has also granted to the several Underwriters an option to purchase up to __________ additional shares of Common Stock on the terms and for the purposes set forth in Section 3 hereof (the "Option Shares"). The Firm Shares and any Option Shares purchased pursuant to this Purchase Agreement are herein collectively called the "Securities."

The Company hereby confirms its agreement with respect to the sale of the Securities to the several Underwriters, for whom you are acting as Representatives (the "Representatives").

1. Registration Statement and Prospectus. A registration statement on Form F-1 (File No. 33-___________) with respect to the Securities, including a preliminary form of prospectus, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission; one or more amendments to such registration statement have also been so prepared and have been, or will be, so filed; and, if the Company has elected to rely upon Rule 462(b) of the Rules and Regulations to increase the size of the offering registered


(1) Plus an option to purchase up to ________ additional shares to cover over-allotments.


under the Act, the Company will prepare and file with the Commission a registration statement with respect to such increase pursuant to Rule 462(b). Copies of such registration statement(s) and amendments and each related preliminary prospectus have been delivered to you.

If the Company has elected not to rely upon Rule 430A of the Rules and Regulations, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus (including a term sheet meeting the requirements of Rule 434 of the Rules and Regulations). If the Company has elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and file a prospectus (or a term sheet meeting the requirements of Rule 434) pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Such registration statement as amended at the time it is or was declared effective by the Commission, and, in the event of any amendment thereto after the effective date and prior to the First Closing Date (as hereinafter defined), such registration statement as so amended (but only from and after the effectiveness of such amendment), including a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the offering registered under the Act and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and Regulations, is hereinafter called the "Registration Statement." The prospectus included in the Registration Statement at the time it is or was declared effective by the Commission is hereinafter called the "Prospectus," except that if any prospectus (including any term sheet meeting the requirements of Rule 434 of the Rules and Regulations provided by the Company for use with a prospectus subject to completion within the meaning of Rule 434 in order to meet the requirements of Section 10(a) of the Rules and Regulations) filed by the Company with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the Rules and Regulations or any other such prospectus provided to the Underwriters by the Company for use in connection with the offering of the Securities (whether or not required to be filed by the Company with the Commission pursuant to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file at the time the Registration Statement is or was declared effective by the Commission, the term "Prospectus" shall refer to such differing prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) from and after the time such prospectus is filed with the Commission or transmitted to the Commission for filing pursuant to such Rule
424(b) (and Rule 434, if applicable) or from and after the time it is first provided to the Underwriters by the Company for such use. The term "Preliminary Prospectus" as used herein means any preliminary prospectus included in the Registration Statement prior to the time it becomes or became effective under the Act and any prospectus subject to completion as described in Rule 430A or 434 of the Rules and Regulations.

2. Representations and Warranties of the Company.

(a) The Company represents and warrants to, and agrees with, the several Underwriters as follows:

(i) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission and each Preliminary Prospectus, at the time of filing thereof, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any Preliminary Prospectus in reliance upon, and in conformity with, written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof.

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(ii) As of the time the Registration Statement (or any post-effective amendment thereto, including a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the offering registered under the Act) is or was declared effective by the Commission, upon the filing or first delivery to the Underwriters of the Prospectus (or any supplement to the Prospectus (including any term sheet meeting the requirements of Rule 434 of the Rules and Regulations)) and at the First Closing Date and Second Closing Date (as hereinafter defined), (A) the Registration Statement and the Prospectus (in each case, as so amended and/or supplemented) conformed or will conform in all material respects to the requirements of the Act and the Rules and Regulations, (B) the Registration Statement (as so amended) did not or will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) the Prospectus (as so supplemented) did not or will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are or were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any such document in reliance upon, and in conformity with, written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof. If the Registration Statement has been declared effective by the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission.

(iii) The consolidated financial statements of the Company, together with the notes thereto, set forth in the Registration Statement and the Prospectus comply in all material respects with the requirements of the Act and fairly present the consolidated financial condition of the Company and its consolidated subsidiaries indicated and the results of operations and changes in cash flows for the periods therein specified in conformity with United States generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise stated therein); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. No other financial statements or schedules are required to be included in the Registration Statement or Prospectus. Kost, Forer & Gabbay (a member of Ernst & Young International), which has expressed its opinion with respect to the financial statements and schedules filed as a part of the Registration Statement and included in the Registration Statement and the Prospectus, are independent public accountants as required by the Act and the Rules and Regulations. The summary financial and other data included in the Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein.

(iv) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries has full corporate power and authority to own its properties and conduct its business as currently being carried on and as described in the Registration Statement and the Prospectus, and is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which it owns or leases real property or in which the conduct of its business makes such qualification necessary and in which the failure to so qualify would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect").

(v)Except as contemplated in the Registration Statement and the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any

-3-

distribution of any kind with respect to its capital stock; and there has not been any change in the capital stock (other than a change in the number of outstanding Ordinary Shares due to the issuance of shares upon the exercise of outstanding options or warrants), or any material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company or any of its subsidiaries, or any change that had a Material Adverse Effect, or any development involving a prospective Material Adverse Effect.

(vi) Except as set forth in the Registration Statement and the Prospectus, there is not pending or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company or any of its subsidiaries is a party or to which any property or assets of the Company or any of its subsidiaries is subject before or by any court or governmental agency, authority or body, or any arbitrator, which might result in a Material Adverse Effect.

(vii) There are no contracts or documents of the Company or any of its subsidiaries that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations that have not been so described or filed.

(viii) This Agreement has been duly authorized, executed and delivered by the Company, and constitutes a valid, legal and binding obligation of the Company, enforceable in accordance with its terms, except as rights to indemnity hereunder may be limited by federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any agreement or instrument to which the Company is a party or by which it is bound or to which any of its property is subject, the Company's charter or by-laws, or any order, rule, regulation or decree of any court or governmental agency or body having jurisdiction over the Company or any of its properties; no consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement or for the consummation of the transactions contemplated hereby, including the issuance or sale of the Securities by the Company, except such as may be required under the Act or state securities or blue sky laws; and the Company has full power and authority to enter into this Agreement and to authorize, issue and sell the Securities as contemplated by this Agreement.

(ix) All of the issued and outstanding shares of capital stock of the Company, including the outstanding Ordinary Shares, are duly authorized and validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws (including, without limitation, applicable Israeli securities laws and the rules and regulations of the Tel Aviv Stock Exchange), were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the holders thereof are not subject to personal liability by reason of being such holders; and the capital stock of the Company, including the Ordinary Shares, conforms to the description thereof in the Registration Statement and Prospectus. Except as otherwise stated in the Registration Statement and Prospectus, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any Ordinary Shares pursuant to the Company's charter, by-laws or any agreement or other instrument to which the Company is a party or by which the Company is bound. All of the issued and outstanding shares of capital stock of each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise described in the Registration Statement and the Prospectus, the Company owns of record and beneficially, free and clear of any security interests, claims, liens, proxies, equities or other encumbrances, all of the issued and outstanding

-4-

shares of such stock. Except as described in the Registration Statement and the Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company or any subsidiary of the Company any shares of the capital stock of the Company or any subsidiary of the Company. The Company has an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus.

(x) The Securities which may be sold hereunder by the Company have been duly authorized and, when issued, delivered and paid for in accordance with the terms hereof, will have been validly issued and will be fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders, and conforms to the description thereof in the Registration Statement and the Prospectus. No further approval or authority of the shareholders of the Company or the Board of Directors of the Company is required for the sale and issuance of the Securities hereunder.

(xi) Neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights for or relating to the registration of any Ordinary Shares or other securities of the Company and no person or entity holds a right to require registration under the Securities Act of shares of capital stock of the Company at any other time, except as disclosed in the Registration Statement and the Prospectus.

(xii) The Company and each of its subsidiaries holds, and is operating in compliance in all material respects with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect; and the Company and each of its subsidiaries is in compliance in all material respects with all applicable federal, state, local and foreign laws, regulations, orders and decrees.

(xiii) The Company and its subsidiaries have good and marketable title to all property described in the Registration Statement and the Prospectus as being owned by them, in each case free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus; the property held under lease by the Company and its subsidiaries is held by them under valid, subsisting and enforceable leases with only such exceptions with respect to any particular lease as do not interfere in any material respect with the conduct of the business of the Company or its subsidiaries.

(xiv) The Company and each of its subsidiaries owns or possesses all patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets know-how, proprietary techniques, processes and rights ("Intellectual Property") used in the conduct of the business of the Company and its subsidiaries as currently carried on (including products, services and technology contemplated by current research and development projects) and as described in the Registration Statement and the Prospectus. Except as stated in the Registration Statement and the Prospectus, no name which the Company or any of its subsidiaries uses and no other aspect of the business of the Company or any of its subsidiaries will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property of others material to the business or prospects of the Company and neither the Company nor any of its subsidiaries has received any notice alleging any such infringement or fee. To the knowledge of the Company, its Intellectual Property is not being infringed by any third parties which infringement could reasonably be expected, whether singly or in the aggregate, to have a Material Adverse Effect.

-5-

(xv) Neither the Company nor any of its subsidiaries (i) is in violation of its respective charter, by-laws or other organizational documents (ii) in breach of or otherwise in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note, indenture, loan agreement or any other contract, lease or other instrument to which any of them is subject or by which any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor has any event occurred nor condition exist that with the notice and/or the passage of time would give rise to such a breach or default or (iii) is in violation of any law, ordinance, government rule, regulation or court order or decree to which any of them is subject or by which any of them may be bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, except in the case of clauses (ii) and (iii) for such breaches, defaults or violations that individually or in the aggregate would not have a Material Adverse Effect.

(xvi) The Company and its subsidiaries have filed all federal, state, local and foreign income and franchise tax returns required to be filed and are not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, other than any which the Company or any of its subsidiaries is contesting in good faith.

(xvii) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by the Company.

(xviii) The Securities have been duly authorized for quotation on the NASDAQ National Market System, subject to official notice of issuance, and, on the date the Registration Statement became or becomes effective, the Company's Registration Statement on Form 8-A or other applicable form under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), became or will become effective.

(xix) The Company has no subsidiary or subsidiaries and the Company owns no capital stock or other equity or ownership or proprietary interest in any corporation, partnership, limited liability company, joint venture association, trust or other entity except for the subsidiaries listed in Exhibit 21 to the Registration Statement.

(xx) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(xxi) Other than as contemplated by this Agreement, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

(xxii) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba.

-6-

(xxiii) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is threatened; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers or contractors which could have a Material Adverse Effect. Neither the Company nor any of its subsidiaries has violated any applicable safety or similar law applicable to its business nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal or state wage and hours law, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, the violation of any of which could have a Material Adverse Effect. The Company is not aware of any threatened or pending litigation between the Company or any of its subsidiaries and any of its executive officers which, if adversely determined, could have a Material Adverse Effect, and has no reason to believe that such officers will not remain in the employment of the Company during the next twelve months.

(xxiv) No transaction has occurred or relationship exists between or among the Company or any of its subsidiaries and any of their officers or directors or any affiliate or affiliates of any such officer or director that is required to be described in and is not described in the Registration Statement and the Prospectus.

(xxv) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks in such amounts as are customary in the business in which they are engaged; and neither the Company nor any subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their business at a cost that would not have a Material Adverse Effect.

(xxvi) There are no affiliations with the National Association of Securities Dealers, Inc. (the "NASD") among the Company's officers, directors or, to the best knowledge of the Company, any five percent or greater shareholder of the Company, except as set forth in the Registration Statement and the Prospectus or otherwise disclosed in writing to the Representatives.

(xxvii) Neither the Company nor any of its subsidiaries is an "investment company" nor a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the "Investment Company Act").

(xxviii) Neither the Company nor any of its subsidiaries or, to the knowledge of the Company, any other person associated with or acting on behalf of the Company or any of its subsidiaries including, without limitation, any director, officer, agent or employee of the Company or any of its subsidiaries has, directly or indirectly, while acting on behalf of the Company or any of its subsidiaries, (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful payment.

(xxix) The Company has reviewed its operations and that of its subsidiaries and any third parties with which the Company or any of its subsidiaries has a material relationship to evaluate the extent to which the business or operations of the Company or any of its subsidiaries will be affected by the Year 2000 Problem (defined below). As a result of such review, the Company has no reason to believe, and

-7-

does not believe, that the Year 2000 Problem will have a Material Adverse Effect, or result in any material loss or interference with the Company's business or operations. The "Year 2000 Problem" as used herein means any significant risk that computer hardware or software used in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission or other utilization of data or in the operation of mechanical or electrical systems of any kind will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000.

(xxx) The Company does not believe that it is, and upon the consummation of the transactions contemplated hereby and the application of the proceeds as described in the Registration Statement and the Prospectus under the caption "Use of Proceeds" does not believe that it will become, a "passive foreign investment company" (herein called a PFIC) as defined in Section 1296 of the Internal Revenue Code of 1986, as amended (herein called the Code).

(xxxi) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Ordinary Shares to facilitate the sale or resale of the Stock.

(xxxii) The Company has received from the Israel Securities Authority an exemption from the requirement to publish a prospectus in Israel for the offer of the Securities in the manner required by the applicable laws of the State of Israel, which exemption was in full force and effect on the date hereof and which shall be in full force and effect on the date of the Prospectus, on the date that any post-effective amendment to the Registration Statement shall become effective, when any supplement or amendment to the Prospectus is filed with the Commission, and at each Closing Date. It is further understood that no public offering (as defined under the laws of the State of Israel) pursuant to the Prospectus will be made within the State of Israel by the Company.

(xxxiii) Each of the Company and its subsidiaries is in material compliance with all conditions and requirements stipulated by the instruments of approval issued by the Investment Center of the Ministry of Industry and Commerce granted entitling it or any of its operations to the status of "approved enterprise" under Israeli law and by Israeli laws and regulations relating to such approved enterprise status except as would not have a Material Adverse Effect. All information supplied by the Company with respect to such applications was true, correct and complete in all material respect when supplied to the appropriate authorities. The Company does not know of any reason or circumstance that would lead to revocation of its status as an "approved enterprise."

(xxxiv) Neither the Company nor any of its subsidiaries is in violation of any conditions or requirements stipulated by the instruments of approval granted to any of them by the Office of the Chief Scientist in the Ministry of Industry & Commerce, with respect to any research and development grants given to it by such office, which violation, individually or in the aggregate, would have a Material Adverse Effect.

(xxxv) No transfer tax, stamp duty or similar tax is payable by or on behalf of the Underwriters in connection with: (i) the issuance by the Company of the Stock; (ii) the purchase by the Underwriters of the Stock from the Company; (iii) the consummation by the Company of any of its obligations under this Agreement; or (iv) resale of the Stock by the Underwriters in connection with the distribution contemplated hereby.

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(b)Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby.

3. Purchase, Sale and Delivery of Securities.

(a)On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell __________ Firm Shares, and each Selling Stockholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite the name of such Selling Stockholder in Schedule I hereto, to the several Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. The purchase price for each Firm Share shall be $_____ per share. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraph (c) of this Section 3 and in
Section 8 hereof, the agreement of each Underwriter is to purchase only the respective number of Firm Shares specified in Schedule I.

The Firm Shares will be delivered by the Company to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Company, as appropriate, at the offices of U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable, at 9:00 a.m. Central time on the third (or if the Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act, after 4:30 p.m. Eastern time, the fourth) full business day following the date hereof, or at such other time and date as you and the Company determine pursuant to Rule 15c6-1(a) under the Exchange Act, such time and date of delivery being herein referred to as the "First Closing Date." If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. Certificates representing the Firm Shares, in definitive form and in such denominations and registered in such names as you may request upon at least two business days' prior notice to the Company, will be made available for checking and packaging not later than 10:30 a.m., Central time, on the business day next preceding the First Closing Date at the offices of U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable.

(b)On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters an option to purchase all or any portion of the Option Shares at the same purchase price as the Firm Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the effective date of this Agreement upon notice (confirmed in writing) by the Representatives to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the certificates for the Option Shares are to be registered and the date and time, as determined by you, when the Option Shares are to be delivered, such time and date being herein referred to as the "Second Closing" and "Second Closing Date", respectively; provided, however, that the Second Closing Date shall not be earlier than the First Closing Date nor earlier than the second business day after the date on which the option shall have been exercised. The number of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of Option Shares to be purchased by the several Underwriters as the number of Firm Shares to be purchased by such

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Underwriter is of the total number of Firm Shares to be purchased by the several Underwriters, as adjusted by the Representatives in such manner as the Representatives deem advisable to avoid fractional shares. No Option Shares shall be sold and delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered.

The Option Shares will be delivered by and the Company, to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Company, as appropriate, at the offices of U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable at 9:00 a.m., Central time, on the Second Closing Date. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. Certificates representing the Option Shares in definitive form and in such denominations and registered in such names as you have set forth in your notice of option exercise, will be made available for checking and packaging not later than 10:30 a.m., Central time, on the business day next preceding the Second Closing Date at the office of U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable.

(c) It is understood that you, individually and not as Representatives of the several Underwriters, may (but shall not be obligated to) make payment to the Company, on behalf of any Underwriter for the Securities to be purchased by such Underwriter. Any such payment by you shall not relieve any such Underwriter of any of its obligations hereunder. Nothing herein contained shall constitute any of the Underwriters an unincorporated association or partner with the Company.

(d) Notwithstanding anything else in this Agreement, the Underwriters shall not solicit offers to purchase Securities in Israel from more than 35 solicitees in the aggregate and will obtain confirmation from such solicitees that they are purchasing such Securities for investment purposes only and not with a view toward distribution or sale. On or before the date two days after the Closing Date, provide that such date is not more than six days after the date of this Agreement, the Underwriters shall furnish the Company, its counsel and the Securities Authority of the State of Israel (the "ISA") with a list of such solicitees, if any (including their name and addresses), so as to enable the Company to comply with the terms of the exemption issued by the ISA.

4. Covenants

(a) The Company covenants and agrees with the several Underwriters as follows:

(i)If the Registration Statement has not already been declared effective by the Commission, the Company will use its best efforts to cause the Registration Statement and any post-effective amendments thereto to become effective as promptly as possible; the Company will notify you promptly of the time when the Registration Statement or any post-effective amendment to the Registration Statement has become effective or any supplement to the Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or the Prospectus or additional information; if the Company has elected to rely on Rule 430A of the Rules and Regulations, the Company will prepare and file a Prospectus (or term sheet within the meaning of Rule 434 of the Rules and Regulations) containing the information omitted therefrom pursuant to Rule 430A of the Rules and Regulations with the Commission within the time period required by, and otherwise in accordance with the provisions of, Rules 424(b), 430A

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and 434, if applicable, of the Rules and Regulations; if the Company has elected to rely upon Rule 462(b) of the Rules and Regulations to increase the size of the offering registered under the Act, the Company will prepare and file a registration statement with respect to such increase with the Commission within the time period required by, and otherwise in accordance with the provisions of, Rule 462(b); the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or the Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) that, in your opinion, may be necessary or advisable in connection with the distribution of the Securities by the Underwriters; and the Company will not file any amendment or supplement to the Registration Statement or Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) to which you shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing.

(ii) The Company will advise you, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the Commission the ISA, the Tel Aviv Stock Exchange, or any Israeli or other foreign regulatory body of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and the Company will promptly use its best efforts to (i) prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued and (ii) maintain in effect the exemption granted by the ISA and, if such exemption shall at any time not be effective, to obtain the reinstatement thereof at the earliest possible moment.

(iii) Within the time during which a prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) relating to the Securities is required to be delivered under the Act, the Company will comply as far as it is able with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which in the opinion of counsel for the Company or of counsel for the Underwriters the Prospectus would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is in the opinion of counsel for the Company of counsel for the Underwriters necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company will promptly notify you and will forthwith amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance.

(iv) The Company will use its best efforts to qualify the Securities for sale under the securities laws of such jurisdictions as you reasonably designate and to continue such qualifications in effect so long as required for the distribution of the Securities, except that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Securities.

(v) The Company will furnish to the Underwriters copies of the Registration Statement (three of which will be signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) to such documents, in each case as soon as available and in such quantities as you may from time to time reasonably request. Prior to the filing thereof with the Commission, the Company

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will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed.

(vi) During a period of five years commencing with the date hereof, the Company will (i) submit to the Commission quarterly reports, which will include unaudited quarterly consolidated financial information, on Form 6-K for the first three quarters of each fiscal year, and file its annual report on Form 20-F within the time period prescribed under Section 13 of the Exchange Act for the filing by domestic issuers of quarterly reports on Form 10-Q and annual reports on Form 10-K, respectively and (ii) furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to shareholders of the Company and of all information, documents and reports filed with the Commission (including the Report on Form SR required by Rule 463 of the Commission under the Securities Act), the Nasdaq National Market, the NASD, the ISA or the Tel Aviv Stock Exchange. Reports to the ISA or the Tel Aviv Stock Exchange may be furnished to you and to any such Underwriter in Hebrew if such reports are not available in English.

(vii) The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company's current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period beginning after the effective date of the Registration Statement that shall satisfy the provisions of Section 11(a) of the Act and Rule 158 of the Rules and Regulations.

(viii) The Company, whether or not the transactions contemplated hereunder are consummated or this Agreement is prevented from becoming effective under the provisions of Section 9(a) hereof or is terminated, will pay or cause to be paid (A) all expenses (including transfer taxes allocated to the respective transferees) incurred in connection with the delivery to the Underwriters of the Securities, (B) all expenses and fees (including, without limitation, fees and expenses of the Company's accountants and counsel but, except as otherwise provided below, not including fees of the Underwriters' counsel) in connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), the Securities, each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto, and the printing, delivery, and shipping of this Agreement and other underwriting documents, including Blue Sky Memoranda, (C) all filing fees and fees and disbursements of the Underwriters' counsel incurred in connection with the qualification of the Securities for offering and sale by the Underwriters or by dealers under the securities or blue sky laws of the states and other jurisdictions which you shall designate in accordance with
Section 4(d) hereof, (D) the fees and expenses of any transfer agent or registrar, (E) the filing fees incident to any required review by the NASD of the terms of the sale of the Securities, (F) listing fees, if any, and (G) all other costs and expenses incident to the performance of its obligations hereunder that are not otherwise specifically provided for herein. If the sale of the Securities provided for herein is not consummated by reason of action by the Company pursuant to Section 9(a) hereof which prevents this Agreement from becoming effective, or by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its or their part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the several Underwriters for all out-of-pocket disbursements (including fees and disbursements of counsel) incurred by the Underwriters in connection with their investigation, preparing to market and marketing the Securities or in contemplation of performing their obligations hereunder. The Company shall not in any event be liable to any of the Underwriters for loss of anticipated profits from the transactions covered by this Agreement.

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(ix) The Company will apply the net proceeds from the sale of the Securities to be sold by it hereunder for the purposes set forth in the Prospectus and will file such reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required in accordance with Rule 463 of the Rules and Regulations.

(x) The Company will not, without your prior written consent, for a period of 180 days after the commencement of the public offering of the Securities by the Underwriters (the "Lock-Up Period") offer for sale, sell, contract to sell, grant any option for the sale of or otherwise issue or dispose of any Ordinary Shares or any securities convertible into or exchangeable for, or any options or rights to purchase or acquire, Common Stock, except to the Underwriters pursuant to this Agreement and except for the issuance of options pursuant to the Company's __________ Plan (provided that no such options shall vest and become exercisable prior to the expiration of the Lock-Up Period) __________ Employee Stock Purchase Plan and pursuant to the exercise of stock options or warrants outstanding on the date hereof. The Company agrees not to accelerate the vesting of any option or warrant or the lapse of any repurchase right prior to the expiration of the Lock-Up Period.

(xi) The Company either has caused to be delivered to you or will cause to be delivered to you prior to the effective date of the Registration Statement a letter (the "Lock-Up Agreement") from each of the Company's directors, officers and other shareholders and each holder of securities convertible into or exercisable for shares of the Company's capital stock stating that such person agrees that, from the date of execution of this Agreement and continuing to and including the date 180 days after the date of the Prospectus, he or she will not publicly or privately announce any intention to, will not allow any affiliate or subsidiary, if applicable, to, and will not itself, without the prior written consent of U.S. Bancorp Piper Jaffray on behalf of the Underwriters, (i) offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Ordinary Shares or any securities convertible into, or exercisable or exchangeable for, Ordinary Shares, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of any Ordinary Shares or any securities convertible into, or exercisable or exchangeable for, Ordinary Shares (whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or such other securities, in cash or otherwise), in each case, beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) or otherwise controlled by the shareholder on the date of the Lock-Up Agreement or thereafter acquired; provided, however, that, if the shareholder is an individual, the shareholder may, without the prior written consent of U.S. Bancorp Piper Jaffray on behalf of the Underwriters, transfer Ordinary Shares or any securities convertible into, or exercisable or exchangeable for, Ordinary Shares either during his or her lifetime or, on death, by will or intestacy to members of the shareholder's immediate family or to trusts exclusively for the benefit of members of the shareholder's immediate family or in connection with bona fide gifts, provided that, prior to any such transfer, such transferee executes an agreement, satisfactory to U.S. Bancorp Piper Jaffray, pursuant to which such transferee agrees to receive and hold such shares subject to the provisions of the Lock-Up Agreement and that there shall be no further transfer except in accordance with the provisions of the Lock-Up Agreement. For purposes of this paragraph, "immediate family" shall mean the shareholder's spouse, lineal descendant, father, mother, brother or sister.

(xii) The Company has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, and has not effected any sales of Common Stock which are required to be disclosed in response to Item 701 of Regulation S-K under the Act which have not been so disclosed in the Registration Statement.

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(xiii) The Company will not incur any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

(xiv) The Company will inform the Florida Department of Banking and Finance at any time prior to the consummation of the distribution of the Securities by the Underwriters if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba. Such information will be provided within 90 days after the commencement thereof or after a change occurs with respect to previously reported information.

(xv) The Company will use its best efforts to ensure that it will not become a PFIC to the extent consistent with its other business objectives. If it believes it is a PFIC, the Company will promptly notify each U.S. holder of the Ordinary Shares (the "U.S. Holders") in order to enable U.S. Holders to consider whether to make a QEF election or a mark to market election. The Company will further comply with the applicable information reporting requirements for U.S. Holders to make such elections.

(xvi) The Company is familiar with the Investment Company Act and will conduct its affairs in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act.

(xvii) To the extent that, and for as long as, the laws of Israel or any other foreign jurisdiction require any permit for approval by, or exemption of any local authority of the transactions contemplated hereby to be legally permitted and to remain effective, the Company will obtain and maintain each such permit, approval or exemption valid and in full force and effect.

(xviii) In any suit (whether in a court in the United States or any other jurisdiction) seeking enforcement of this Agreement, or provisions of this Agreement, (i) no defense (other than a procedural defense) given or allowed by the laws of any other state or country shall be interposed in any suit, action or proceeding hereon unless such defense is also given or allowed by the laws of the State of California or of the United States, (ii) if the plaintiffs therein seek a judgment in United States dollars, the Company will not interpose any defense or objection to or otherwise oppose judgment, if any, being awarded in such currency, and (iii) if the plaintiffs therein seek to have any judgment (or any aspect thereof) awarded in foreign currency linked, for the period from entry of such judgment until actual payment thereof in full has been made, to the changes in the foreign currency-United States dollar exchange rate, the Company will not interpose any defense or objection to or otherwise oppose inclusion of such linkage in any such judgment. The Company agrees that it will not initiate or seek to initiate any action, suit or proceeding, in Israel or in any other jurisdiction other than the United States, seeking damages or for the purpose of obtaining any injunction or declaratory judgment against the enforcement of or a declaratory judgment concerning any alleged breach by the Company of or other claim by you in respect of, this Agreement or any of your rights under this Agreement, including without limitation any action, suit or proceeding challenging the enforceability of or seeking to invalidate in any respect the submission by the Company hereunder to the jurisdiction of federal or California State courts or the designation of the laws of the State of California as the law applicable to this Agreement.

(xix) If any payment of any sum due under this Agreement from the Company is made to or received by the Underwriters or any controlling person of any Underwriter in a currency other than freely transferable United States dollars, whether by judicial judgment or otherwise, the obligations of the Company under this Agreement shall be discharged only to the extent of the net amount of freely transferable

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United States dollars that the Underwriters or such controlling persons, as the case may be, in accordance with normal bank procedures, are able to lawfully purchase with such amount of such other currency. To the extent that the Underwriters or such controlling persons are not able to purchase sufficient United States dollars with such amount of such other currency to discharge the obligations of the Company to the Underwriters or such controlling persons, as the case may be, shall not be discharged with respect to such difference, and any such undischarged amount will be due as a separate obligation and shall not be affected by payment or of judgment being obtained for any other sums due under or in respect of this Agreement.

(xx) The Company will use its best efforts to effect and maintain the quotation of the Ordinary Shares on the Nasdaq National Market.

5. Conditions of Underwriters' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy, as of the date hereof and at each of the First Closing Date and the Second Closing Date (as if made at such Closing Date), of and compliance with all representations, warranties and agreements of the Company and the Selling Stockholders contained herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions:

(a) The Registration Statement shall have become effective not later than 5:00 p.m., Central time, on the date of this Agreement, or such later time and date as you, as Representatives of the several Underwriters, shall approve and all filings required by Rules 424, 430A and 434 of the Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or any amendment thereof shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your satisfaction.

(b) The legality and sufficiency of the sale of the Securities hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation, U.S. counsel for the Underwriters, and Yigal Arnon & Co., Israeli counsel for the Underwriters.

(c) No Underwriter shall have advised the Company that the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), contains an untrue statement of fact which, in your opinion, is material, or omits to state a fact which, in your opinion, is material and is required to be stated therein or necessary to make the statements therein not misleading.

(d) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries shall have incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock; and there shall not have been any change in the capital stock (other than a change in the number of outstanding Ordinary Shares due to the issuance of shares upon the exercise of outstanding options or warrants), or any material change in the short-term or long-term debt of the Company, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company or any of its subsidiaries, or any material adverse change or any development involving a prospective material adverse change (whether or not arising in the ordinary course of business), in the general affairs, condition (financial

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or otherwise), business, key personnel, property, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, that, in your judgment, makes it impractical or inadvisable to offer or deliver the Securities on the terms and in the manner contemplated in the Registration Statement or the Prospectus.

(e) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of McCutchen, Doyle, Brown & Emerson LLP, U.S. counsel for the Company, dated such Closing Date and addressed to you, covering the matters set forth in Schedule II hereto.

In rendering such opinion such counsel may rely (i) as to matters of law other than California and federal law, upon the opinion or opinions of local counsel provided that the extent of such reliance is specified in such opinion and that such counsel shall state that such opinion or opinions of local counsel are satisfactory to them and that they believe they and you are justified in relying thereon and (ii) as to matters of fact, to the extent such counsel deems reasonable upon certificates of officers of the Company and its subsidiaries provided that the extent of such reliance is specified in such opinion.

(f) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of Naschitz, Brandes & Co, Israeli counsel for the Company, dated such Closing Date and addressed to you, covering the matters set forth in Schedule III hereto

In rendering such opinion such counsel may rely (i) as to matters of law other than Israeli law, upon the opinion or opinions of local counsel provided that the extent of such reliance is specified in such opinion and that such counsel shall state that such opinion or opinions of local counsel are satisfactory to them and that they believe they and you are justified in relying thereon and (ii) as to matters of fact, to the extent such counsel deems reasonable upon certificates of officers of the Company and its subsidiaries provided that the extent of such reliance is specified in such opinion.

(g) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, such opinion or opinions from Wilson Sonsini Goodrich & Rosati, Professional Corporation, U.S. counsel for the several Underwriters, and Yigal Arnon & Co., Israeli counsel for the several Underwriters, dated such Closing Date and addressed to you, with respect to the validity of the Securities, the Registration Statement, the Prospectus and other related matters as you reasonably may request, and such counsel shall have received such papers and information as they request to enable them to pass upon such matters.

(h) On each Closing Date you, as Representatives of the several Underwriters, shall have received a letter of Kost, Forer & Gabbay (a member of Ernst & Young International), dated such Closing Date and addressed to you:

(i) confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualifications of accountants under Rule 2-01 of Regulation S-X of the Commission,

(ii) stating that, in their opinion, the audited consolidated financial statements and schedules examined by them and included in the Registratio Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations,

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(iii) stating, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of such letter), the conclusions and findings of said firm with respect to the financial information and other matters covered by its letter delivered to you concurrently with the execution of this Agreement, and the effect of the letter so to be delivered on such Closing Date shall be to confirm the conclusions and findings set forth in such prior letter,

(iv) stating that, at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company or any decrease in net current assets or shareholders' equity of the Company in each case compared with amounts shown on the December 31, 1998 audited consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from January 1, 1998 to such specified date there were any decreases, as compared with the comparable period of the prior fiscal quarter, in total sales of services and license fees, income before taxes or total or per share amounts of net income of the Company, except in all instances for changes, decreases or increases set forth in such letter,

(v) stating that they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentaged and financial information that are derived from the general accounting records of the Company and are included in the Registration Statement and the Prospectus, including the amounts, percentages and financial information included under the captions "Summary Consolidated Financial and Operating Data," "Capitalization," "Selected Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and have compared such amounts, percentages and financial information with such records of the Company and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation.

(i) On each Closing Date, there shall have been furnished to you, as Representatives of the Underwriters, a certificate, dated such Closing Date and addressed to you, signed by the chief executive officer and by the chief financial officer of the Company, to the effect that:

(i) The representations and warranties of the Company in this Agreement are true and correct, in all material respects, as if made at and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date;

(ii) No stop order or other order suspending the effectiveness of the Registration Statement or any amendment thereof or the qualification of the Securities for offering or sale has been issued, and no proceeding for that purpose has been instituted or, to the best of their knowledge, is contemplated by the Commission or any state or regulatory body; and

(iii) The signers of said certificate have carefully examined the Registration Statement and the Prospectus, and any amendments thereof or supplements thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), and (A) such documents contain all statements and information required to be included therein, the Registration Statement, or any amendment thereof, does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, does not include any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (B)

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since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth, (C) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock, and except as disclosed in the Prospectus, there has not been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the issuance of shares upon the exercise of outstanding options or warrants), or any material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company, or any of its subsidiaries, or any Material Adverse Effect or any development involving a prospective Material Adverse Effect, and (D) except as stated in the Registration Statement and the Prospectus, there is not pending, or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company or any of its subsidiaries is a party before or by any court or governmental agency, authority or body, or any arbitrator, which might result in any Material Adverse Effect.

(j) Subsequent to the execution of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereto) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in subparagraph (h) of this
Section 5 or (ii) any change, or any development involving a prospective change (including without limitation a change in management or control of the Company), in or affecting the business or properties of the Company and its subsidiaries the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto);

(k) At the execution of this Agreement, the Company shall have furnished to the Representatives a letter from each director, executive officer, shareholder and holder of securities convertible or exercisable for shares of capital stock of the Company an executed copy of the Lock-Up Agreement addressed to the Representatives;

(l) Prior to the commencement of the offering of the Securities, the Securities shall have been approved for quotation on the Nasdaq National Market, subject to official notice of issuance; and

(m) The Company shall have furnished to you and counsel for the Underwriters such additional documents, certificates and evidence as you or they may have reasonably requested.

All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and counsel for the Underwriters. The Company will furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request.

6. Indemnification and Contribution.

(a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise (including in settlement of any litigation if such settlement is effected with the written

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consent of the Company), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness pursuant to Rules 430A and 434(d) of the Rules and Regulations, if applicable, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof.

In addition to their other obligations under this Section 6(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 6(a), they will reimburse each Underwriter on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter that received such payment shall promptly return it to the party or parties that made such payment, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by ____________________ (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement shall be in addition to any liabilities which the Company or the Selling Stockholders may otherwise have.

(b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by such Underwriter through you, specifically for use in the preparation thereof, and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending against any such loss, claim, damage, liability or action.

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(c)Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party. In case any such action shall be brought against any indemnified party, and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the sole judgment of the Representatives, it is advisable for the Underwriters to be represented as a group by separate counsel, the Representatives shall have the right to employ a single counsel to represent the Representatives and all Underwriters who may be subject to liability arising from any claim in respect of which indemnity may be sought by the Underwriters under subsection (a) of this Section 6, in which event the reasonable fees and expenses of such separate counsel shall be borne by the indemnifying party or parties and reimbursed to the Underwriters as incurred (in accordance with the provisions of the second paragraph in subsection (a) above). An indemnifying party shall not be obligated under any settlement agreement relating to any action under this Section 6 to which it has not agreed in writing.

(d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this subsection (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages

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that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint.

(e)The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 6 shall be in addition to any liability that the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Act.

7. Representations and Agreements to Survive Delivery. All representations, warranties, and agreements of the Company herein or in certificates delivered pursuant hereto, and the agreements of the several Underwriters and the Company contained in Section 6 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof, or the Company or any of its officers, directors, or controlling persons, and shall survive delivery of, and payment for, the Securities to and by the Underwriters hereunder.

8. Substitution of Underwriters.

(a)If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased does not aggregate more than 10% of the total amount of Firm Shares set forth in Schedule II hereto, the remaining Underwriters shall be obligated to take up and pay for (in proportion to their respective underwriting obligations hereunder as set forth in Schedule II hereto except as may otherwise be determined by you) the Firm Shares that the withdrawing or defaulting Underwriters agreed but failed to purchase.

(b) If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased aggregates more than 10% of the total amount of Firm Shares set forth in Schedule II hereto, and arrangements satisfactory to you for the purchase of such Firm Shares by other persons are not made within 36 hours thereafter, this Agreement shall terminate. In the event of any such termination the Company shall not be under any liability to any Underwriter (except to the extent provided in Section
4(a)(viii), Section 4(b)(ii) and Section 6 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the amount of Firm Shares agreed by such Underwriter to be purchased hereunder) be under any liability to the Company (except to the extent provided in Section 6 hereof).

If Firm Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by any other party or parties, the Representatives or the Company shall have the right to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be

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effected. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 8.

9. Effective Date of this Agreement and Termination.

(a) This Agreement shall become effective at 10:00 a.m., Central time, on the first full business day following the effective date of the Registration Statement, or at such earlier time after the effective time of the Registration Statement as you in your discretion shall first release the Securities for sale to the public; provided, that if the Registration Statement is effective at the time this Agreement is executed, this Agreement shall become effective at such time as you in your discretion shall first release the Securities for sale to the public. For the purpose of this Section, the Securities shall be deemed to have been released for sale to the public upon release by you of the publication of a newspaper advertisement relating thereto or upon release by you of telexes offering the Securities for sale to securities dealers, whichever shall first occur. By giving notice as hereinafter specified before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except that the provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at all times be effective.

(b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the First Closing Date, and the option referred to in Section 3(b), if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) the Company shall have failed, refused or been unable, at or prior to such Closing Date, to perform any agreement on its part to be performed hereunder, (ii) any other condition of the Underwriters' obligations hereunder is not fulfilled, (iii) trading on the New York Stock Exchange or the American Stock Exchange shall have been wholly suspended, (iv) minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange or the American Stock Exchange, by such Exchange or by order of the Commission or any other governmental authority having jurisdiction, (v) a banking moratorium shall have been declared by Federal or New York authorities, or (vi) there has occurred any material adverse change in the financial markets in the United States or an outbreak of major hostilities (or an escalation thereof) in which the United States is involved, a declaration of war by Congress, any other substantial national or international calamity or any other event or occurrence of a similar character shall have occurred since the execution of this Agreement that, in your judgment, makes it impractical or inadvisable to proceed with the completion of the sale of and payment for the Securities. Any such termination shall be without liability of any party to any other party except that the provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at all times be effective.

(c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section, the Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified promptly by you by telephone or telegram, confirmed by letter. If the Company elects to prevent this Agreement from becoming effective, you and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by the Company by telephone or telegram, confirmed by letter.

10. Default by the Company. If the Company shall fail at the First Closing Date to sell and deliver the number of Securities which it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party.

No action taken pursuant to this Section shall relieve the Company so defaulting from liability, if any, in respect of such default.

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11. Information Furnished by Underwriters. The statements set forth in the last paragraph of the cover page and under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the written information furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.

12. Notices. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to the Representatives c/o U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address stated in the Underwriters' Questionnaire furnished by such Underwriter in connection with this offering; if to the Company, shall be mailed, telegraphed or delivered to it at ____________________ Attention: _______________; or in each case to such other address as the person to be notified may have requested in writing. All notices given by telegram shall be promptly confirmed by letter. Any party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose.

13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns and the controlling persons, officers and directors referred to in Section 6. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Securities from any of the several Underwriters.

14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

[Signature Page Follows]

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Please sign and return to the Company the enclosed duplicates of this letter whereupon this letter will become a binding agreement between the Company, the Selling Stockholders and the several Underwriters in accordance with its terms.

Very truly yours,

**[Name of Issuer]

By__________________________________
**[Title]

Confirmed as of the date first above mentioned, on behalf of themselves and the other several Underwriters named in Schedule II hereto.

U.S. BANCORP PIPER JAFFRAY

By________________________________
Managing Director

Prudential Securities Incorporated

By________________________________
Managing Director

Warburg Dillon Read LLC,
A subsidiary of UBS AG

By________________________________
Managing Director


SCHEDULE I

Underwriter                                            Number of Firm Shares (1)
-----------                                            -------------------------
















                                                            -----------
Total.............................................
                                                            ===========

(1) The Underwriters may purchase up to an additional __________ Option Shares, to the extent the option described in Section 3(b) of the Agreement is exercised, in the proportions and in the manner described in the Agreement.


SCHEDULE II

MATTERS TO BE COVERED IN THE OPINION OF
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
U.S. COUNSEL FOR THE COMPANY

(i) CommTouch Software Inc. ("CommTouch Inc.") is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Each of the Company and its subsidiaries are duly qualified to transact business and are in good standing as a foreign corporation in each state of the United States where the character of their activities requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. CommTouch Inc. has all has full corporate power and authority to own its properties and conduct its business as currently being carried on and as described in the Registration Statement and the Prospectus.

(ii) All of the issued and outstanding shares of capital stock of CommTouch Inc. are duly authorized, validly issued, fully paid and nonassessable, and are owned of record beneficially by the Company. There are no outstanding securities of CommTouch Inc. convertible into or evidencing the right to purchase or subscribe for any shares of capital stock of CommTouch Inc., there are no outstanding or authorized options, warrants, rights or any other agreements of any character obligating CommTouch Inc. to issue and shares of its capital stock or any securities convertible into or evidencing the right to purchase or subscribe for any shares of such stock.

(iii) The Registration Statement has become effective under the Securities Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b), or if the Rule 434 Term Sheet was used, the required filing has been made in the manner and within the time period required by Rule 434; and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or, to such counsel's knowledge, are contemplated by the Commission;

(iv) The Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and with the Rules and Regulations;

(v) The registration of the Company's Ordinary Shares under
Section 12(g) of the Exchange Act has become effective;


(vi) The Company is not an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act;

(vii) Neither the issue and sale by the Company of theSecurities sold by the Company as contemplated by this Agreement nor the execution of this Agreement by the Company nor the consummation of any other transactions contemplated by this Agreement will (with or without the passage of time and/or notice) conflict with, or result in a breach or violation of or constitute a default under (A) the Articles of Incorporation or bylaws of CommTouch, Inc., (B) any agreement or instrument filed as an exhibit to the Registration Statement, or known to such counsel and made available to such Counsel in English, to which the Company or any of such subsidiaries is a party or by which it is bound, (C) any applicable United States federal or state law or regulation, or (D) so far as is known to such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality applicable to the Company or any of its subsidiaries;

(viii) The information required to be set forth in the Registration Statement in answer to Item 10 (insofar as it relates to such counsel) of Form F-1 is to the best of such counsel's knowledge accurately and adequately set forth therein in all material respects or no response is required with respect to such Item, and the description of the Option Plans and the options granted and which may be granted thereunder set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the Rules and Regulations;

(ix) Such counsel does not know of any franchises, contracts, leases or other documents which in the opinion of such counsel are of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described, referred to and filed as required;

(x) To such counsel's knowledge, there is no pending or threatened action, suit, investigation or proceeding before andy court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or any of their property or assets of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectus, and the statements in the Prospectus under the heading "Shares Eligible for Future Sale" are correct in all material respects;

(xi) No consent, approval, waiver, license, authorization, order or other action by or filing with any United States federal or state court or governmental agency, body or authority is required in connection with the execution and delivery by the Company of the this Agreement or for the issue and sale of the Securities by the Company or the consummation of any others transactions contemplated by this Agreement, except for filings and other actions required pursuant to the Securities Act and/or the Exchange Act, as amended, and the Rules and Regulations, required by the NASD and such as may be required

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under state securities or blue sky laws in connection with the purchase and distribution of the Securities by the Underwriters;

(xii) To such counsel's knowledge, the Company meets the test to qualify as a "foreign private issuer" set forth in Rule 405, and, as no other form is authorized or prescribed for use by the Company, the Company meets all the conditions necessary for the use of Form F-1;

(xiii) The statements made the Prospectus under the caption "U.S. Federal Income Taxes," to the extent that they constitute matters of law or legal conclusions, have been reviewed by us and fairly reflect the status of such provisions purported to be summarized and are correct in all material aspects;

(xiv) To the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered to any other registration statement filed by the Company under the Securities Act;

(xv) The description of the Option Plans and options granted and which may be granted thereunder and the options granted otherwise than under such plans set forth in the Prospectus accurately and fairly presents the information with respect to such plans and options;

(xvi) To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries (A) is in violation of its Memorandum or Articles of Association, or other governing documents, (B) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement of other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (C) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, except in the case of clauses (B) and
(C) for such violations or failures that, individually or in the aggregate, would not have a Material Adverse Effect;

(xvii) This Agreement has been duly authorized, executed, delivered by the Company and constitutes a valid, legal and binding obligation of the Company enforceable in accordance with its terms (except as rights to indemnity hereunder may be limited by federal

-3-

or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity) and all corporate authorizations and consents necessary for the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been given;

(xviii) To the best of such counsel's knowledge, neither the Company nor any of its subsidiaries own any real property except as otherwise described in the Prospectus; and all real property and buildings held under lease by CommTouch Software, Inc.and the Company's U.S.subsidiaries are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries;

(xix) To the best knowledge of such counsel, there are no material contracts, indentures, mortgages, loan agreements, notes, leases or other agreements or instruments or other documents which are not described or referred to in or filed with the Registration Statement and the Prospectuses; the statements in the Registration Statement and the Prospectus, insofar as such statements refer to material contracts, indentures, mortgages, loan agreements, notes, leases, plans pertaining to option arrangements, employment agreements and other agreements, arrangements or instruments to which the Company is a party, are accurate and adequate in all material respects;

(xx) To the best knowledge of such counsel, there is no litigation, action, suit or governmental proceeding or investigation pending, threatened or contemplated to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject or that seeks to restrain, enjoin or prevent the execution and delivery of this Agreement, or the consummation of the transactions contemplated thereby, or that questions the legality or validity of any such transaction or that seeks to recover damages or obtain other relief in connection with any such transactions, or which would could be reasonably be expected to have a Material Adverse Effect, if determined adversely to the Company or its subsidiaries;

(xxi) The Company has duly and irrevocably appointed ____________, Inc., a corporation organized under the laws of the State of California, as its agent to receive service of process in any section against it in any federal or state court sitting in the county of San Francisco, California arising out of or in connection with the offering; and

(xxii) The Ordinary Shares have been duly approved for inclusion on The Nasdaq National Market, subject to the consummation of the transactions contemplated by this Agreement and to official notice of issuance.

In addition to the matters set forth above, counsel rendering the foregoing opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads

-4-

them to believe that the Registration Statement (except as to the financial statements and schedules and other financial data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or financial statements and schedules and other financial data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

Counsel rendering the foregoing opinion may also rely as to questions of law not involving the laws of the United Stated or of the State of California, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to relay upon the opinions of such local counsel.

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SCHEDULE III

MATTERS TO BE COVERED IN THE OPINION OF NASCHITZ BRANDES & CO.,
ISRAELI COUNSEL FOR THE COMPANY AND ITS ISRAELI SUBSIDIARIES

(i) Each of the Company and its Israeli subsidiaries (the "Israeli Subsidiaries") has been duly incorporated and is validly existing as a corporation in good standing under the laws of Israel, is duly qualified to do business as a foreign corporation in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such qualification, except where any failure to so qualify or be in good standing, individually or in the aggregate, would not have a Material Adverse Effect, and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement;

(ii) All the issued and outstanding capital stock of each of the Israeli Subsidiaries of the Company has been duly authorized and validly issued and is fully paid and nonassessable, and is owned of record by the Company free and clear of all liens, encumbrances and security interests. To the best of such counsel's knowledge, no options, warrants or other rights to purchase, agreements or other obligations to issue other rights to convert any obligations into shares of capital stock or ownership interests in such subsidiaries are outstanding, except as otherwise described in the Prospectus;

(iii) The authorized capital stock of the Company consists of _________ Ordinary Shares, nominal value NIS 1.0 per share, of which there are outstanding ____________ shares (including, upon the issuance and delivery thereof and payment therefor, the Securities); the capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock" ; proper corporate proceedings have been taken to validly authorize such authorized capital stock; all of the outstanding shares of such capital stock (including the Securities) have been duly and validly issued and are fully paid and nonassessable; and no preemptive rights of, or rights of refusal in favor of, shareholders exist with respect to the Securities, or the issue and sale thereof, pursuant to the Memorandum or Articles of Association and other governing documents of the Company and, to the knowledge of such counsel, there are no contractual preemptive rights that have not been waived, rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Securities, except as otherwise described in the Prospectus;

(iv) The Securities to be issued and old by the Company hereunder have been duly authorized and, when issued, delivered and paid for in accordance with the terms of this Agreement, will have been validly issued and will be fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders. Except as otherwise stated in the Registration Statement and Prospectus, there are no


preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any Ordinary Shares pursuant to the Company's charter, by-laws or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company is bound.

(v) The information in the Registration Statement in the Prospectus with respect to interest of named experts and counsel (insofar as they relate to such counsel) are to the best of such counsel's knowledge accurately and adequately set forth in all material respects or there is no such information required with respect to such counsel;

(vi) The description of the Option Plans and options granted and which may be granted thereunder and the options granted otherwise than under such plans set forth in the Prospectus accurately and fairly presents the information with respect to such plans and options;

(vii) Neither the execution and delivery of this Agreement, the issue and sale by the Company of the shares of Stock sold by the Company as contemplated by this Agreement nor the consummation of any other transactions contemplated by this Agreement will (with or without notice and/or the passageof time) conflict with, result in a violation of, constitute a default under or result in a breach of (A) the Articles of Association or other governing documents of the Company or any of its Israeli subsidiaries, (B) any agreement, indenture or instrument known to such counsel to which the Company or any of such subsidiaries is a party or by which it is bound or to which any of their properties is subject, (C) any applicable law, rule, regulation, administrative regulation or decree or (D) so far as is known to such counsel, any order, writ, injunction or decree, or any jurisdiction, court or governmental instrumentality;

(viii) To the best of such counsel's knowledge, the Company and each of its subsidiaries holds, and is operating in compliance in all material respects with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect.

(ix) To the best of such counsel's knowledge, all holders of securities of the Company having rights to the registration of Ordinary Shares, or other securities, because of the filling of the Registration Statement by the Company have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; to the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the

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Registration Statement except as described in the Registration Statement; to such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Ordinary Shares as contemplated by this Agreement gives rise to any rights for or relating to the registration of any Ordinary Shares or other securities of the Company, except as otherwise described in the Prospectus;

(x) No consent, approval, authorization, exemption or order of any court or Israeli governmental agency or body or to the best of our knowledge, any financial institution, is required for the issuance and sale of the Stock as contemplated by this Agreement and the consummation of the other transactions contemplated in this Agreement, except such as have been obtained in connection with the purchase and distribution of the Securities by the Underwriters or such consents, approvals, authorizations, exemptions or orders, the lack of which will not have a Material Adverse Effect; to the best knowledge of such counsel, no proceedings to rescind or modify such consents, approvals, authorizations, exemptions or orders have been instituted and are pending or contemplated by any Israeli authority; a draft prospectus has been filed with the ISA and an exemption, permitting the publication of the Prospectus in connection with the offering contemplated by the Registration Statement without a permit from the ISA, has been granted;

(xi) The Registration Statement has become effective under the Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or threatened by the Commission.

(xii) Upon issuance and delivery of the Ordinary Shares being sold by the Company against payment therefor pursuant to this Agreement, the Underwriters will in each case acquire good and valid title to such Ordinary Shares in each case (so far as it depends on the Company) free and clear of all liens, encumbrances, equities, preemptive rights and other claims arising through the Company; the Ordinary Shares conform in all material respects to the description thereof contained in the Prospectus; no further approval or authority of the shareholders or the Board of Directors of the Company is required for the issuance and sale of the Ordinary Shares;

(xiii) To the best of such counsel's knowledge, neither the Company nor any Israeli Subsidiary (i) is in violation of its Memorandum or Articles of Association, or other governing documents,
(ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement of other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary

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to the ownership of its property or to the conduct of its business, except in the case of clauses (ii) and (iii) for such violations or failures that, individually or in the aggregate, would not have a Material Adverse Effect;

(xiv) The Company has full power and authority to enter into this Agreement; this Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid, legal and binding obligation of the Company enforceable in accordance with its terms (except as rights to indemnity hereunder may be limited by federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity) and all corporate authorizations and consents necessary for the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been given;

(xv) The Company has all requisite corporate power and authority to issue, sell and deliver the Ordinary Shares being issued and sold by it in accordance with and upon the terms and conditions set forth in this Agreement; all corporate action required to be taken by the Company for the due and proper authorization, issuance, sale and deposit of the Ordinary Shares, and the offering, sale and delivery of the Ordinary Shares, has been validly and sufficiently taken; the filing of the Registration Statement and the Prospectus with the Commission and to the extent required, with the appropriate Israeli authorities, has been duly authorized by and on behalf of the Company and has been duly executed in accordance with Israeli law;

(xvi) To the best of such counsel's knowledge, neither the Company nor any of the Israeli Subsidiaries own any real property except as otherwise described in the Prospectus; and all real property and buildings held under lease by the Company and the Israeli Subsidiaries are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and the Israeli Subsidiaries.

(xvii) To the best knowledge of such counsel, there are no material contracts, indentures, mortgages, loan agreements, notes, leases or other agreements or instruments or other documents which are not described or referred to in or filed with the Registration Statement and the Prospectuses; the statements in the Registration Statement and the Prospectus, insofar as such statements refer to the Company's Memorandum or Articles of Association or other governing documents or to material contracts, indentures, mortgages, loan agreements, notes, leases, plans pertaining to option arrangements, employment agreements and other agreements, arrangements or instruments to which the Company is a party, are accurate and adequate in all material respects thereunder insofar as such statements refer to statements of Israeli law or legal conclusions;

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(xviii) To the best knowledge of such counsel, there is no litigation, action, suit or governmental proceeding or investigation pending, threatened or contemplated to which the Company or any of the Israeli Subsidiaries is a party or to which any property of the Company or any of the Israeli Subsidiaries is subject or that seeks to restrain, enjoin or prevent the execution and delivery of this Agreement, or the consummation of the transactions contemplated thereby, or that questions the legality or validity of any such transaction or that seeks to recover damages or obtain other relief in connection with any such transactions, or which would could be reasonably be expected to have a Material Adverse Effect, if determined adversely to the Company;

(xix) The certificates for the Stock to be sold by the Company and delivered on the Closing Date, are in due and proper form under Israeli law;

(xx) The information required to be set forth in the Registration Statement in response to Item 10 of Form F-1, insofar as it relates to such counsel, is, to such counsel's knowledge, accurately and adequately set forth therein in all material respects, or no reponse is required with respect to such Item;

(xxi) The statements set forth in the Prospectuses describing Israeli statutes and regulations and the statements in the Registration Statement and the Prospectuses with respect to matters of Israeli law, including the statements describing Israeli law under the captions
[CONFORM THE FOLLOWING LIST] "Risk Factors--Risks Related to Location in Israel," "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Income Taxes; Effective Corporate Tax Rate," "Management," "Description of Ordinary Shares," "Israeli Taxation, Foreign Exchange Regulation and Investment Programs," "Conditions in Israel" and "Indemnification of Directors and Officers" are insofar as they describe Israeli statutes, rules, or legal conclusions and insofar as they describe the contents of certain provisions of the Company's Memorandum of Association, Articles of Association or other organizational documents, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

(xxii) The Registration Statement and its filing with the Commission, and the Prospectus and its filing with the appropriate Israeli authorities, have been duly authorized by and on behalf of the Company, and the Registration Statement has been duly executed pursuant to such authorization, by and on behalf of the Company;

(xxiii) No Israeli stamp or other issuance or transfer taxes or duties and capital gains, income withholding or other taxes are payable by or on behalf of the Underwriters to any Israeli taxing authority in connection with: (a) the issuance of the Stock; (b) the sale and delivery by the Company of the Stock in the manner contemplated in the Agreement; or

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(c) the sale and delivery outside of Israel by the Underwriters to the initial purchasers thereof in the manner contemplated by the Agreement;

(xxiv) To the best knowledge of such counsel, there is no tax deficiency that has been asserted against the Company or the Israeli subsidiaries that could, if adversely determined, have a Material Adverse Effect;

(xxv) To the best of such counsel's knowledge, neither the Company nor any Israeli Subsidiary is in violation of any condition or requirement stipulated by (i) the instruments of approval granted to any of them by any Israeli authority with respect to the "approved enterprise" status of any of its facilities or (ii) Israeli laws and regulations relating to such approved enterprise status, which violation, individually or in the aggregate, could have a Material Adverse Effect; to the best of such counsel's knowledge, neither the Company nor the Israeli Subsidiaries has received any notice of proceeding relating to revocation or modification of the approved enterprise status of any of its facilities which notice is currently in effect;

(xxvi) The Company has duly and irrevocably appointed ____________, Inc., a corporation organized under the laws of the State of California, as its agent to receive service of process in any section against it in any federal or state court sitting in the county of San Francisco, California arising out of or in connection with the offering;

(xxvii) To the best of such counsel's knowledge, neither the Company nor any Israeli Subsidiary is in violation of any conditions or requirements stipulated by the instruments of approval granted to any of them by the Office of the Chief Scientist in the Ministry of Industry & Trade, with respect to any research and development grants given to it by such office, which violation, individually or in the aggregate, could have a Material Adverse Effect;

(xxviii) Under the laws of Israel, the submission by the Company to the jurisdiction of any federal or state court sitting in the county of San Francisco and the designation of the law of the state of California to apply to this Agreement is binding upon the Company and, if properly brought to the attention of the court or administrative body in accordance with the laws of Israel, would be enforceable in any judicial or administrative proceeding in Israel; and

(xxix) Such counsel does not know of any material franchises, contracts, leases, documents or legal or governmental proceedings, pending or threatened, which are not described or referred to in or filed with the Registration Statement of the Prospectus;

(xxx) Subject to certain time limitations, Israeli courts are empowered to enforce foreign (including United States) final executory judgments for liquidated amounts in civil matters, obtained after completion of due process before a court of competent jurisdiction

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which recognizes and enforces similar Israeli judgments, provided such judgments or the enforcement thereof are not contrary to Israeli law, public policy, security or the sovereignty of the State of Israel; the enforcements of judgments is conditioned upon (a) adequate service of process being effected and the defendant having had reasonably opportunity to be heard, (b) such judgment having been obtained before a court of competent jurisdiction according to the rules of private international law prevailing in Israel (c) such judgment not being in conflict with any other valid judgment in the same matter between the same parties, (d) such judgment not having been obtained by fraudulent means and (e) an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court.

In addition to the matters set forth above, counsel rendering the foregoing opinion shall also provide a statement to the effect that nothing has come to the attention of such counsel that leads them to believe that the Registration Statement (except as to the financial statements and schedules and other financial data contained or incorporated by reference therein, as to which such counsel need not express an opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and scheduled and other financial data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

Counsel rendering the foregoing opinion may also rely as to questions of law not involving the laws of the State of Israel, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to Counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel.

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EXHIBIT 3.1

THE COMPANIES ORDINANCE (NEW VERSION) 5743 - 1983
A PRIVATE COMPANY LIMITED IN SHARES

MEMORANDUM OF ASSOCIATION OF INTOUCH LTD.

1. The Company's Name: Intouch Ltd.

2. The objectives for which the Company was established are:

(a) To initiate, establish, develop, manage and maintain businesses for research, development, design, manufacture, testing, marketing, selling, distribution, importing, exporting, lease, maintenance, repair and provision of services and auxiliary services and engage in any way in software and hardware systems for electronic communication, to provide consulting and management services for the above, and carry out any type of commercial activity, in Israel and abroad with respect to the above.

(b) To initiate, establish, promote, organize, manage and engage in any way and mode in engineering and economic consulting.

(c) To serve as agents, proxies and representatives of companies and firms engaged in the Company's fields or other fields, and enter into partnerships, share assets, joint investments, and establish companies, and act in any other way or mode of businesses with other bodies and people.

(d) To finance import and export transactions and any other commercial transactions.

(e) Initiate, consult, promote, advertise, organize and manage any business and carry out any action with respect to matters mentioned in sub-paragraphs a-d above and for any other purpose even if not specified explicitly, in Israel and abroad.

(f) To manage businesses as capital owners, assets holders, concessionaires, and financiers. Accept upon itself manage and carry out any capital businesses and investments.


(g) Undertake upon itself to carry out, manage and engage in manufacture, and all businesses of agency, brokerage, trust, and purchase agencies, representations, brokerages of any type, and hold, manage, and develop them;

(h) Manage businesses of any type (whether manufacturing, commerce and industry or others) which to Company's discretion can be managed and is suitable for management with respect to the above, or which may, directly or indirectly, increase the value or profits of any Company's assets or rights; provided that the above are within the Company's objectives.

(i) To receive and purchase all or any part of the businesses, assets, obligations and rights of any person, or Company or corporation maintaining any businesses that the Company is allowed to maintain or holding any assets which suit the objectives of this Company.

(j) In general, buy, rent, lease, replace or acquire in any way property, which at Company's discretion fits or required the Company's objectives or businesses, provided that the above are within the objectives of the Company.

(k) To enter into any partnership or share and participate in any arrangement for profit sharing. Join interests, mutual action, cooperation, joint ventures, and mutual and other venture with any person or corporation or Company engaged or dealing or intending to engage and deal in a business, trade or any transaction, which this Company is supposed to engage with in a way benefiting the Company directly or indirectly.

(l) Sell the Company's rights, assets or property or any part of them, for any consideration as the Company sees fit, and specifically for shares, debentures or sureties of any other Company whose objectives are similar, partly or wholly, to those of this Company.

(m) Borrow or get funds for securities or mortgages without guarantees and if this is necessary for securing re-payment of amounts borrowed or attained, in a way the Company sees fit, by lien, mortgage, guarantee, deed of guarantee, debenture on all or part of Company's assets, or its rights and property, including the uncalled capital or by transferring general deed of guarantee or issuing debentures or stock debentures,


permanent or others, guaranteeing any part of Company's assets (present or future) and redeem or pay for any such guarantees, and lend moneys to others the guarantee them

(n) Give options on and/or sell, improve, deal in, develop, manage, rent, lease, mortgage, release, transfer, dispose of, make accounts and/or deal otherwise in any part of Company's property.

(o) Carry out any other actions related to said objectives or which might help in achieving the said objectives or any of them.

(p) Make any arrangement with any governments or other high authorities, municipal, local or other authorities, as the Company sees fit for any of its objectives.

(q) Make any contribution for development, research, science, security, charity, welfare, national settlements and institutions, and assist any of them towards its objectives.

(r) Act for the implementation of any other objective as will be decided in the Company's general Meetings at any time by extraordinary resolution duly adopted.

(s) Carry out any action and use any power and the objectives listed in the second Addendum of the Companies Ordinance which were not specified in this memorandum, as if they were integral part of the Company's objectives specified in it and take all actions related to or stemming from or leading to or beneficial to the attainment of any objective listed in this memorandum.

The objectives listed in the various paragraphs of this document shall not be limited in any way by comparison to any other paragraph or paragraphs, or by Company's name and it will be allowed to carry them out effectively and fully and they will be interpreted in the broadest way as if in these paragraphs objectives of other companies were defined in any case of doubt matters shall be interpreted in a way broadening as far as possible the Company's objectives.

3. Members' Liability The members' liability is limited.

4. The Share Capital of the Company The Share Capital of the Company will be as follows:

(a) NIS 16,000 (sixteen thousands New Shekels) divided to 16,000 ordinary NIS 1 nominal value shares.

(b) The Company may increase the share capital by issuing new shares and issue shares of different types, including shares with different, preferred, deferred or additional rights, in the way stated in the Company's by-laws of association.

(c) The rights related from time to time to any type of shares, in the original capital or increased capital of the Company, may be changed only as stated in the Company's by-laws of association.

We, the undersigned, would like to incorporate as per this memorandum of association and take the number of shares listed by our names below:

------------------------------------------------------------------------------------------------------------
Signatories        I.D. #            Address             Description      Number of        Signature
                                                                          shares taken
------------------------------------------------------------------------------------------------------------
Nahum Sharfman     556711            22 Hameyasdim        Engineer        900 Shares of    (signed)
                                     St., Carcour                         NIS 1
                                     37000
------------------------------------------------------------------------------------------------------------
Gideon Mantel      5600618-2         5 Hashloshim        Economist        100 Shares of    (signed)
                                     Vehamesh St.,                        NIS 1
                                     Ramat Gan 52224
------------------------------------------------------------------------------------------------------------

Total shares taken: 1000 ordinary shares, NIS 1 each Today, February 5, 1991 Witness to above signatures: (Signed)

Reuven Heller


THE COMPANIES ORDINANCE

Company's Name: Intouch Ltd.
Company No.: 51-154534-5

Submitted for registration by: M. Porat & Co., Advocates and Notaries 10 Karlibach St., Tel-Aviv 67132 Tel. 03-5610111, Fax 03-5610934

NOTICE OF SPECIAL RESOLUTION

At an extraordinary Meeting of the Company duly convened and held on August 13, 1995, the following resolution was adopted as a special resolution:

SPECIAL RESOLUTION

To approve unanimously the change of the Company's name to COMMTOUCH SOFTWARE LTD., or a similar name to be approved by the Companies Registrar.

/s/ Nahum Sharfman
---------------------------


EXHIBIT 3.2

THE COMPANIES ORDINANCE

A COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

OF

COMMTOUCH SOFTWARE LTD.
(the "Company")


PRELIMINARY

1. Table "A" Excluded

The regulations contained in the second schedule to the Companies Ordinance (New Version), 5743-1983 (the "Companies Ordinance") shall not apply to the Company.

2. Public Company

This Company is a Public Company, as such term is defined in the Companies Ordinance.

SHARE CAPITAL

3. Share Capital

(a) The authorized share capital of the Company is NIS 2,000,000 divided into forty million (40,000,000) Ordinary Shares, nominal value NIS 0.05 per share.

(b) The Ordinary Shares all rank pari passu.

Page 1 of 29

4. Increase of Authorized Share Capital

(a) The Company may, from time to time, by Special Resolution, whether or not all the shares then authorized have been issued, and whether or not all the shares previously issued have been called up for payment, increase its authorized share capital. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such Special Resolution shall provide.

(b) Except to the extent otherwise provided in such Special Resolution, any new shares included in the authorized share capital so increased shall be subject to all the provisions of these Articles which are applicable to shares of such class included in the existing share capital without regard to class (and, if such new shares are of the same class as a class of shares included in the existing share capital, to all of the provisions which are applicable to shares of such class included in the existing share capital).

5. Special Rights; Modification of Rights

(a) Subject to the provisions of the Memorandum of Association of the Company, and without prejudice to any special rights previously conferred upon the holders of existing shares in the Company, the Company may, from time to time, by Special Resolution, provide for shares with such preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such Special Resolution.

(b) (i) If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles, may be modified or abrogated by the Company, by Special Resolution, subject to the consent in writing of the holders of seventy-five percent (75%) of the issued shares of such class.

(ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of the holders of the shares of a particular class; provided, however, that the requisite quorum at any such separate General Meeting shall be two or more members present in person or proxy and holding not less than seventy-five percent (75%) of the issued shares of such class.

(iii) Unless otherwise provided by these Articles, the enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed, for purposes of this Article 5(b), to modify or abrogate the rights attached to previously issued shares of such class or of any other class.


6. Consolidation, Subdivision, Cancellation and Reduction of Share Capital

(a) The Company may, from time to time, by Special Resolution (subject, however, to the provisions of Article 5(b) hereof and to applicable law):

(i) consolidate and divide all or any part of its issued or unissued authorized share capital into shares of a per share nominal value which is larger than the per share nominal value of its existing shares;

(ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by the Memorandum of Association (subject, however, to the provisions of Section 144(4) of the Companies Ordinance);

(iii) cancel any shares which, at the date of the adoption of such Special Resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled; or

(iv) reduce its share capital in any manner, subject to any consent required by law.

(b) With respect to any consolidation of issued shares of a larger nominal value per share, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, and in connection with any such consolidation or other action which would result in fractional shares may, without limiting its power:

(i) determine, as to the holder of the shares so consolidated, which issued shares shall be consolidated into a share of a larger nominal value per share;

(ii) allot, in contemplation of or subsequent to such consolidation or other action, shares or fractional shares sufficient to preclude or remove fractional share holdings;

(iii) redeem, in the case of redeemable preference shares and subject to applicable law, such fractional shares sufficient to preclude or remove fractional share holdings;

(iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees of such fractional shares to pay the transferors thereof the fair value thereof, and the Board of Directors is hereby authorized to act in connection with such transfer as agent for the transferors and transferees of any


such fractional shares, with full power of substitution, for the purposes of implementing the provisions of this sub-Article 6(b)(iv).

SHARES

7. Issuance of Share Certificates; Replacement of Lost Certificates

(a) Share certificates shall be issued under the corporate seal of the Company and shall bear the signature of one Director, or of any other person or persons authorized by the Board of Directors.

(b) Each member shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board of Directors so approves, to several certificates, each for one or more of such shares. Each certificate shall specify the serial numbers of the shares represented thereby and may also specify the amount paid up thereon.

(c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of Members in respect of such co-ownership.

(d) A share certificate which has been defaced, lost or destroyed may be replaced, and the Company shall issue a new certificate to replace such defaced, lost or destroyed certificate, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors in its discretion deems fit.

8. Registered Holder

Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of each share as the absolute owner thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by statute, be obligated to recognize any equitable or other claim to, or interest in, such share on the part of any other person.

9. Allotment of Shares

The unissued shares from time to time shall be under the control of the Board of Directors. The Board of Directors shall have the power to allot, issue or otherwise dispose of shares to such persons, on such terms and conditions (including terms relating to calls as set forth in Article 11(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Ordinance, at a discount and/or


with payment of commission, and at such times, as the Board of Directors deems fit. The Board of Directors shall also have the power to give to any person the option to acquire from the Company any shares, either at par or at a premium, or, subject as aforesaid, at a discount and/or with payment of commission, during such time and for such consideration as the Board of Directors deems fit.

10. Payment in Installments

If, pursuant to the terms of the allotment or issue of any share, all or any portion of the price thereof shall be payable in installments, every such installment shall be paid to the Company on the due date thereof by the then registered holder(s) of the share or the person(s) then entitled thereto.

11. Calls on Shares

(a) The Board of Directors may, from time to time, as it in its discretion deems fit, make calls for payment upon members in respect of any sum which has not been paid up in respect of shares held by such members and which is not, pursuant to the terms of allotment or issue of such shares or otherwise, payable at a fixed time, and each member shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments) to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares in respect of which such call was made.

(b) Notice of any call for payment by a member shall be given in writing to such member not less than fourteen (14) days prior to the time of payment fixed in such notice, and shall specify the time and place of payment, and the person to whom such payment is to be made. Prior to the time for any such payment fixed in a notice of a call given to a member, the Board of Directors may in its absolute discretion, by notice in writing to such member, revoke such call in whole or in part, or stipulate different place of payment or person to whom payment is to be made. In the event of a call payable in installments, only one notice thereof need be given.

(c) If, pursuant to the terms of allotment or issue of a share or otherwise, an amount is made payable at a fixed time (whether on account of such share or by way of premium), such amount shall be payable at such time as if it were payable by virtue of a call made by the Board of Directors and for which notice was given in accordance with paragraphs (a) and (b) of this Article 11, and the provisions of these Articles with regard to calls (and the non-payment thereof) shall be applicable to such amount (and the non-payment thereof).


(d) Joint holders of a share shall be jointly and severally liable to pay all calls for payment in respect of such share and all interest payable thereon.

(e) Any amount called for payment which is not paid when due shall bear interest from the date fixed for payment until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel) and payable at such time(s) as the Board of Directors may prescribe.

(f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amounts and times for payment of calls for payment in respect of such shares.

12. Prepayment

With the approval of the Board of Directors, any member may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment by the Company of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty. Nothing in this Article 12 shall derogate from the right of the Board of Directors to make any call for payment before or after receipt by the Company of any such advance.

13. Forfeiture and Surrender

(a) If any member fails to pay an amount payable by virtue of a call, or interest thereon as provided for in these Articles, on or before the day fixed for payment of the same, the Board of Directors may, at any time after the day fixed for such payment, so long as such amount (or any portion thereof) or interest thereon (or any portion thereof) remains unpaid, forfeit all or any of the shares in respect of which such payment was called. All expenses incurred by the Company in attempting to collect any such amount or interest thereon, including without limitation attorneys' fees and costs of legal proceedings, shall be added to, and shall for all purposes (including the accrual of interest thereon) constitute a part of, the amount payable to the Company in respect of such call.

(b) Upon the adoption of a resolution as to the forfeiture of a member's share, the Board of Directors shall cause notice thereof to be given to such member, which notice shall state that, in the event of the failure to pay the entire amount so payable by a date specified in the notice (which date shall be not less than fourteen (14) days after the date such notice is given and which may be extended by the Board of Directors), such shares shall be ipso facto forfeited; provided, however, that prior to such date, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall stop


the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount.

(c) Without derogating from Articles 54 and 59 hereof, whenever shares are forfeited as herein provided, all dividends, if any, previously declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time.

(d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share.

(e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors deems fit.

(f) Any member whose shares have been forfeited or surrendered shall cease to be a member in respect of the forfeited or surrendered shares, but shall nevertheless be liable to pay, and shall immediately pay to the Company, all calls, interest and expenses owing on or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 11(e) above. The Board of Directors in its discretion may, but shall not be obligated to, enforce the payment of such moneys or any part thereof. In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing to the Company by the member in question (but not yet due) in respect of all shares owned by such member, solely or jointly with another.

(g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it deems fit, but no such nullification shall stop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 13.

14. Lien

(a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each member (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and obligations to the Company arising from any amount payable by such member in respect of any unpaid or partly paid share, whether or not such debt, liability or obligation has matured. Such lien shall extend to all dividends from time to time declared or paid in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer.


(b) The Board of Directors may cause the Company to sell a share subject to such a lien when the debt, liability or obligation giving rise to such lien has matured, in such manner as the Board of Directors deems fit, but no such sale shall be made unless such debt, liability or obligation has not been satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such member, his executors or administrators.

(c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or obligations of such member in respect of such share (whether or not the same have matured), and the residue (if any) shall be paid to the member, his executors, administrators or assigns.

15. Sale after Forfeiture or Surrender or in Enforcement of Lien

Upon any sale of a share after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint any person to execute an instrument of transfer of the share so sold and cause the purchaser's name to be entered in the Register of Members in respect of such share. The purchaser shall be registered as the shareholder and shall not be bound to see to the regularity of the sale proceedings, or to the application of the proceeds of such sale, and after his name has been entered in the Register of Members in respect of such share the validity of the sale shall not be impeached by any person and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.

16. Redeemable Shares

The Company may, subject to applicable law, issue redeemable shares and redeem the same.

17. Conversion of Shares into Stock

(a) The Board of Directors may, with the sanction of the members previously given by Special Resolution, convert any paid-up shares into stock, and may with like sanction reconvert any stock into paid-up shares of any denomination.

(b) The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations as the shares from which the stock arose might have been transferred prior to conversion, or as near thereto as circumstances admit; provided, however, that the Board of Directors may from time to time fix the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value of each of the shares from


which such stock arose.

(c) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value of each of the shares from which such stock arose.

(d) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards dividends, voting at meetings of the Company and other matters as if they held the shares from which such stock arose, but no such right or privilege except participation in the dividends and profits of the Company shall be conferred by any such aliquot part of such stock as would not, if existing in shares, have conferred that right or privilege.

(e) Such of the Articles of the Company as are applicable to paid-up shares shall apply to stock, and the words "share" and "shareholder" (or "member") therein shall include "stock" and "stockholder."

TRANSFER OF SHARES

18. Registration of Transfer

(a) No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board of Directors) has been submitted to the Company (or its transfer agent), together with the share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Members in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof.

(b) The Board of Directors may, in its discretion to the extent it deems necessary, close the Register of Members for registrations of transfers of shares during any year for a period determined by the Board of Directors, provided that the Register of Members shall be closed for no longer than fourteen (14) days prior to any general meeting of the shareholders of the Company and for no more than thirty (30) days in any calendar year, and no registrations of transfers of shares shall be made by the Company during any such period during which the Register of Members is so closed.


19. Record Date for Notices of General Meetings

Notwithstanding any other contrary provision of these Articles, the Board of Directors may fix a date, not exceeding ninety (90) days prior to the date of any General Meeting, as the date as of which shareholders entitled to notice of and to vote at such meetings shall be determined, and all persons who were holders of record of voting shares on such date and no others shall be entitled to notice of and to vote at such meeting.


TRANSMISSION OF SHARES

20. Decedent's Shares

(a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 21(b) have been effectively invoked.

(b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient), shall be registered as a member in respect of such share, or may, subject to the regulations as to transfer contained in these Articles, transfer such share.

21. Receivers and Liquidators

(a) The Company may recognize any receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate member, and a trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceeding with respect to, a member or its properties, as being entitled to the shares registered in the name of such member.

(b) Such receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a corporate member and such trustee, manager, receiver, liquidator, or similar official appointed in bankruptcy or in connection with the reorganization of, or similar proceedings with respect to, a member or its properties, upon producing such evidence as the Board of Directors may deem sufficient to his authority to act in such capacity or under this Article, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a member in respect of such shares, or may, subject to the regulations as to transfer contained in these Articles, transfer such shares.

22. Business

(a) The Board of Directors shall be permitted to engage the Company in any one or more of the businesses in which the Company is permitted to engage under its Memorandum of Association or Articles of Association or under the law, or to discontinue such engagement, at any time that they shall deem appropriate.

(b) The registered office of the Company shall be at such place as the


Board of Directors shall from time to time select.

GENERAL MEETINGS

23. Annual General Meeting

An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place, either within or out of the State of Israel, as may be determined by the Board of Directors.

24. Extraordinary General Meetings

All General Meetings other than Annual General Meetings shall be called "Extraordinary General Meetings." The Board of Directors may, whenever it thinks fit, convene an Extraordinary General Meeting, at such time and place, within or out of the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a request in writing in accordance with Section 109 of the Companies Ordinance.

25. Notice of General Meetings; Omission to Give Notice

(a) Not less than seven (7) days' prior notice shall be given of every General Meeting; provided, however, that a Special Resolution shall not be passed unless at least twenty-one (21) days' prior notice shall have been given of the meeting at which it is proposed to pass the same. Each such notice shall specify the place and the day and hour of the meeting and the general nature of each item to be acted upon, such notice to be given to all members who would be entitled to attend and vote at such meeting. Anything herein to the contrary notwithstanding, with the consent of all members entitled to vote thereon a resolution may be proposed and passed at such meeting although a lesser notice than prescribed above has been given.

(b) The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting.

PROCEEDINGS AT GENERAL MEETINGS

26. Quorum

(a) No business shall be transacted at a General Meeting, or at any


adjournment thereof, unless the quorum required under these Articles for such General Meeting or such adjourned meeting, as the case may be, is present when the meeting proceeds to business.

(b) In the absence of contrary provisions in these Articles, two or more members (not in default in payment of any sum referred to in Article 32(a) hereof), present in person or by proxy and holding shares conferring in the aggregate more than one third of the voting power of the Company, shall constitute a quorum of General Meetings.

(c) If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon request under
Section 109 of the Companies Ordinance, shall be dissolved, but in any other case it shall be adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the shares present in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting (other than an adjourned separate meeting of a particular class of shares as referred to in Article 5 of these Articles), any two (2) members (not in default as aforesaid) present in person or by proxy shall constitute a quorum.

27. Chairman

The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If at any meeting the Chairman is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the Co-Chairman shall preside at the meeting. If at any such meeting both the Chairman and the Co-Chairman are not present or are unwilling to act as Chairman, members present shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however from the rights of such Chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy).

28. Adoption of Resolutions at General Meetings

(a) (i) An Ordinary Resolution shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon.

(ii) A Special or Extraordinary Resolution shall be deemed adopted if approved by the holders of not less then seventy-five per cent (75%) of the voting power represented at the meeting in person or by proxy and voting thereon.


(b) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any member present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another member may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded.

(c) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution.

29. Resolutions in Writing

A resolution in writing signed by all members of the Company then entitled to attend and vote at General Meetings or to which all such members have given their written consent (by letter, telegram, telex, facsimile or otherwise) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held.

30. Power to Adjourn

The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called.

31. Voting Power

Subject to the provisions of Articles 3(b) and 32(a) and subject to any other provision conferring special rights as to voting, or restricting the right to vote, every member shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written


ballot or by any other means.

32. Voting Rights

(a) No member shall be entitled to vote at any General Meeting (or be counted as a part of the quorum) unless all calls then payable by him in respect of his shares in the Company have been paid, but this Article 32(a) shall not apply to separate General Meetings of the holders of a particular class of shares pursuant to Article 5(b).

(b) A company or other corporate body being a member of the Company may duly authorize any person to be its representative at any meeting of the Company or to execute or deliver a proxy on its behalf. Any person so authorized shall be entitled to exercise on behalf of such member all the power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him.

(c) Any member entitled to vote may vote either in person or by proxy (who need not be a member of the Company) or, if the member is a company or other corporate body, by a representative authorized pursuant to Article 32(b).

(d) If two or more persons are registered as joint holders of any shares, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s). For the purpose of this Article 32(d), seniority shall be determined by the order of registration of the joint holders in the Register of Members.

PROXIES

33. Instrument of Appointment

(a) An instrument appointing a proxy shall be in writing and shall be substantially in the following form:

"I_______________________ of ______________________________________


(Name of Shareholder) (Address of Shareholder)

being a member of CommTouch Software Ltd. hereby appoint _______________________ of _____________________________


(Name of Proxy) (Address of Proxy)


as my Proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the _________ day of ___________, ________ and at any adjournment(s) thereof.

Signed this _____________ day of _______________, ____________.


(Signature of Appointor)"

or in any usual or common form or in such other form as may be approved by the Board of Directors. Such proxy shall be duly signed by the appointor or such person's duly authorized attorney or, if such appointor is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s).

(b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its registered office, at its principal place of business, at the offices of its registrar or transfer agent, or at such place as the Board of Directors may specify) not less than 24 hours before the time fixed for the meeting at which the person named in the instrument proposes to vote, or presented to the Chairman at such meeting. An instrument appointing a proxy which is not limited in time shall expire 12 months after the date of its execution. If the appointment shall be for a limited period, whether in excess of 12 months or not, the instrument shall be valid for the period stated therein.

34. Effect of Death of Appointor or Transfer of Share and/or Revocation of Appointment

(a) A vote cast in accordance with an instrument appointing a proxy shall be valid notwithstanding the prior death or bankruptcy of the appointing member (or of his attorney-in-fact, if any, who signed such instrument), or the transfer of the share in respect of which the vote is cast, unless written notice of such matters shall have been received by the Company or by the Chairman of such meeting prior to such vote being cast.

(b) An instrument appointing a proxy shall be deemed revoked (i) upon receipt by the Company or the Chairman, subsequent to receipt by the Company of such instrument, of written notice signed by the person signing such instrument or by the member appointing such proxy cancelling the appointment thereunder (or the authority pursuant to which such instrument was signed) or of an instrument appointing a different proxy (and such other documents, if any, required under Article 33(b) for such new appointment), provided such notice of cancellation or instrument appointing a different proxy were so received at the place and within the time for delivery of the instrument


revoked thereby as referred to in Article 33(b) hereof, or (ii) if the appointing member is present in person at the meeting for which such instrument of proxy was delivered, upon receipt by the Chairman of such meeting of written notice from such member of the revocation of such appointment, or if and when such member votes at such meeting. A vote cast in accordance with an instrument appointing a proxy shall be valid notwithstanding the revocation or purported cancellation of the appointment, or the presence in person or vote of the appointing member at a meeting for which it was rendered, unless such instrument of appointment was deemed revoked in accordance with the foregoing provisions of this Article 34(b) at or prior to the time such vote was cast.

BOARD OF DIRECTORS

35. Powers of Board of Directors

(a) In General

The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company by action of its members at a General Meeting. The authority conferred on the Board of Directors by this Article 35 shall be subject to the provisions of the Companies Ordinance, these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company by action of its members at a General Meeting; provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted.

(b) Borrowing Power

The Board of Directors may from time to time, at its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being.

(c) Reserves

The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the


Board of Directors, in its absolute discretion, shall deem fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit.

36. Exercise of Powers of Board of Directors

(a) A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretion vested in or exercisable by the Board of Directors.

(b) A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present when such resolution is put to a vote and voting thereon.

(c) A resolution in writing signed by all of Directors then in office and lawfully entitled to vote thereon or to which all such Directors have given their written consent (by letter, telegram, telex, facsimile, electronic mail or otherwise) shall be deemed to have been unanimously adopted by a meeting of the Board of Directors duly convened and held.

37. Delegation of Powers

(a) The Board of Directors may, subject to the provisions of the Companies Ordinance, delegate any or all of its powers to committees, each consisting of one or more persons (who are Directors), and it may from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in these Articles referred to as a "Committee of the Board of Directors"), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis, be governed by the provisions contained in these Articles for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers.

(b) Without derogating from the provisions of Article 50, the Board of Directors may from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors deems fit, and


may terminate the service of any such person. The Board of Directors may, subject to the provisions of the Companies Ordinance, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it deems fit.

(c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law or in fact for such purpose
(s) and with such powers, authorities and discretion, and for such period and subject to such conditions, as it deems fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board of Directors deems fit, and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him.

38. Number of Directors

The Board of Directors shall consist of nine (9)directors, or such greater number as may be determined from time to time by an ordinary resolution of the shareholders.

39. Election and Removal of Directors

Directors shall be elected at the Annual General Meeting by the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the elections of directors, and each Director shall serve, subject to Article 42 hereof, and with respect to a Director appointed pursuant to Article 41 hereof subject to such Article, until the Annual General Meeting next following the Annual General Meeting or General Meeting at which such Director was elected pursuant to this Article or Article 41 hereof and until his successor is elected, or until his earlier removal pursuant to this Article 39. The holders of a majority of the voting power represented at a General Meeting in person or by proxy and voting thereon at such Meeting shall be entitled to remove any Director(s) from office, to elect Directors instead of Directors so removed or to fill any vacancy, however created, in the Board of Directors.

40. Qualification of Directors

No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past.

41. Continuing Directors in the Event of Vacancies


In the event of one or more vacancies in the Board of Directors, the continuing Directors may continue to act in every matter and, pending the filling of any vacancy pursuant to the provisions of Article 39, may appoint Directors to temporarily fill any such vacancy; provided, however, that if they number less than a majority of the number provided for pursuant to Article 38 hereof, they may only act in an emergency or to fill the office of director which has become vacant up to the minimum number or in order to call a General Meeting of the Company for the purpose of electing Directors to fill any or all vacancies, so that at least a majority of the number of Directors provided for pursuant to Article 38 hereof are in office as a result of said meeting.

42. Vacation of Office

(a) The office of a Director shall be vacated, ipso facto, upon his death, or if he be found lunatic or become of unsound mind, or if he becomes bankrupt, or if the Director is a company upon its winding-up.

(b) The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.

43. Remuneration of Directors

A Director shall be paid remuneration by the Company for his services as Director to the extent such remuneration shall have been approved by a General Meeting of the Company and in accordance with the Companies Ordinance.

44. Conflict of Interests

Subject to the provisions of the Companies Ordinance, no Director shall be disqualified by virtue of his office from holding any office or place of profit under the Company or under any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any Director shall be in any way interested, be avoided, nor, other than as required under the Companies Ordinance, shall any Director be liable to account to the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such Director's holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by him at the meeting of the Board of Directors at which the contract or arrangement is first considered, if his interest then exists, or, in any other case, no later than at the first meeting of the Board of


Directors after the acquisition of his interest.

45. Alternate Directors

(a) A Director may, by written notice to the Company given in the manner set forth in Article 45(b) below, appoint any individual (whether or not such person is then a member of the Board of Directors) as an alternate for himself (in these Articles referred to as "Alternate Director"), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. Unless the appointing Director, by the instrument appointing an Alternative Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for all purposes, and for a period of time concurrent with the term of the appointing Director.

(b) Any notice to the Company pursuant to Article 45(a) shall be given in person to, or by sending the same by mail to the attention of, the General Manager of the Company at the principal office of the Company, to such other persons or place as the Board of Directors shall have determined for such purpose, and shall become effective on the date fixed therein or upon the receipt thereof by the Company, whichever is later.

(c) An Alternate Director shall have all the rights and obligations of the Director who appointed him; provided, however, that (i) he may not in turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides), (ii) an Alternate Director shall have no standing at any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present, and (iii) the Alternate Director is not entitled to remuneration.

(d) Any individual, whether or not he be a member of the Board of Directors, may act as an Alternate Director. One person may act as Alternate Director for several Directors, and in such event he shall have a number of votes (and shall be treated as the number of persons for purposes of establishing a quorum) equal to the number of Directors for whom he acts as Alternative Director. If an Alternate Director is also a Director in his own right, his rights as an Alternate Director shall be in addition to his rights as a Director.

(e) An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the Director(s) who appointed him.

(f) The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis, set forth in Article 42, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director.


PROCEEDINGS OF THE BOARD OF DIRECTORS

46. Meetings

(a) The Board of Directors may meet and adjourn its meeting and otherwise regulate such meetings and proceedings as the Directors think fit.

(b) Any Director may at any time, and the Secretary, upon the request of such Director, shall, convene a meeting of the Board of Directors, but not less than seven (7) days' notice shall be given of any meeting so convened. Notice of any such meeting may be given orally, by telephone, in writing or by mail, electronic mail, telex, cablegram or facsimile. Notwithstanding anything to the contrary herein, failure to deliver notice to a Director of any such meeting in the manner required hereby may be waived by such Director, and a meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defect is waived prior to action being taken at such meeting by all Directors entitled to participate at such meeting to whom notice was not duly given as aforesaid.

47. Quorum

Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence in person or by telephone conference of a majority of the Directors then in office who are lawfully entitled to participate in the meeting. No business shall be transacted at a meeting of the Board of Directors unless the requisite quorum is present (in person or by telephone conference) when the meeting proceeds to business.

48. Chairman of the Board of Directors

The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors and another of its members to be the Co-Chairman, remove such Chairman and Co-Chairman from office, and appoint others in their place. The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting or if he is unwilling to take the chair, the Co-Chairman shall preside. If both the Chairman and the Co-Chairman are not present or are unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting.

49. Validity of Acts Despite Defects


All acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any person (s) acting as Director (s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect of disqualification.

CHIEF EXECUTIVE OFFICER AND PRESIDENT

50. Chief Executive Officer and President

The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as Chief Executive Officer or Officers, General Manager or Managers, or President of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall have authority with respect to the management of the Company in the ordinary course of business. Such appointment
(s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Ordinance and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places.

MINUTES

51. Minutes

(a) Minutes of each General Meeting and of each meeting of the Board of Directors and Committee of the Board of Directors shall be recorded and duly entered in books provided for that purpose, and shall be held by the Company at its registered office or such other place as shall have been determined by the Board of Directors. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat.

(b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima


facie evidence of the matters recorded therein.

DIVIDENDS

52. Declaration of Dividends

The Board of Directors may from time to time declare, and cause the Company to pay, such interim dividend as may appear to the Board of Directors to be justified by the profits of the Company. The final dividend in respect of any fiscal period shall be proposed by the Board of Directors and shall be payable only after the same has been approved by Ordinary Resolution of the Company, but no such resolution shall provide for the payment of an amount exceeding that proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall affect any interim dividend previously declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the shareholders entitled thereto.

53. Funds Available for Payment of Dividends

No dividend shall be paid otherwise than out of the profits of the Company.

54. Amount Payable by Way of Dividends

(a) Subject to the rights of the holders of shares as to dividends, any dividend paid by the Company shall be allocated among the members entitled thereto in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective holdings of the shares in respect of which such dividend is being paid, without taking into account the premium paid up for the shares. The amount paid up on account of a share which has not yet been called for payment or fallen due for payment and upon which the Company pays interest to the shareholder shall not be deemed, for the purposes of this Article, to be a sum paid on account of the share.

(b) Whenever the rights attached to any shares or the terms of issue of the share do not provide otherwise, shares which are fully paid up or which are credited as fully or partly paid within any period in respect of which dividends are paid shall entitle the holders thereof to a dividend in proportion to the amount paid up or credited as paid up in respect of the nominal value of such shares and to the date of payment thereof (pro rata temporis).


55. Interest

No dividend shall carry interest as against the Company.

56. Payment in Specie

Upon the recommendation of the Board of Directors approved by Ordinary Resolution of the Company, the Company (i) may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, to the credit of a reserve fund for the redemption of capital or in the hands of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or debenture stock; and (ii) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum.

57. Implementation of Powers under Article 56

For the purpose of giving full effect to any resolution under Article 56, and without derogating from the provisions of Article 6(b) hereof, the Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issued fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any member upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the right of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors. Where requisite, a proper contract shall be filed in accordance with Section 130 of the Companies Ordinance, and the Board of Directors may appoint any person to sign such contract on behalf of the persons entitled to the dividend or capitalized fund.

58. Dividends on Unpaid Shares

Without derogating from Article 54 hereof, the Board of Directors may give an instruction which shall prevent the distribution of a dividend to the holders of


shares whose full nominal amount has not been paid up.

59. Retention of Dividends

(a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities or obligations in respect of which the lien exists.

(b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 20 or 21, entitled to become a member, or which any person is, under said Articles, entitled to transfer, until such person shall become a member in respect of such share or shall transfer the same.

60. Unclaimed Dividends

All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof. The principal (and only the principal) of an unclaimed dividend or such other moneys shall be, if claimed, paid to a person entitled thereto.

61. Mechanics of Payment

Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to the joint holder whose name is registered first in the Register of Members of his bank account or the person who the Company may then recognize as the owner thereof or entitled thereto under Article 20 or 21 hereof, as applicable, or such person's bank account), or to such person and at such other address as the person entitled thereto may be writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company.

62. Receipt from a Joint Holder


If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such shares.

ACCOUNTS

63. Books of Account

The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Ordinance and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No member, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by Ordinary Resolution of the Company.

64. Audit

At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors.

65. Auditors

The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by applicable law; provided, however, that in exercising its authority to fix the remuneration of the auditor(s), the members in General Meeting may, by Ordinary Resolution, act (and in the absence of any action in connection therewith shall be deemed to have so acted) to authorize the Board of Directors to fix such remuneration subject to such criteria or standards, if any, as may be provided in such Ordinary Resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by such auditor(s).


BRANCH REGISTERS

66. Branch Registers

Subject to and in accordance with the provisions of Sections 71 to 80, inclusive, of the Companies Ordinance and to all orders and regulations issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers.

AUDIT COMMITTEE

67. Audit Committee

(a) For purposes of these Articles the terms "Office Holder," "Personal Interest" and "Relative" shall be defined as set forth in Section 96(24) of the Companies Ordinance.

(b) The Board of Directors shall appoint an Audit Committee which shall be composed of three members, none of whom shall be Chairman or Co-Chairman of the Board of Directors, the Chief Executive Officer, Controller, Secretary or any other Office Holder who is an employee of the Company, and the majority of whom shall not be shareholders of the Company holding more than 5% (five percent) of the issued and outstanding share capital of the Company, or their relatives.

(c) All of the following matters shall be brought before the Audit Committee, and no action in respect thereof shall be taken prior to receiving the Audit Committee's and the Board of Director's approval. Approval of the Board of Directors may be given only following the Audit Committee's approval:

(i) proposed transactions to which the Company intends to be a party in which an Officer Holder has a direct or indirect Personal Interest;

(ii) actions which may otherwise be deemed to constitute a breach of fiduciary duty or the duty of care, as defined in Section 96(27) of the Companies Ordinance, of an Office Holder of the Company;

(iii) agreements with directors as to the terms of their services; and

(iv) indemnification of Office Holders.


(d) Approval by the majority of the Members of the Audit Committee shall be deemed approval of the Audit Committee for the purposes of this Article.

(e) The Audit Committee shall meet upon receiving at least seven days' prior written notice from the Board of Directors of a meeting. Such prior written notice shall contain details of the action in respect of which the meeting will be convened.

(f) Should a majority of the Audit Committee of the Board of Directors have a Personal Interest in any of the matters detailed in Section 67(c) above, the action shall be raised at the next General Meeting, and shall be subject to approval of the General Meeting.

(g) Any Office Holder whose interest is brought before the Audit Committee and the Board of Directors for approval shall not be present nor shall he have a vote at any meeting at which his interest shall be discussed or voted upon.

INDEMNITY AND INSURANCE

68. Indemnity and Insurance

Subject to the provisions of the Companies Ordinance, the Company may (i) procure insurance for, or indemnify any Office Holder, to the fullest extent permitted and not prohibited by Sections 96(41) and 96(42) of the Companies Ordinance, or any successor provisions; provided, however, that the procurement of any such insurance or provision of any such indemnification, as the case may be, is approved by the Audit Committee of the Company and otherwise as required by law; or (ii) procure insurance for or indemnify any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder.

WINDING UP

69. Winding up

If the Company is wound up, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the members shall be distributed to them in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made.


RIGHTS OF SIGNATURE, STAMP AND SEAL

70. Rights of Signature, Stamp and Seal

(a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority.

(b) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed.

(c) The Company may exercise the powers conferred by Section 102 of the Companies Ordinance regarding a seal for use abroad, and such powers shall be vested in the Board of Directors.

NOTICES

71. Notices

(a) Any written notice or other document may be served by the Company upon any member either personally or by sending it by prepaid mail (airmail if sent internationally) addressed to such member at his address as described in the Register of Members or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any member upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid registered mail (airmail if posted outside Israel) to the Company at its registered office. Any such notice or other document shall be deemed to have been served forty-eight (48) hours after it has been posted (seven (7) business days if sent internationally), or when actually received by the addressee if sooner than forty-eight hours or seven days, as the case may be, after it has been posted, or when actually tendered in person, to such member (or to the Secretary or the General Manager). Notice sent by cablegram, telex, facsimile or electronic mail shall be deemed to have been served when actually received by such member (or by the Company). If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received,


notwithstanding that it was defectively addressed or failed, in some other respect, to comply with the provisions of this Article 71(a).

(b) All notices to be given to the members shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Members, and any notice so given shall be sufficient notice to the holders of such share.

(c) Any member whose address is not described in the Register of Members, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.

(d) Notwithstanding anything to the contrary contained herein, notice by the Company of a General Meeting which is published in at least two daily newspapers in the State of Israel within the time otherwise required for giving notice of such meeting under Article 25 hereof and containing the information required to be set forth in such notice under such Article shall be deemed to be a notice of such meeting duly given, for purposes of these Articles, to any member whose address as registered in the Register of Members

is located in the State of Israel.


EXHIBIT 4.1

[COMMTOUCH SOFTWARE LTD. SHARE CERTIFICATE]

INCORPORATED UNDER THE LAWS OF THE STATE OF ISRAEL
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY

SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP

THIS CERTIFIES THAT

IS THE REGISTERED HOLDER OF

FULLY PAID AND NON-ASSESSABLE ORDINARY SHARES OF THE PAR VALUE OF 0.05 NEW
ISRAELI SHEKELS EACH, OF

-------------------------------COMMTOUCH SOFTWARE LTD.--------------------------

Transferable on the books of the Corporation by the holder hereof in portion or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Memorandum of Association and Articles of Association and amendments thereto of the Corporation, to all of which the holder by acceptance hereof assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:

CHIEF FINANCIAL OFFICER [COMMTOUCH SOFTWARE LTD. CHIEF EXECUTIVE OFFICER

INCORPORATED IN
ISRAEL
1991
SEAL]

COUNTERSIGNED AND REGISTERED;
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR

BY

AUTHORIZED SIGNATURE


COMMTOUCH SOFTWARE LTD.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM -- as tenants in common                   UNIF GIFT MIN ACT -- ___________ Custodian __________________
TEN ENT -- as tenants by the entireties                                    (Cust)               (Minor)
JT TEN  -- as joint tenants with right of
           survivorship and not as                                     under Uniform Gifts to Minors
           tenants in common                                           Act ____________________________________

                                                  UNIF TRF MIN ACT  -- ___________ Custodian (until age _______)
                                                                          (Cust)

                                                                       _______________ under Uniform Transfers

                                                                       to Minors Act __________________________
                                                                                               (State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, _____________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE




(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)



_______________________________________________________________ Ordinary Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint

______________________________________________________________________ Attorney to transfer the said Ordinary Shares on the books of the within-named Corporation with full power of substitution in the premises.

Dated ________________________

X __________________________________________

X __________________________________________

NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed

By _________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION

PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.


EXHIBIT 4.2

AMENDED AND RESTATED

REGISTRATION RIGHTS AGREEMENT

This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT is made as of the 19th day of April, 1999 by and among CommTouch Software Ltd., an Israeli company (the "COMPANY") having its principal executive offices at 10 Technology Avenue, Ein Vered 40696, Israel, the investors identified in Exhibit A to this Agreement (the "ORIGINAL INVESTORS") and the investors identified in Exhibit B to this Agreement (the "NEW INVESTORS"; the Original Investors and the New Investors are sometimes referred to in this Agreement collectively as the "INVESTORS," the "PREFERRED SHAREHOLDERS" and individually as a "PREFERRED SHAREHOLDER").

WHEREAS    the New Investors are purchasing 42,081 Series D Preferred Shares
           of the Company pursuant to a Series D Preferred Share Purchase
           Agreement dated the date hereof (the "PURCHASE AGREEMENT"); and

WHEREAS    the Company wishes to have the New Investors purchase the Series D
           Preferred Shares; and

WHEREAS    in order to induce the New Investors to purchase the Series D
           Preferred Shares, and in order to convince the Original Investors to
           agree to certain changes to their rights required in order to allow
           the Company to enter into the Purchase Agreement and related
           agreements, the Company is entering into this Agreement;

THEREFORE, the parties agree as follows:

For purposes of this Agreement, the term "SERIES D PREFERRED SHARES" refers to the Series D Preferred Shares issued and sold under the Purchase Agreement at the Closing (as such term is defined in the Purchase Agreement); and "SHARES" refers to the Series A Preferred Shares, the Series B Preferred Shares, the Series C Preferred Shares, the Series D Preferred Shares, any shares of the Company issued upon the exercise of Warrants issued under the Preferred Shares Purchase Agreements dated as of January 25, 1996, and April 22, 1996 and any other shares or equity securities of the Company distributed in respect of, in substitution for or upon the conversion of such shares.


1. REGISTRATION UPON REQUEST. Promptly upon the written request by the holders of a majority of the Shares, as one group, made at any time or from time to time, and, in any event, within 90 days of such request, the Company shall use its reasonable efforts to file a registration statement under the United States Securities Act of 1933 and the rules and regulations thereunder, all as amended from time to time (collectively, the "Act"), covering all Shares that any Preferred Shareholders desire to register, and shall use its reasonable efforts to cause such registration statement to become effective as soon as practicable. The Company shall promptly notify any Preferred Shareholders who are then holders of Shares, other than those requesting the registration, and afford them the opportunity of including in the registration such Shares owned by them as they shall specify in a written notice delivered to the Company within 30 days after their receipt of the Company's notice of the proposed filing. No other persons shall be entitled to include any securities in any registration pursuant to this Section 1 without the consent of a majority in interest of the Investors participating in the registration. The Company shall not be required to effect more than an aggregate of two registrations pursuant to this Section 1, shall not be required to effect more than one registration during any 12-month period pursuant to this Section 1, and shall not be required to effect any registration for any Preferred Shareholder who could dispose of all of its Shares within 12 months without registration pursuant to Rule 144 promulgated under the Act. In addition, the Company shall not be required to effect any registration pursuant to this Section 1 prior to the second anniversary of the closing of the Company's first public offering of its securities registered under the Act. The Company shall have the right to defer filing a registration statement under the Act pursuant to this Section 1 not more than once in any 12-month period if the Board of the Directors of the Company shall determine that it would be seriously detrimental to the Company to file such registration statement at the date the filing would otherwise be required under this Agreement, in which case the Company shall have an additional period of not more than 120 days within which to file such registration statement.

2. INCIDENTAL REGISTRATION. If the Company at any time proposes to register any of its equity securities under the Act for its own account or for the account of any security holders (other than any registration pursuant to
Section 1, or any registration of an offering to employees, consultants or other persons providing services to the Company or its subsidiaries, or any registration on Form F-4 or a successor form), it shall promptly give written notice to each Preferred Shareholder who is then a holder of Shares of its intention to do so, and if within 30 days after receipt of such notice any such Preferred Shareholder so requests in writing, the Company shall include in such registration all shares that such Preferred Shareholders shall specify in writing to the Company. However, if the proposed registration is to be underwritten (whether on a "best efforts" or a "firm commitment" basis), the managing underwriter shall have the right to exclude Shares from such registration if it advises the Company that such exclusion is necessary to avoid interfering with the successful marketing of the underwritten portion of the public offering, provided that the securities to be included in any such registration other than those for which the Company initiated such registration and those which are being sold by the Company shall be allocated pro rata among the affected holders in proportion to their respective share holdings prior to giving effect to the sale of shares pursuant to such registration.

3. FORM F-3 REGISTRATION. On the written request of Investors holding a majority of the Shares that the Company effect a registration of Shares on Form F-3, the Company shall, as promptly as practicable, use its reasonable efforts to effect the registration of such Shares as are specified in such request; provided, however, that the Company shall not be obligated to effect any such registration pursuant to this Section 3 if (i) Form F-3 is not available for such offering; or (ii) the Board of the Directors of the Company shall determine that it would be seriously detrimental to the Company to file

2

such registration statement at the date the filing would otherwise be required under this Agreement, in which case the Company shall have an additional period of not more than 120 days within which to file such registration statement. The Company's obligation under this Section 3 shall be limited to a Form F-3 registration that will, in the opinion of the Company's counsel, meet the legal requirements for allowing the Preferred Shareholders to dispose of their Shares in a non-underwritten transaction, and the Company's obligations in such case under Section 4 shall be limited accordingly.

4. CONDITIONS. Registrations of Shares pursuant to Sections 1, 2 or 3 shall be subject to the following:

(a) FILING OF AMENDMENTS. The Company shall file such amendments and supplements to the registration statement and the related prospectus and take such other action as may be necessary to keep the registration statement effective and to comply with the Act for such period, in the case of registrations under Sections 1 and 2 above, not exceeding six months from the original effective date of the registration statement, and, in the case of registrations under Section 3, not less than the period ending 60 months from the date of the Company's initial public offering under the Act, as a majority in interest of the participating Preferred Shareholders may request.

(b) FURNISH COPIES. The Company shall furnish to the participating Preferred Shareholders such reasonable number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request to facilitate the disposition of the Shares being registered.

(c) BLUE SKY. The Company shall take such action under the securities laws of such states of the United States as any participating Preferred Shareholder shall reasonably request; provided, however, that the Company shall not be required to qualify to do business as a foreign corporation, or to file any general consent to service of process, in any state.

(d) UNDERWRITING. In the event of an underwritten public offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter. Each participating holder shall also enter into and perform its obligations under the underwriting agreement.

(e) NOTIFICATION. The Company shall notify each participating holder at any time when a prospectus is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing.

(f) COUNSEL AND ACCOUNTANT'S OPINION. The Company shall furnish, at the request of any participating Preferred Shareholder, on the date the registered Shares are delivered to the underwriters for sale through underwriters, or, if such Shares are not being sold through underwriters, on the date that the registration statement becomes effective: (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to the underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the participating Investors; and (ii) a letter, dated such date, of the independent certified public accountants of the Company, in form and substance as is customarily given by independent

3

certified public Accountants to the underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the participating Preferred Shareholders.

(g) EXPENSES. The Company shall bear the cost of all registrations, including, but not limited to, all registration and filing fees, printing expenses and fees, expenses and disbursements of counsel and accountants for the Company (subject, however, to subsection (h) below), except that each Preferred Shareholder shall pay the fees, expenses and disbursements of any counsel retained by such Preferred Shareholder and the underwriting fees and selling commissions applicable to such Preferred Shareholder's Shares.

(h) AUDITS. The Company shall not be required to furnish any audited financial statements at the request of any proposed seller of Shares other than those statements customarily prepared at the end of its fiscal year, unless (i) the requesting proposed sellers shall agree to reimburse the Company for the out-of-pocket costs incurred by the Company in the preparation of such other audited financial statements, or (ii) such other audited financial statements as shall be required by the United States Securities and Exchange Commission (the "COMMISSION") as a condition to ordering a registration statement effective under the Act.

(i) INDEMNIFICATION. (1) The Company shall indemnify and hold harmless each seller of Shares, any underwriter (as defined in the Act) and each person who under the Act is deemed a controlling person of such seller or underwriter, against any losses, claims, damages or liabilities to which any such seller, underwriter or controlling person may become subject under the Act or otherwise, to the extent that such losses, claims, damages or liabilities (or actions in respect thereto) shall arise out of or be based upon any untrue or allegedly untrue statement of any material fact contained in the registration statement, any related prospectus or preliminary prospectus or any amendment or supplement to the registration statement or any prospectus or preliminary prospectus or upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse any legal or other expenses reasonably incurred by any such seller, underwriter or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to any such seller, underwriter or controlling person for any losses, claims, damages, liabilities or actions to the extent the same shall arise out of or be based upon any such untrue statement or omission made in reliance upon and in conformity with written information furnished by such seller, underwriter or controlling person seeking indemnification hereunder to the Company for use in the registration statement, prospectus, preliminary prospectus, amendment or supplement.

(2) Each seller of Shares shall similarly indemnify and hold harmless the Company and its controlling persons against any such losses, claims, damages, liabilities or actions, but only to the extent that the same shall arise out of or be based upon any untrue or allegedly untrue statement, or any omission or alleged omission, made in reliance upon and in conformity with written information furnished by such indemnifying person to the Company for use in the registration statement, prospectus, preliminary prospectus, amendment or supplement; provided, that the liability under this Section 4(i)(2) of each seller of Shares shall not exceed such seller's gross proceeds from such sale.

(3) Each party entitled to indemnification hereunder (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such

4

Indemnified Party becomes aware of any claim or potential claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom. The Indemnified Party may participate in such defense at its own expense. No Indemnified Party shall consent to entry of any judgment or settle such claim or litigation without the prior, written consent of the Indemnifying Party.

(4) If the indemnification provided for in this Section 3(i) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any losses, claims, damages or liabilities referred to herein for reasons of public policy, the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other, in connection with the matters that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

(j) INFORMATION CONCERNING PREFERRED SHAREHOLDERS. Each Preferred Shareholder that participates in a registration of Shares shall furnish to the Company such information regarding such Preferred Shareholder and the distribution proposed by such Preferred Shareholder as the Company may reasonably request and as shall be required in connection with any registration, qualification or compliance referred to herein.

(k) SAME EXCHANGE. The Company shall cause all Shares registered hereunder to listed on each securities exchange on which similar securities issued by the Company are then listed.

(l) TRANSFER AGENT. The Company shall provide a transfer agent and registrar for all Shares registered pursuant to this Agreement and a CUSIP number for all such Shares, in each case not later than the effective date of such registration.

5. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Preferred Shareholders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the Commission that may at any time permit an Investor to sell Shares to the public without registration, the Company agrees to:

(a) use its reasonable efforts to make and keep public information available, as those terms are understood and defined in Commission Rule 144, at all times after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public in the United States;

(b) use its reasonable efforts to file with or submit to the Commission in a timely manner all reports and other documents required of the Company under the Act and the United States Securities Exchange Act of 1934 (the "1934 ACT"); and

5

(c) furnish to any Preferred Shareholder promptly upon request (i) a written statement by the Company as to whether or not it has complied with the reporting requirements of Commission Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public in the United States), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may reasonably be requested in availing such holder of any rule or regulation of the Commission which permits the selling of any such securities without registration.

6. NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to cause the Company to register the Shares shall not be assignable except with the prior written consent of the Company, except that any Preferred Shareholder may assign its rights to cause the Company to register shares pursuant to this Agreement to a permitted transferee under the Company's Articles of Association of all or any part of its Shares. The transferor shall, within thirty (30) days after such transfer, furnish the Company with notice of the name and address of such transferee and the securities with respect to which such registration rights are being assigned and the transferee's written agreement to be bound by this Agreement.

7. AMENDMENT OF REGISTRATION. Any provision of these registration rights may be amended, and the exercise of any rights under this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company, and a 75% majority in interest of the holders of the Shares, except that any party may waive as to itself the exercise of any rights under this Agreement.

8. "MARKET STAND-OFF" AGREEMENT. Holders of Shares, if requested by the Company and the underwriters of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any ordinary shares or other securities of the Company held by such holders during the 7-day period prior to and the 180-day period (or such shorter period as is required by the underwriters) following the effective date of a registration statement of the Company filed under the Act in connection with an underwritten public offering (except for any securities of the Company sold by them pursuant to such registration statement). The obligation of this Section 8 shall apply only if such agreement is also entered into by the Company's founders.

9. EXPIRATION. The Preferred Shareholders' rights to cause the Company to register the Shares pursuant to this agreement shall expire on the fifth anniversary of the closing of the Company's first public offering of its securities.

10. RIGHTS GRANTED TO SUBSEQUENT INVESTORS. Without the prior written consent of the holders of a 75% majority in interest of the Shares, the Company shall not grant any registration rights which are more favorable that those granted herein to the Preferred Shareholders, to any party other than the Preferred Shareholders and their permitted transferees under the Company's Articles of Association.

11. FUTURE INVESTORS. Future investors that invest in the Company in consideration of Preferred Shares of the Company (the "Future Investors" and collectively with the Investors are sometimes referred to in this Agreement as the "Preferred Shareholders" and individually as a Preferred Shareholder") may become a party to this Agreement as of the date of their execution of an


addendum substantially in the form of Exhibit C to this Agreement and thereby shall be bound by, and entitled to the benefits of, this Agreement. Upon receipt of such documents the Company shall deliver a copy thereof to all parties to this Agreement (including future Investors who have previously become parties to this Agreement).

12. MISCELLANEOUS.

(a) GOVERNING LAW; FORUM FOR DISPUTE RESOLUTION. This Agreement shall be governed by the laws of Israel, with any terms relating to United States securities laws to be interpreted in accordance with the federal laws of the United States of America. Any dispute arising, under or with respect to this Agreement shall be resolved exclusively in the appropriate court in Tel-Aviv, Israel.

(b) ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement, constitutes the entire agreement among the parties regarding the transactions contemplated herein and therein, and may not be amended except in writing.

(c) NOTICES. All communications provided for in this Agreement shall be in writing and shall be sent to each party at the address set forth at the beginning of this Agreement, or to such other address as a party may from time to time designate in writing to the other parties. Notices shall be sent by personal delivery, by registered air mail, return receipt requested, or by express courier.

(d) HEADINGS. The headings contained in this Agreement are solely for convenience of reference and shall not affect the interpretation of this Agreement.

(e) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(f) SUCCESSORS AND ASSIGNS. The Company shall not sell, assign transfer, or otherwise convey any of its rights or delegate any of its duties under this Agreement, except to a company which has succeeded to substantially all of the business and assets of the Company in compliance with this Agreement and has assumed in writing its obligations under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the Preferred Shareholders and the Company and their respective successors and assigns. A Preferred Shareholder may only assign its rights and duties to a party that is a permitted assignee or transferee under, and has acquired the shares of the Preferred Shareholder in accordance with, the Articles of Association of the Company.

(g) DELAYS OR OMISSIONS; WAIVER. No delay or omission to exercise any right, power, or remedy accruing to either the Company or the Investors upon any breach or default by the other under this Agreement shall impair any such right, or remedy nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein or in any similar breach or default thereafter occurring.

(h) FURTHER ACTIONS. At any time and from time to time, each part, agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement.


(i) AMENDED AND RESTATED AGREEMENT. This Amended and Restated Registration Rights Agreement supersedes the Registration Rights Agreement dated _______________________, 19__, between the Company and the Original Investors.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

COMMTOUCH SOFTWARE LTD. [ ]

By:   /s/ Gideon Mantel
    -----------------------------
Name: Gideon Mantel                    ------------------------------------
Titles: Chief Executive Officer        [formerly DATAMARK HOLDING, INC.]


         Dr. Ed Mlavsky                GEMINI ISRAEL FUND, L.P.
---------------------------------      by its general partner, GEMINI CAPITAL
         Dr. Ed Mlavsky                FUND MANAGEMENT, LTD.

         /s/ Yosef Sela                By:  /s/ Yosef Sela
---------------------------------          --------------------------------
           Yosef Sela                  Name: Yosef Sela
                                       Title: Executive Vice President

A.M.T. COMPUTING LTD.                  HOSEN AMOT LTD.


By:  /s/ Shraga Sharak                 By:  /s/ Moti Hanochi
    -----------------------------          ---------------------------------
Name: Shraga Sharak                    Name: Moti Hanochi
Title: Managing Director               Title: Manager

HARBOURVEST-EVERGREEN L.P.


By:  /s/ Jacob Barak
    -----------------------------
Name: Jacob Barak
Title:

                                       GEMUL INVESTMENT
                                       COMPANY LTD.
By:
    -----------------------------
Name: Victor Amara                     By:  /s/ Ariel Aven
                                           ---------------------------------
                                       Name: Ariel Aven
                                       Title: Investment Manager

ISRAEL GROWTH FUND, L.P. by its        SEMEL INVESTMENTS LTD.
general partner, APAX-LEUMI Inc.


By:  /s/ Allan Barkat                  By:
    -----------------------------          ---------------------------------

Name: Allan Barkat Name:


Title:                                       Title:

YAMAICHI UNI VEN NO.6                        YAMAICHI UNI VEN NO.6-S
INVESTMENT PARTNERSHIP                       INVESTMENT PARTNERSHIP

By:                                          By:
   --------------------------------             --------------------------------
   Senior Managing Director                     Senior Managing Director
   Phoenix Capital Management                   Phoenix Capital Management
   Co. Ltd.,                                    Co. Ltd.,
   its Managing Partner                         its Managing Partner

JAFCO CO. LTD.

By: /s/ Mitsumasa Murase
   --------------------------------
   President
                                             GEMINI ISRAEL II PARALLEL
                                             FUND, L.P.

                                             By: /s/ Yosef Sela
                                                --------------------------------
                                                 /s/ Ed Mlavsky
                                                --------------------------------
                                                its general partner,
                                                Gemini Capital Associates, L.P.,
                                                by its general partner
                                                Gemini Capital Fund Management
                                                Ltd.

YVC - YOZMA MANAGEMENT AND
INVESTMENTS LTD.

By: /s/ Yigol Erlich
   --------------------------------

THE CHALLENGE FUND-ETGAR L.P.
INVESTMENT PARTNERSHIP

By:
its general partner
Challenge Partners, L.P.,
by its general partner
Atidim Etgar Nihul Kranot Ltd.

k.t. CONCORD VENTURE                            k.t. CONCORD VENTURE
FUND (CAYMAN) L.P.                              FUND (ISRAEL) L.P.

By: /s/ M. Steingert                            By: /s/ M. Steingert
   --------------------------------                -----------------------------
   its general partner                          its general partner

9

k.t. Concord Investment Partners Ltd.      k.t. Concord Investment Partners Ltd.

k.t. CONCORD VENTURE                       k.t. CONCORD VENTURE
ADVISORS (CAYMAN) L.P.                     ADVISORS (ISRAEL) L.P.

By: /s/ M. STEINGERT                       By:  M. STEINGERT
   ----------------------------------         ----------------------------------
its general partner                        its general partner
k.t. Concord Investment Partners Ltd.      k.t. Concord Investment Partners Ltd.

-------------------------------------
         C. R. Fredrick

BPPA CTSL LLC

/s/ Emilio Bassini
----------------------------
    Managing Member

EMV CTSL LLC
By: Emerging Markets Ventures, I, L.P., its managing member
By: EMV MGP LLC,
its managing general partner
By: Bassini Playfair Capital LLC,
its managing member
By: Bassini Playfair & Associates LLC, its class A member

/s/ Emilio Bassini
----------------------------
    Managing Principal

NOMURA INTERNATIONAL PLC

/s/ Kazo Yamazoe
----------------------------
    Managing Director

CSK VENTURE CAPITAL LTD.

/s/ Kinya Nakagome
----------------------------

YVC - YOZMA MANAGEMENT AND
      INVESTMENTS LTD.

/s/ Yigol Erlich
----------------------------
k.t. CONCORD VENTURE
     FUND (CAYMAN) L.P.

/s/ M. Steingert
----------------------------
    General Partner

k.t. CONCORD VENTURE FUND (ISRAEL) L.P.

/s/ M. Steingert
----------------------------

JAFCO CO. LTD.

/s/ Mitsumasa Murase
----------------------------
    President


Investor International (Cayman) Ltd.

/s/ ALAIN ANDREY
-------------------------------
    Attorney in fact

WOLFCOMM.Com PARTNERS

/s/ AARON WOLFSON
-------------------------------
     General Partner

WOLFSON EQUITIES

/s/ AARON WOLFSON
-------------------------------
    General Partner

Ottley Properties, LLC

/s/ MICHAEL B. WHITE
-------------------------------

The LaCroix, LLC

/s/ H. HUNTER WHITE III
-------------------------------
    Manager

Navesink Equity Derivative Fund, LDC

/s/ John Burke
-------------------------------
    Advisor

OCEANIC BANK AND TRUST LIMITED

/s/ H. GOODY
-------------------------------
    Chairman

HULL OVERSEAS, Ltd.

/s/ J. MITCHELL HULL
-------------------------------
    Director

OTP LLC

/s/ MARK H. RAIHSLY
-------------------------------
    Manager


SYNERGY VENTURES MANAGEMENT, INC.

/s/ Yariv H. Zahool

YOZMA VENTURE CAPITAL, LTD.

/s/ Avi Levy

DSJ International Trust

/s/ Stuart Feldman
    President



/s/ Gerald L. Golub


/s/ David Gol


EXHIBIT A

ORIGINAL INVESTORS

Gemini Israel Fund, L.P.

A.M.T. Computing Ltd.

Hosen Amot Ltd.

Evergreen Canada Israel Investments and Company Ltd.

Yarok Ad Fund Investment Partnership, L.P.

Investech Ltd.

Gemul Investment Company Ltd.

Semel Investments Ltd.

CSK

Israel Growth Fund

Ed Mlavsky

Yossi Sela

C.R. Fredrick

[________](formerly Datamark Holdings, Inc.)

Yamaichi Uni Ven No. 6 Investment Partnership

Yamaichi Uni Ven No. 6-S Investment Partnership

JAFCO Co. Ltd.

YVC - YOZMA MANAGEMENT AND INVESTMENTS LTD.

The Challenge Fund-Etgar L.P.

k.t. Concord Venture Fund (Cayman) L.P.

11

k.t. Concord Venture Fund (Israel) L.P.

k.t. Concord Venture Advisors (Cayman) L.P.

k.t. Concord Venture Advisors (Israel) L.P.

12

EXHIBIT B

NEW INVESTORS

13

EXHIBIT C

ADDENDUM

________________ (Name of Future investor) hereby agrees to become a party, as of the date hereof to the Registration Rights Agreement dated as of _________, 1999, to be bound by and to be entitled to the benefits of such Registration Rights Agreement as if it were an original party thereof.

14

EXHIBIT 4.3

December 23, 1998

To:
Amara Victor
CSK Venture Capital Ltd.
Datamark Holding, Inc.
E&M Computing Ltd.
Dr. Ed Mlavsky
C.R. Fedrick
Gemini Israel Fund L.P.
Gemul Investment Company Ltd.
Hosen Amot Ltd.
HarbourVest-Evergreen L.P.
Israel Growth Fund, L.P.
Yossi Sela
Semel Investments Ltd.
Yamaichi Uni Ven No. 6 and S-6 Investment Partnerships, c/o Phoenix Capital Management Co. Ltd.
The Challenge Fund-Etgar, L.P.
JAFCO CO, Ltd.
JAFCO G7A Investment Enterprize Partnership JAFCO G7B Investment Enterprize Partnership Gemini Israel II Parallel Fund L.P.
The Challenge Fund-Etgar L.P.
Yozma II (Israel) L.P.
Yozma II (B.V.I.) L.P.
Poalim Capital Markets (Funds) Ltd.
(the above are referenced to collectively as the "Existing Investors")

k.t. Concord Venture Fund (Cayman), L.P.
k.t. Concord Venture Fund (Israel), L.P.
k.t. Concord Venture Advisors (Cayman) L.P.
k.t. Concord Venture Advisors (Israel) L.P.


Ladies and Gentlemen:

This letter agreement shall replace and supersede the letter agreements providing tag-along rights to the Existing Investors dated February 12, 1996, July 2, 1997, September 4, 1997, May 18, 1998, September __, 1998 and November 17, 1998. We hereby agree as follows:

In the event that any one of us (the "SELLER") wishes to sell any of our shares in CommTouch Software Ltd. (the "COMPANY") for value, other than a transfer by one of us to the other, to a member of our immediate families, or to a company controlled by any of us, or a sale or series of sales of shares in which a Seller sells less than 10% of the shares he holds in the Company, then the Seller shall promptly deliver to the Company and to you written notice of the proposed disposition and the basic terms and conditions thereof, including the number of shares proposed to be sold (the "TARGET SHARES"), the proposed purchase price and the identity of the proposed purchaser (the "PURCHASER").

In the event that the Target Shares are not acquired by you or by other shareholders of the Company pursuant to the right of first refusal provisions contained in the Company's Articles of Association, then you shall, for a period of 20 calendar days following the latest date on which the Target Shares could have been acquired pursuant to such right of first refusal, have the right to notify the Seller of your intention to exercise your rights under this letter agreement and to add your shares to the shares being sold by the Seller to the Purchaser, in an amount equal to your relative share holdings in the Company and upon the same terms and conditions specified in the notice referred to in the preceding paragraph. In the event you exercise your rights hereunder, the Seller must cause the Purchaser to add such shares to the Target Shares to be purchased by the Purchaser, as part of the sale agreement, or to reduce the number of the Seller's Target Shares from the number of shares to be purchased by the Purchaser, and either conclude the transaction in accordance with such revised structure or withdraw from completing the transaction.

The provisions of this letter agreement shall expire upon the consummation of the initial public offering of the Company, and shall expire with respect to each of us at such time as such individual holds less than 33% of the number of shares in the Company held by such individual on the date hereof. For all purposes of this letter agreement, the number of shares in the Company shall be calculated to include the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares, on an as-converted basis.

If the foregoing correctly sets for our understanding, please countersign below and return the enclosed copy of this letter agreement.

Sincerely,


EXHIBIT 4.4

April 15, 1999

CommTouch Software Ltd. and
each of the holders of ordinary shares or preferred shares of CommTouch Software Ltd. c/o CommTouch Software Inc.
3945 Freedom Circle, Ste. 730
Santa Clara, CA 95054

Ladies and Gentlemen:

This letter agreement (the "Letter Agreement") is being delivered to CommTouch Software Ltd. (the "Company") and all of the holders of ordinary shares and holders of preferred shares of the Company (collectively, the "Shareholders") in connection with the purchase by the undersigned (the "Investor") of Series D Preferred Shares of the Company pursuant to the Share Purchase Agreement between the Company and the Investor dated April 15, 1999. (The ordinary shares and preferred shares of the Company shall be referred to collectively herein as the "Company Shares.") For purposes of this Agreement, the Investor shall be deemed to be a "Shareholder."

The Investor hereby agrees that if Shareholders holding 80 percent or more of the outstanding Company Shares (the "Majority Shareholders") determine to sell their Company Shares in a transaction approved by the Board of Directors of the Company, the Majority Shareholders have the right, upon giving ten calendar days' written notice thereof to the other shareholders of the Company, to require the other shareholders to participate in such transaction and sell their Company Shares, provided that the disposition of Company Shares by the Majority Shareholders is at the same consideration per share and on the same terms and conditions as the disposition of the other shareholders' Company Shares, and the other shareholders shall receive their pro rata portion of any other consideration received by the Majority Shareholders in respect of such transaction. Each Shareholder hereby agrees to deliver such shareholder's Company Shares free and clear of all liens and encumbrances in connection with a disposition pursuant to this Letter Agreement.

Very truly yours,


EXHIBIT 5.1

C/255/60
Tel-Aviv, June 3, 1999

CommTouch Software Ltd.
10 Technology Avenue
Ein Vered 40696
Israel

Ladies and Gentlemen:

We refer to Amendment no. 1 to the registration statement on Form F-1, Registration No. 333-78531 (the "Registration Statement"), initially filed by CommTouch Software Ltd. (the "Company") on June 3, 1999 with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in connection with the sale of up to 3,000,000 Ordinary Shares, nominal value NIS 0.01 per share, of the Company (the "Firm Shares") to the Underwriters as described in the Registration Statement for resale to the public. The Company will issue and sell these 3,000,000 Firm Shares. The Underwriters may, as described in the Registration Statement, purchase up to an additional 450,000 Ordinary Shares, nominal value NIS 0.01 per share, of the


2

Company (the "Option Shares" and, together with the Firm Shares, the "Shares) at the initial public offering price less the underwriting discount.

As special Israeli counsel to the Company in connection with the offering of the Shares pursuant to the Registration Statement, we have examined such corporate records and documents and such questions of law as we have considered necessary or appropriate for the purpose of this opinion.

Upon the basis of such examination, we are of the opinion that the Shares to be issued and sold by the Company, as contemplated by the Prospectus included in the Registration Statement, are duly and validly authorized and, when issued and sold in the manner contemplated by the Underwriting Agreement filed as an exhibit to the Registration Statement (the "Underwriting Agreement") and upon receipt by the Company of payment therefor as provided in the Underwriting Agreement, will be legally and validly issued, fully paid and non-assessable.

We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus contained in the Registration Statement and elsewhere in the Registration Statement and Prospectus.

Very truly yours,

/s/ Naschitz, Brandes & Co.


Naschitz, Brandes & Co.


EXHIBIT 10.1

COMMTOUCH SOFTWARE LTD.

1996 CSI STOCK OPTION PLAN


COMMTOUCH SOFTWARE LTD.

1996 CSI STOCK OPTION PLAN

1. Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel, to provide additional incentive to Employees and Consultants of the Company and its Subsidiary and to promote the success of the Company and the Subsidiary's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option and subject to the applicable provisions of Section 422 of the Code and the regulations promulgated thereunder. Shares Purchase Rights may also be granted under the Plan. The Options and Shares Purchase Rights offered pursuant to the Plan are a matter of separate inducement and are not in lieu of salary or other compensation.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Administrator" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan, in its capacity as an administrator of the Plan.

(b) "Board" means the Board of Directors of the Company.

(c) "Code" means the Internal Revenue Code of 1986, as amended.

(d) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan.

(e) "Company" means CommTouch Software Ltd., an Israeli company.

(f) "Consultant" means any person who is not an Employee and who is engaged by the Company or the Subsidiary to render consulting or advisory services and is compensated for such services, and any Director of the Company or the Subsidiary whether compensated for such services or not. If the Company registers any class of any equity security pursuant to the Exchange Act, the term Consultant shall thereafter not include Directors who are not compensated for their services or are paid only a Director's fee.

(g) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship with the Company or the Subsidiary is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or the Subsidiary or (ii) transfers between locations of the Company or the Subsidiary or between the Subsidiary and the Company or any successor. A leave of absence shall include sick leave, military leave, or any other personal leave approved by an authorized representative of the Company or the Subsidiary, as applicable. For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract, including policies of the Company or the Subsidiary, as applicable. If reemployment upon expiration of a leave of absence approved by the Company or the Subsidiary is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option.


(h) "CSI" means CommTouch Software, Inc., a California corporation.

(i) "Director" means a member of either of the boards of directors of the Company or the Subsidiary.

(j) "Employee" means any person, including Officers and Directors, employed by the Company or the Subsidiary. The payment of a Director's fee by the Company or the Subsidiary shall not be sufficient to constitute "employment."

(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(l) "Fair Market Value" means, as of any date, the value of the Ordinary Shares determined as follows:

(i) If the Ordinary Shares are listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination and reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Ordinary Shares are quoted on the NASDAQ System (but not on the Nasdaq National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Ordinary Shares on the last market trading day prior to the day of determination; or

(iii) In the absence of an established market for the Ordinary Shares, the Fair Market Value thereof shall be determined in good faith by the Administrator.

(m) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(n) "Nonstatutory Stock Option" means an option not intended to qualify as an Incentive Stock Option.

(o) "Officer" means a person who is an officer of the Company or the Subsidiary within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(p) "Option" means a stock option granted pursuant to the Plan.

(q) "Optioned Stock" means the Ordinary Shares subject to an Option or a Shares Purchase Right.

(r) "Optionee" means an Employee or Consultant who receives an Option or Shares Purchase Right.

(s) "Ordinary Shares" means the Ordinary Shares of stock of the Company.

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(t) "Plan" means the 1996 CSI Stock Option Plan.

(u) "Restricted Shares" means each of the Ordinary Shares acquired pursuant to a grant of a Shares Purchase Right under Section 11 below.

(v) "Section 16(b)" means Section 16(b) of the Exchange Act.

(w) "Shares Purchase Right" means a right to purchase Ordinary Shares pursuant to Section 11 below.

(x) "Subsidiary" means CommTouch Software, Inc., a California corporation, the Company's wholly-owned U.S. subsidiary.

3. Shares Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the aggregate number of Ordinary Shares that may be subject to option and sold under this Plan is 5,000,000, unless amended by the shareholders of the Company. The Ordinary Shares may be authorized but unused, or reacquired Ordinary Shares.

If an Option or Shares Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an option exchange pursuant to Section 4(c)(viii) or otherwise, the unpurchased Ordinary Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Ordinary Shares that have actually been issued under the Plan, upon exercise of either an Option or Shares Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan.

4. Administration of the Plan.

(a) Initial Plan Procedure. Prior to the date, if any, upon which the Company becomes subject to the Exchange Act, the Plan shall be administered by the Board or a Committee appointed by the Board.

(b) Plan Procedure After the Date, if any, upon which the Company becomes Subject to the Exchange Act.

(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the plan may be administered by different bodies with respect to Directors, Officers and Employees who are neither Directors nor Officers.

(ii) Administration With Respect to Directors and Officers. With respect to grants of Options and Shares Purchase Rights to Employees who are also Officers or Directors, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with applicable Israeli securities laws, the rules under Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted to comply with the applicable laws of Israel, rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and

3

appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by applicable laws of Israel, the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made.

(iii) Administration With Respect to Other Employees and Consultants. With respect to grants of Options and Shares Purchase Rights to Employees or Consultants who are neither Directors nor Officers, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of the laws and regulations of Israel, of California laws and regulations, of the Code, and of any applicable stock exchange (collectively, the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws.

(iv) Compliance with Section 162(m). If, at any time, awards made under the Plan shall be subject to Section 162(m) of the Code, the Plan shall be administered by a committee comprised solely of "outside directors" (within the meaning of Prop. Treas. Reg. Section 1.162-27(e)(3)) or such other persons as may be permitted from time to time under Section 162(m) of the Code and the Treasury Regulations promulgated thereunder.

(c) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any stock exchange upon which the Ordinary Shares are listed, the Administrator shall have the authority in its discretion:

(i) to determine the Fair Market Value of the Ordinary Shares, in accordance with Section 2(1) of the Plan;

(ii) to select the Consultants and Employees to whom Options and Shares Purchase Rights may from time to time be granted hereunder;

(iii) to determine whether and to what extent Options and Shares Purchase Rights or any combination thereof are granted hereunder;

(iv) to determine the number of Ordinary Shares to be covered by each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Ordinary Shares covered by such Option has declined since the date the Option was granted; and

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(viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan.

(d) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options or Shares Purchase Rights.

5. Eligibility.

(a) Nonstatutory Stock Options and Shares Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option or Shares Purchase Right may, if otherwise eligible, be granted additional Options or Shares Purchase Rights.

(b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Ordinary Shares with respect to which Incentive Stock Options are exercisable for the first time by any particular Optionee during any calendar year (under all plans of the Company and the Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Ordinary Shares shall be determined as of the time the Option with respect to such Ordinary Shares is granted.

(c) Neither the Plan nor any Option or Shares Purchase Right shall confer upon any Optionee any right with respect to continuation of his or her employment or consulting relationship with the Company or the Subsidiary, as applicable, nor shall it interfere in any way with his or her right or the Company or the Subsidiary's right to terminate his or her employment or consulting relationship at any time, with or without cause.

6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company, as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan.

7. Term of Option. The term of each Option shall be the term stated in the option agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or the Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the option agreement.

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8. Option Exercise Price and Consideration.

(a) The per share exercise price for the Ordinary Shares to be issued upon exercise of any Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or of the Subsidiary, the per share exercise price shall be no less than 110% of the Fair Market Value per Ordinary Share on the date of grant.

(B) granted to any other Employee, the per share exercise price shall be no less than 100% of the Fair Market Value per Ordinary Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option

(A) granted to a person who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or of the Subsidiary, the per share exercise price shall be no less than 110% of the Fair Market Value per Ordinary Share on the date of the grant.

(B) granted to any other person, the per share exercise price shall be no less than 85% of the Fair Market Value per Ordinary Share on the date of grant.

(b) The consideration to be paid for the Ordinary Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note (to the extent permitted by Applicable Laws) in the form attached hereto as Exhibit A, secured by a pledge of the shares issued pursuant to a share pledge in the form attached hereto as Exhibit B, or (4) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. Optionee shall also deliver a properly executed exercise notice together with such other documentation as the Administrator and a broker, if applicable, shall require to effect an exercise of the Option.

9. Exercise of Option.

(a) Procedure for Exercise: Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan, but in no case at a rate of less than 20% per year over five (5) years from the date the Option is granted.

An Option may not be exercised for a fraction of an Ordinary Share.

An Option shall be deemed to be exercised when written notice of such exercise in the form attached hereto as Exhibit C has been given to the Company in accordance with terms of the Option by the person entitled to exercise the Option and full payment for the Ordinary Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the

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Administrator, consist of any consideration and method of payment allowable under Section 8(b) hereof. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Ordinary Shares, no right to vote, receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 hereof.

Exercise of an Option in any manner shall result in a decrease in the number of Ordinary Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Ordinary Shares as to which the Option is exercised.

(b) Termination of Employment or Consulting Relationship. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant (but not in the event of an Optionee's change of status from Employee to Consultant (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the date three (3) months and one day following such change of status) or from Consultant to Employee), such Optionee may, but only within such period of time as is determined by the Administrator, of at least thirty (30) days, with such determination in the case of an Incentive Stock Option not exceeding three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the option agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate.

(c) Disability of Optionee. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her disability, the Optionee may, but, only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the termination of such Option as set forth in the option agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her "permanent disability" as such term is defined in Section 22(e)(3) of the Code, the Optionee shall be entitled, but only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the option agreement), to exercise all Options such Employee or Consultant would have been entitled to exercise had such Employee or Consultant remained employed for two (2) years from the date of such termination. If such disability is not a "permanent disability," in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. If the Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Ordinary Shares covered by such Option shall revert to the Plan.

(d) Death of Optionee. In the event of the death of an Optionee, the Optionee's estate or any person who acquired the right to exercise the Option by bequest or inheritance shall be entitled, but only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the option agreement), to exercise all Options such Employee or Consultant would have received had such Employee or Consultant remained employed for two (2) years from the date of such termination. All remaining Ordinary Shares covered by the unexercisable portion of

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the Option shall immediately revert to the Plan. If, after the Optionee's death, the Optionee's estate or a person who acquires the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Ordinary Shares covered by such Option shall revert to the Plan.

(e) Rule 16b-3. Options granted to a person subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

10. Non-Transferability of Options and Shares Purchase Rights. Options and Shares Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

11. Restricted Shares.

(a) Awards of Restricted Shares.

The Committee may, in its discretion, permit an Optionee to exercise an Option prior to the time the Option would otherwise be exercisable under Section 9. Without limiting the generality of the foregoing, the Committee may provide that if an Option is exercised prior to satisfaction of the vesting requirements of Section 9, the Shares issued upon such exercise shall remain subject to vesting as described in Section 11(c) and shall be subject to a right, but not an obligation, of repurchase by the Company with respect to all unvested Shares if the Optionee ceases to be an Employee for any reason.

(b) Restrictions.

(i) Restricted Shares may not be sold, assigned, transferred, pledged, encumbered, or otherwise disposed of, either voluntarily or involuntarily, until the release of such Shares from the Company's repurchase option under Section 11(c), other than by will or the laws of descent and distribution.

(ii) Optionees receiving Restricted Shares shall be entitled to dividend and voting rights for the Restricted Shares even though they are not vested, provided that such rights shall terminate immediately as to any Restricted Shares that are repurchased by the Company.

(iii) With respect to each receipt of Restricted Shares by an Optionee, such Optionee shall execute a Restricted Share Purchase Agreement in the form attached hereto as Exhibit D.

(c) Vesting.

If the Optionee ceases to be an Employee for any reason, the Company shall have the right, but not the obligation, to repurchase certain of the Shares at their original Exercise Price. The Company's right to repurchase the Shares at their original Exercise Price shall lapse, unless the stock option agreement provides otherwise, as to one-fourth (1/4) of the Shares at the end of the first year of continuous employment and as to one forty-eighth (1/48) of the Shares per month of continuous

8

employment over the next thirty-six (36) months. Shares that are subject to repurchase at their original Exercise Price are referred to as "Restricted Shares."

(d) Section 83(b) Election.

Within 30 days after the issuance of Restricted Shares to an Optionee under the Plan, the Optionee shall decide whether or not to file an election pursuant to Section 83(b) of the Code and Treasury Regulation section 1.83-2 (and state law counterparts) with respect to the Restricted Shares. If the Optionee does file such an election, the Optionee shall promptly furnish a copy of such election to the Company.

12. Shares Purchase Rights.

(a) Rights to Purchase. Shares Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Shares Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Ordinary Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator makes the determination to grant the Shares Purchase Right. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.

(b) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser.

(c) Rights as a Shareholder. Once the Shares Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder of the Company and shall be a shareholder of the Company when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares Purchase Right is exercised, except as provided in Section 13 of the Plan.

13. Adjustments Upon Changes in Capitalization or Merger.

(a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Ordinary Shares covered by each outstanding Option or Shares Purchase Right, and the number of Ordinary Shares which have been authorized for issuance under the Plan but as to which no Options or Shares Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Shares Purchase Right, as well as the price for each Ordinary Share covered by each such outstanding Option or Shares Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Ordinary Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Ordinary Shares, or any other increase or decrease as determined by the Administrator. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no

9

adjustment by reason thereof shall be made with respect to, the number of Ordinary Shares subject to an Option or Shares Purchase Right.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Shares Purchase Right shall terminate immediately prior to the consummation of such proposed action.

(c) Merger. In the event of a merger of the Company with or into another corporation, each outstanding Option or Shares Purchase Right may be assumed or an equivalent option or right may be substituted by such successor corporation or a parent or subsidiary of such successor corporation. If, in such event, an Option or Shares Purchase Right is not assumed or substituted, the Option or Stock Purchases Right shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option or Shares Purchase Right shall be considered assumed if, following the merger, the Option or Shares Purchase Right confers the right to purchase or receive, for each share of Optioned Stock subject to the Option or Shares Purchase Right immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Ordinary Shares for each share held on the effective date of the transaction (and if the holders are offered a choice of consideration, the type of consideration received in the merger is not solely common stock of the successor corporation or its parent). The Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Shares Purchase Right, for each share of Optioned Stock subject to the Option or Shares Purchase Right, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Ordinary Shares in the merger.

(d) Compliance with Incentive Stock Option Provisions. Notwithstanding anything to the contrary herein, each adjustment made to an Incentive Stock Option pursuant to this Section 13 shall comply with the rules of Section 424(a) of the Code, and no adjustment shall be made that would cause any Incentive Stock Option to become a Nonstatutory Stock Option.

14. Time of Granting Options and Shares Purchase Rights. The date of grant of an Option or Shares Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Shares Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Shares Purchase Right is so granted within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required.

(b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options or Shares Purchase Rights already granted, and such Options and Shares Purchase Rights shall remain in full force and effect as if this Plan had not been amended or terminated,

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unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company.

16. Conditions Upon Issuance of Ordinary Shares. Ordinary Shares shall not be issued pursuant to the exercise of an Option or Shares Purchase Right unless the exercise of such Option or Shares Purchase Right and the issuance and delivery of such Ordinary Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the laws of Israel, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Ordinary Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an Option or Shares Purchase Right, the Company may require the person exercising such Option or Shares Purchase Right to represent and warrant at the time of any such exercise that the Ordinary Shares are being purchased only for investment and without any present intention to sell or distribute such Ordinary Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

17. Reservation of Ordinary Shares. During the term of this Plan, the Company shall at all times reserve and keep available such number of Ordinary Shares as shall be sufficient to satisfy the requirements of the Plan.

The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by Company counsel to be necessary to the lawful issuance and sale of any Ordinary Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Ordinary Shares as to which such requisite authority shall not have been obtained.

18. Agreements. Options and Shares Purchase Rights shall be evidenced by written agreements in such form as the Administrator shall approve from time to time.

19. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws.

20. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Ordinary Shares pursuant to the Plan, not less frequently than annually during the period such Optionee has one or more Options or Shares Purchase Rights outstanding, and, in the case of an individual who acquires Ordinary Shares pursuant to the Plan, during the period such individual owns such Ordinary Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.

Approved by the Board of Directors: January 1, 1996

Approved by the Shareholders: January 1, 1996

Amended by the Board of Directors: April 18, 1999

Amendment approved by the Shareholders: _________, 1999

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COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN

STOCK OPTION AGREEMENT

Capitalized terms used without definition in this Stock Option Agreement (the "OPTION AGREEMENT") shall have the meanings given such terms in the CommTouch Software Ltd. 1996 CSI Stock Option Plan (the "PLAN").

I.

NOTICE OF STOCK OPTION GRANT

Name

OPTION. You have been granted an option to purchase ordinary shares (the "ORDINARY SHARES") of CommTouch Software Ltd., an Israeli corporation, subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant:
                                                    --------------------

Exercise Price per Share:                           $
                                                    --------------------

Total Number of Ordinary Shares Granted:
                                                    --------------------

Total Exercise Price:                               $
                                                    --------------------

Type of Option:
                                                    --------------------

Expiration Date:                                                ,
                                                    ------------ -------

VESTING; TERMINATION. This Option will vest with respect to one fourth of the Ordinary Shares subject to the Option on the first anniversary of the Date of Grant, and with respect to an additional one thirty-sixth of the remaining Ordinary Shares subject to the Option each month thereafter, and will therefore be fully vested on __________ __, ____. This Option may be exercised, in whole or in part, with respect to any vested shares, on or before __________ __, ____.

II.

AGREEMENT

1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli corporation
(the "COMPANY"), hereby grants to the Optionee (the "OPTIONEE") named in the Notice of Stock Option Grant set forth above (the "NOTICE OF GRANT") an option (the "OPTION") to purchase the total number of Ordinary Shares set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE"), subject to the terms, definitions and provisions of the Plan, which is incorporated herein by reference. Capitalized terms used without definition in this Option Agreement shall have the meanings given such terms in the Plan.

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2. EXERCISE OF OPTION.

(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement.

(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice (in the form attached hereto as Exhibit A), which shall state the election to exercise the Option, the number of Ordinary Shares with respect to which the Option is being exercised, and such other representations and agreements as to the Optionee's investment intent with respect to the Ordinary Shares as may be required by the Company pursuant to the provisions of the Plan. The written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Company's Chief Financial Officer. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to the exercise of any Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Ordinary Shares may then be listed. Assuming such compliance, for income tax purposes the Ordinary Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such shares.

3. OPTIONEE'S REPRESENTATIONS. In the event the Ordinary Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.

4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or check or by a combination thereof, at the election of the Optionee. In the event there is a public market for Ordinary Shares, Optionee shall also deliver a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option.

5. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

6. TERM OF OPTION. This Option may be exercised only in accordance with the terms set out in the Notice of Grant, and may be exercised prior to its expiration date only, in accordance with the Plan and the terms of this Option Agreement.

7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company, the Subsidiary and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee.

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In case of conflict between the provisions in the Plan and this Option Agreement, the provisions in the Plan shall prevail. This Option Agreement is governed by California law except for that body of law pertaining to conflict of laws.

8. ACKNOWLEDGMENTS OF OPTIONEE.

(a) NO RIGHT OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY OR THE SUBSIDIARY, AS THE CASE MAY BE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. [19__] CSI STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY OR THE SUBSIDIARY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S OR THE SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

Date: __________, 19__

COMMTOUCH SOFTWARE LTD.

By: ___________________________________
Its: Chief Executive Officer



(name)

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COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN

STOCK OPTION AGREEMENT

Capitalized terms used without definition in this Stock Option Agreement (the "OPTION AGREEMENT") shall have the meanings given such terms in the CommTouch Software Ltd. 1996 CSI Stock Option Plan (the "PLAN").

I.

NOTICE OF STOCK OPTION GRANT

Name

OPTION. You have been granted an option to purchase ordinary shares (the "ORDINARY SHARES") of CommTouch Software Ltd., an Israeli corporation, subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant:

Exercise Price per Share: $

Total Number of Ordinary Shares Granted:

Total Exercise Price:                               $
                                                    --------------------

Type of Option:
                                                    --------------------

Expiration Date:                                                ,
                                                    ------------ -------

VESTING; TERMINATION. This Option will vest with respect to one fourth of the Ordinary Shares subject to the Option on the first anniversary of the Date of Grant, and with respect to an additional one thirty-sixth of the remaining Ordinary Shares subject to the Option each month thereafter, and will therefore be fully vested on __________ __, ____; provided, however, that if the Company (a) sells all or substantially all of its assets or (b) merges with another corporation and such merger results in the shareholders immediately prior to such transaction holding less than 50 percent of the voting power of the merged entity after the transaction (in either case, a "CHANGE OF CONTROL"), then 50 percent of the Optionee's unvested shares shall vest immediately prior to the effectiveness of the Change of Control and the remaining unvested shares shall vest on the earlier to occur of (i) any termination of the Optionee's employment other than voluntary termination which does not qualify as termination for "Good Reason," as defined in Exhibit A to this agreement or termination for "Cause," as defined in such Exhibit A or (ii) the one-year anniversary of the Change of Control. This Option may be exercised, in whole or in part, with respect to any vested shares, on or before __________ __, ____.

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II.

AGREEMENT

1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli corporation (the "COMPANY"), hereby grants to the Optionee (the "OPTIONEE") named in the Notice of Stock Option Grant set forth above (the "NOTICE OF GRANT") an option (the "OPTION") to purchase the total number of Ordinary Shares set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE"), subject to the terms, definitions and provisions of the Plan, which is incorporated herein by reference. Capitalized terms used without definition in this Option Agreement shall have the meanings given such terms in the Plan.

2. EXERCISE OF OPTION.

(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement.

(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice (in the form attached hereto as Exhibit A), which shall state the election to exercise the Option, the number of Ordinary Shares with respect to which the Option is being exercised, and such other representations and agreements as to the Optionee's investment intent with respect to the Ordinary Shares as may be required by the Company pursuant to the provisions of the Plan. The written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Company's Chief Financial Officer. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to the exercise of any Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Ordinary Shares may then be listed. Assuming such compliance, for income tax purposes the Ordinary Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such shares.

3. OPTIONEE'S REPRESENTATIONS. In the event the Ordinary Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.

4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or check or by a combination thereof, at the election of the Optionee. In the event there is a public market for Ordinary Shares, Optionee shall also deliver a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option.

5. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

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6. TERM OF OPTION. This Option may be exercised only in accordance with the terms set out in the Notice of Grant, and may be exercised prior to its expiration date only, in accordance with the Plan and the terms of this Option Agreement.

7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company, the Subsidiary and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. In case of conflict between the provisions in the Plan and this Option Agreement, the provisions in the Plan shall prevail. This Option Agreement is governed by California law except for that body of law pertaining to conflict of laws.

8. ACKNOWLEDGMENTS OF OPTIONEE.

(a) NO RIGHT OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY OR THE SUBSIDIARY, AS THE CASE MAY BE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. [19__] CSI STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY OR THE SUBSIDIARY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S OR THE SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

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(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below.

Date: __________, 19__

COMMTOUCH SOFTWARE LTD.

By: ___________________________________
Its: Chief Executive Officer



(name)

COMMTOUCH SOFTWARE INC.

1996 STOCK OPTION PLAN

EXERCISE NOTICE

CommTouch Software Ltd.
c/o CommTouch Software Inc.
3945 Freedom Circle, Ste. 730
Santa Clara, CA 95054
Attention: Secretary

1. Exercise of Option. Effective as of today, ____________, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _____ ordinary shares (the "Shares") of CommTouch Software Ltd. (the "Company") under and pursuant to the CommTouch Software Inc. 1996 Stock Option Plan (the "Plan") and the CommTouch Software Inc. Stock Option Agreement dated _____________ ( the "Stock Option Agreement") at a price of $___ per Share, or an aggregate price of $_________ (the "Exercise Price").

2. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Stock Option Agreement and agrees to abide by and be bound by their terms and conditions.

3. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice.

4. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

5. Delivery of Payment. Optionee herewith delivers to the Company a
[check/promissory] in the amount of the Exercise Price for the Shares.

Submitted by:                                Accepted by:
OPTIONEE:                                    CommTouch Software Ltd.

                                             By:________________________________
___________________________________          Its:_______________________________


                       INVESTMENT REPRESENTATION STATEMENT

OPTIONEE        :

COMPANY         :     COMMTOUCH SOFTWARE LTD.

SECURITY        :     ORDINARY SHARES

AMOUNT          :

DATE :

In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following:

(a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act").

(b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's representations as expressed herein. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or exempt from registration.

(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act.

Unless an exemption from registration is otherwise available, the Securities may only be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of certain of the conditions specified by Rule 144, including:
(1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Exchange Act); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable.


Signature of Optionee:


Date: _________________


RESTRICTED SHARE PURCHASE AGREEMENT

This Restricted Share Purchase Agreement dated as of March 17, 1999 (the "Agreement") is entered into by and between CommTouch Software Ltd., a corporation formed under the laws of Israel (the "Company") whose executive offices are located at 10 Technology Avenue, Ein Vered, Israel, and _____________ ("Purchaser"), an employee of the Company, whose address is set forth below his signature at the end of this Agreement.

W I T N E S S E T H:

WHEREAS, Purchaser is an employee of the Company and the Company desires to provide Purchaser the opportunity to acquire share ownership in the Company; and

WHEREAS, the Company desires to issue and Purchaser desires to purchase Ordinary Shares of the Company as herein described, on the terms and conditions hereinafter set forth:

NOW, THEREFORE, it is agreed between the parties as follows:

1. (a) Purchaser hereby agrees to purchase from the Company and the Company agrees to sell and issue to Purchaser ______ Ordinary Shares of the Company, nominal value NIS 1.00 per share (the "Shares") for a purchase price of $______ per share, or an aggregate purchase price of $______________, payable by delivery at the Closing (as hereinafter defined) of Purchaser's Promissory Note in the form attached as Exhibit A and the Share Pledge and Security Agreement in the form attached as Exhibit B.

(b) The closing of the transactions contemplated hereby (the "Closing") shall occur at the offices of the Company, or at such other time and place as the parties may mutually agree upon in writing (the "Closing Date").

(c) At the Closing, Purchaser shall deliver the Promissory Note and the Share Pledge and Security Agreement to the Company and the Company shall issue and deliver to the Trustee (as hereinafter defined) a certificate or certificates for the Shares in the name of the Purchaser. In addition, the parties shall execute and deliver the items specified in Section 4(a) of this Agreement.

2. The Shares to be purchased by the Purchaser pursuant to this Agreement shall be subject to the following option (the "Purchase Option"):

(a) In the event the Purchaser ceases to be continuously employed by the Company, or a parent or subsidiary of the Company, for any reason, with or without cause, the Trustee may exercise the Purchase Option. Shares subject to the Purchase Option are hereinafter sometimes referred to as the "Option Shares." For the purpose of this Agreement, Purchaser's "continuous employment" shall cease when he ceases to be actively employed by the Company or a parent or subsidiary of the Company, as determined by and in the sole discretion


of the Board of Directors of the Company. A leave of absence, regardless of the reason therefor, shall be deemed to constitute the cessation of Purchaser's active employment unless such leave is authorized by the Company in writing upon approval of the Company's Board of Directors and Purchaser returns to work within the time specified in such authorization; provided, however, that if the Purchaser dies or becomes totally and permanently disabled during any such leave of absence, the Purchaser's continuous employment will be deemed to have terminated as of the date of his death or the date the Board of Directors determines him to be totally and permanently disabled.

(b) Purchaser understands that the Shares are being sold in order to induce Purchaser to become and/or remain employed by the Company and to work diligently for the continued success of the Company. Accordingly, the unvested portion of the Shares shall be subject to a right of repurchase by the Trustee. The Trustee shall have the right at any time within sixty (60) calendar days after the later of Purchaser's termination or the date any approved leave terminates (if Purchaser fails to return within the time specified) to purchase from the Purchaser at a price equal to the original purchase price of the Shares on the date of such termination or expiration of approved leave (such price hereinafter referred to as the "Option Price"), any Shares which have not become vested shares based on the following vesting schedule (as such vesting schedule may be modified pursuant to Section 2(c)):

The purchase price may be paid by the Trustee at its discretion in cash, check or wire transfer or by assumption of the unpaid balance of the Promissory Note, or by a combination of any of the foregoing.

(c) In the event of a Change of Control, as defined below, 50% of the then unvested Shares shall immediately vest and the remaining unvested Shares shall become fully vested on the earlier of (i) the date Purchaser's employment is terminated (A) by the Company (or any successor) without Cause, as defined below, or (B) by Purchaser for Good Reason (as defined below), or (ii) one year following the date of the Change of Control.

"Change of Control" shall mean (i) the acquisition of 50% or more of the outstanding shares of the Company pursuant to a lawful tender offer validly made by a third party, (ii) a merger, consolidation or other reorganization of the Company (other than reincorporation of the Company), if after giving effect to such merger, consolidation, or other reorganization of the Company, the shareholders of the Company immediately prior to such merger, consolidation, or other reorganization do not represent a majority in interest of the holders of voting securities (on a fully diluted basis) with the ordinary power to elect directors of the surviving entity after such merger, consolidation or other reorganization, or (iii) the sale of all or substantially all of the assets of the Company to a third party who is not an affiliate of the Company.

2

"Cause" shall mean (i) failure or refusal to perform a directive of the Chief Executive Officer that is consistent with Purchaser's duties and responsibilities, provided the Company provides Purchaser with written notice specifying the nature of such failure or refusal and the actions needed by Purchaser to cure the same and such failure or refusal is not cured within 30 days of receipt of such notice, (ii) Purchaser shall have been determined to be guilty of misconduct or be in material violation of his fiduciary obligations to the Company (provided that the Company provides to Purchaser written notice specifying the nature of such breach and actions needed to be taken by Purchaser to cure the same and such breach is not cured by Purchaser within 10 days of receipt of such notice), (iii) Purchaser performs his duties in a grossly negligent manner, or (iv) Purchaser is convicted of a crime that has a material adverse impact on (A) Purchaser's ability to perform his duties, (B) the Company, or (C) the Company's business.

"Good Reason" shall be deemed to exist if (i)(A) there is a material adverse change in Purchaser's position causing such position to be of significantly less stature or of significantly less responsibility, (B) there is a reduction of more than 20% of Purchaser's base compensation, or (C) Purchaser refuses to relocate to a facility or location that is more than 50 miles from the Company's current location, and (ii) within the 30 days immediately following such material change, reduction, or refusal Purchaser elects to terminate his employment voluntarily.

(d) If Purchaser's employment is terminated (i) by the Company without Cause, or (ii) by Purchaser for Good Reason, prior to the effective date of the initial public offering of the Company's Ordinary Shares under the Securities Act of 1933, then 50% of the then unvested shares shall immediately vest.

(e) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's engagement, for any reason, with or without cause.

3. The Purchase Option shall be exercised by written notice delivered or mailed as provided in Section 12 of this Agreement and as provided for and defined in Section 16 of the Joint Escrow Instructions attached as Exhibit C to this Agreement.

4. (a) As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Option Shares upon exercise of the Purchase Option, Purchaser agrees to deliver to the Trustee named in the Joint Escrow Instructions, attached hereto as Exhibit C, the certificate or certificates evidencing the Option Shares and two Share Transfer Deeds duly executed (with date and number of shares in blank) in the form attached hereto as Exhibit D. Such documents are to be held by the Trustee and delivered by the Trustee pursuant to the Joint Escrow Instructions, which instructions shall also be delivered to the Trustee at the Closing hereunder.

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(b) Within thirty (30) calendar days after payment in full of the Promissory Note, and within thirty (30) days after each June 30 and December 31 following the payment in full of the Promissory Note, if Purchaser so requests, the Trustee will deliver to Purchaser certificates representing as many of the Shares as are no longer subject to the Purchase Option (less such shares as have been previously delivered). Ninety (90) calendar days after cessation of Purchaser's continuous employment by the Company, the Company will direct the Trustee to deliver to Purchaser a certificate or certificates representing the number of shares of Option Shares not repurchased by the Trustee pursuant to exercise of the Purchase Option (less such shares as have been previously delivered).

5. If, from time to time during the term of the Purchase Option:

(a) there is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, or

(b) there is any consolidation, merger or sale of all or substantially all, of the assets of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of the Option Shares shall be immediately subject to such Purchase Option and be included in the term "Option Shares" for all purposes of the Purchase Option with the same force and effect as the shares of Option Shares from time to time subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per Option Share upon exercise of the Purchase Option shall be appropriately adjusted as determined by the Board of Directors of the Company.

6. If the Trustee makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be repurchased in accordance with the provisions of Section 2 of this Agreement, then from and after such time the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed to have been repurchased in accordance with the applicable provisions of this Agreement, whether or not the certificate(s) therefor have been delivered as required by this Agreement.

7. All certificates representing the Shares purchased under this Agreement shall, where applicable, have endorsed thereon legends in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE

4

SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND THE REGISTERED HOLDER. SUCH AGREEMENT GRANTS CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH THE ISSUER. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE ISSUER BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.

and any legend required to be placed thereon by the California Commissioner of Corporations and any applicable state securities law or Israeli securities law.

8. (a) This Agreement is made with Purchaser in reliance upon Purchaser's representation to the Company, which by his acceptance hereof he confirms, that the Shares which he will receive will be acquired for investment for an indefinite period for his own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that he has no present intention of selling, granting participation in, or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of his property shall at all times be within his control. By executing this Agreement, Purchaser further represents (i) that he does not have any contract, understanding or agreement with any person to sell, transfer or grant participations, to such person or to any third person, with respect to any of the Shares, (ii) that his current residence address is as set forth on the signature page hereto, and (iii) that all communications between the parties concerning the purchase and sale of the Shares have taken place within the State of California.

(b) Purchaser understands that the Shares will not be registered under the Securities Act on the ground that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on his representations set forth herein.

(c) Purchaser agrees that in no event will he make a disposition of any of the Shares unless and until (a) he shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the

5

proposed disposition, and (b) he shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this Section 8.

(d) In connection with the investment representations made herein, Purchaser represents that he has heretofore discussed or had the opportunity to discuss the Company's plans, operations and financial condition with the Company's officers and has heretofore received all such information as he deems necessary and appropriate to enable him to evaluate the financial risks inherent in his investment. The Purchaser further represents that he has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof, and by reason of the Purchaser's business or financial experience or the business or financial experience of the Purchaser's professional advisors who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, the Purchaser has the capacity to protect his own interest in connection with the transactions contemplated by this Agreement.

(e) Purchaser understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or if a registration statement covering the Shares (or a filing pursuant to the exemption from registration under Regulation A of the Securities Act) under the Securities Act is not in effect when he desires to sell the Shares, he may be required to hold the Shares for an indeterminate period. Purchaser also acknowledges that he understands that any sale of the Shares which might be made by him in reliance upon Rule 144 under the Securities Act may be made only in limited amounts in accordance with the terms and conditions of that Rule 144.

9. The Company covenants and agrees that (a) at all times after it first becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act it will use its best efforts to comply with the current public information requirements of Rule 144(c)(1) under the Securities Act and that if prior to becoming subject to such reporting requirements an over-the-counter market develops for the Shares, it will make publicly available the information required by Rule 144(c)(2), (b) it will furnish Purchaser upon request with all information required for the preparation and filing of Form 144, and (c) it will on a timely basis use its best efforts to file all reports required to be filed and make all disclosures, including disclosures of material adverse information, required to permit Purchaser to make the required representations in Form 144.

10. Except as otherwise provided herein, Purchaser shall, during the term of this Agreement, be entitled to exercise all rights and privileges of a shareholder of the Company with respect to the Shares.

6

11. The parties agree to execute such further documents or agreements and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

12. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon the earliest of personal delivery, actual receipt or the third full business day following deposit in the United States mail with postage and fees prepaid, addressed to the other party to this Agreement at such other party's address shown below his or her signature or at such other address as such party may designate by ten (10) calendar days' advance written notice to the other party to this Agreement.

13. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, his heirs, executors, administrators, successors and assigns. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of a like or different nature.

14. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

15. No modification of this Agreement shall be valid unless made in writing and signed by the parties to this Agreement.

16. This Agreement constitutes the entire agreement between the Company and the Purchaser regarding the purchase of the Shares. Any and all prior agreements and negotiations concerning the subject matter of this Agreement are merged herein. Should any part, term or provision of this Agreement be declared invalid, void or unenforceable, all remaining parts, terms and provisions of this Agreement shall remain in full force and effect and shall in no way be invalidated, impaired or affected thereby. Nothing in this Agreement, express or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

COMMTOUCH SOFTWARE LTD.:                     PURCHASER:

By ________________________________          ___________________________________
Its _______________________________

Address:

7

EXHIBIT C

JOINT ESCROW INSTRUCTIONS

__________________, 1999




Dear Sir:

As Trustee for both CommTouch Software Ltd., a corporation formed under the laws of Israel (the "Company") and _____________ ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Share Purchase Agreement (the "Agreement") of even date herewith between the Company and Purchaser, to which a form of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions:

1. In the event you shall elect to exercise the Purchase Option set forth in the Agreement, you shall give to Purchaser a written notice as provided in the Agreement. Purchaser hereby irrevocably authorizes and directs you to close the transaction contemplated by such notice, including prompt delivery of stock certificates.

2. At such closing, you are directed (a) to date the Share Transfer Deed or Deeds necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate or certificates evidencing the shares to be transferred, to the Company against the simultaneous delivery by you to Purchaser of the purchase price (by certified or bank cashier's check or assumption of the Promissory Note) for the number of shares being purchased pursuant to the exercise of the Purchase Option.

3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents and documents or agreements necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this Section 3, Purchaser shall be entitled to exercise all rights and privileges of a shareholder of the Company while the certificates representing the shares are held by you.

4. In accordance with the terms of Section 4 of the Agreement, you shall, upon request from time to time after the Promissory Note has been paid in full, deliver to


Purchaser a certificate or certificates representing so many shares as are no longer subject to the Purchase Option.

5. This escrow shall terminate upon the release of all shares held under the terms and provisions hereof.

6. If at the time of termination of this escrow you should have in your possession any documents, securities or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged from all further obligations hereunder.

7. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

8. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Trustee or as attorney-in-fact of Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

9. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

10. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder.

11. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.

12. You shall be entitled to employ such legal counsel and other experts as you may deem necessary to properly advise you in connection with your obligations hereunder and you may rely upon the advice of such counsel.

13. Your responsibilities as Trustee hereunder shall terminate if you resign by written notice to each party. In the event of any such termination, the Company shall appoint another person as successor Trustee.

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14. If you reasonably require other or further documents or agreements in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such documents or agreements.

15. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment or a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

16. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties entitled at the following addresses, or at such other addresses as a party may designate by ten
(10) calendar days' advance written notice to each of the other parties hereto.

COMPANY:                     CommTouch Software Ltd.
                             10 Technology Avenue
                             Ein Vered, Israel

PURCHASER:                   Notices to Purchaser shall be sent to the address
                             set forth below Purchaser's signature on these
                             Joint Escrow Instructions.

TRUSTEE:                     ________________________
                             ________________________

               17. By signing these Joint Escrow Instructions, you become a

party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement.

18. This Agreement shall be governed by and construed in accordance with the laws of the State of California and the laws of Israel.

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19. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

Very truly yours,

COMMTOUCH SOFTWARE LTD.

By ________________________________
Its ____________________________

PURCHASER


Address:

TRUSTEE


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EXHIBIT D

SHARE TRANSFER DEED

The undersigned, __________________ (the "Transferor"), in consideration of the sum of NIS _____ paid to the Transferor by ________________ (the "Transferee"), does hereby transfer to the Transferee ____ Ordinary Shares, nominal value NIS 1 per share, in COMMTOUCH SOFTWARE LTD., an Israeli company (the "Company"), to be held unto the said Transferee, his executors, administrators, heirs and assigns, upon all of the terms and conditions subject to which the Transferor held such shares, and the said Transferee does hereby agree to take such shares subject to the above terms and conditions.

AS WITNESS our hand the ___ day of __________________.

___________________                 TRANSFEREE

____________________         By:  __________________

Witness to signature:        Witness to signature:

____________________         ______________________

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CONSENT OF SPOUSE
OF PURCHASER OF ORDINARY SHARES OF
COMMTOUCH SOFTWARE LTD.

The undersigned, as spouse to the Purchaser of shares of COMMTOUCH SOFTWARE LTD., hereby acknowledges that she has read and reviewed the terms of the Restricted Share Purchase Agreement between COMMTOUCH SOFTWARE LTD. and the Purchaser and hereby agrees to be bound by the terms and conditions thereof, as if the undersigned had executed said Agreement as an original party thereto.

Dated: _______________, 1999


Name (please print): ___________________

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Internal Revenue Service Center                     Election Under Section 83(b)
Fresno, CA  93888                                   of the Internal Revenue Code
                                                    of 1986

Gentlemen:

I hereby elect under section 83(b) of the Internal Revenue Code of 1986 to include in gross income any excess of fair market value over purchase price with respect to the transfer of the property described below:

1. Name:

2. Address:

3. Social Security Number: ____________________

4. Tax Year of Election: Calendar year of 1999.

5. Description of Property: __________ Ordinary Shares of CommTouch Software Ltd., a corporation formed under the laws of Israel.

6. Date of Property Transfer:

7. Nature of Property Restrictions: Property is subject to a declining right to repurchase the stock at the undersigned's original purchase price if the undersigned ceases to be employed with CommTouch Software Ltd., which right will lapse over a 48-month period.

8. Fair Market Value at the Time of Transfer: $______ per share for an aggregate of $__________. The Fair Market Value at the time of transfer was determined without regard to any lapse restrictions as defined in section 1.83-3(i) of the Income Tax Regulations.

9. Amount Paid for Property: $_____ per share for an aggregate of $_________.

10. A copy of this election has been furnished to CommTouch Software Ltd., the person for whom the services are performed.

____________________, 1999 ____________________________

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SHARE PLEDGE AND SECURITY AGREEMENT

THIS SHARE PLEDGE AND SECURITY AGREEMENT (the "Agreement"), dated as of _______________, is made by and between ________________ ledgor") and CommTouch Software Ltd., a corporation formed under the laws of Israel ("Secured Party").

R E C I T A L S

A. Pledgor is the owner of _____ shares of common stock of Secured Party (the "Pledged Shares").

B. As security for the "Obligations" described in Section 2 below, Pledgor has agreed to make the pledge contemplated by this Agreement.

IT IS AGREED:

1. PLEDGE. Pledgor hereby pledges and delivers to _________________ ("Trustee") on behalf of Secured Party, and grants to Secured Party a security interest in, all of the following (the "Pledged Collateral"):

(a) The Pledged Shares and the certificates representing the Pledged Shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; and

(b) All additional shares of stock or other securities of Secured Party from time to time acquired by Pledgor in connection with any stock split, stock dividend or other distribution or exchange in respect of any shares of stock pledged hereunder, and the certificates representing such additional shares or other securities, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares.

The inclusion of proceeds in this Agreement does not authorize Pledgor to sell, dispose of or otherwise use the Pledged Collateral in any manner not specifically authorized hereby.

2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment and performance of (i) all indebtedness evidenced by, and all liabilities and obligations of Pledgor to Secured Party under, that certain Promissory Note executed by Pledgor dated March 17, 1999, in favor of Secured Party (the "Note"), and all modifications, renewals, extensions and rearrangements thereof and substitutions and replacements therefor, and (ii) all indebtedness, liabilities and obligations of Pledgor now or hereafter existing under this Agreement (all of the foregoing collectively the "Obligations").

3. DELIVERY OF PLEDGED COLLATERAL. All certificates representing the Pledged Collateral, accompanied by instruments of transfer or assignment duly executed in blank by Pledgor, have been delivered to the Trustee and shall be held on behalf of Secured Party pursuant hereto, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an event which, with the giving of notice or the lapse of time, or both, would become an Event of Default (as defined in Section 7 hereof), Secured Party shall have the right,


in its discretion and without notice to Pledgor, to direct the Trustee to transfer to or to register in its name or the name of a nominee any or all of the Pledged Collateral, subject only to the revocable rights specified in
Section 5(a) hereof. In addition, Secured Party shall have the right at any time to exchange certificates representing the Pledged Collateral in the Trustee's possession for certificates of smaller or larger denominations.

4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows:

(a) Pledgor is a resident of the State of California and has full power and authority to enter into and perform all of his obligations under this Agreement.

(b) The execution, delivery and performance by Pledgor of this Agreement does not violate any provision of any statute, law, rule, regulation, judgment, order or decree binding upon Pledgor and will not conflict with, or constitute a breach or default under, any indenture, loan agreement, contract or other agreement or instrument to which Pledgor is a party or by which Pledgor or any of his property is bound.

(c) No authorization, consent or approval or other action by, and no notice to or other filing with, any governmental authority or regulatory body is required either (i) for the execution and delivery by Pledgor of this Agreement, the pledge by Pledgor of the Pledged Collateral pursuant hereto or the performance by Pledgor of any of his obligations hereunder, or (ii) for the exercise by Secured Party of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant hereto (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally).

(d) Pledgor is, and in the case of any Pledged Collateral other than the Pledged Shares will be, the legal and beneficial owner of the Pledged Collateral free and clear of any lien, security interest, option, charge or encumbrance, except for the security interest created by this Agreement.

(e) The pledge of the Pledged Shares creates a valid and perfected first priority security interest in the Pledged Collateral, securing payment of the Obligations.

5. VOTING RIGHTS; DIVIDENDS; ETC.

(a) So long as no Event of Default or event which, with the giving of notice or the lapse of time, or both, would become an Event of Default shall have occurred and be continuing:

(i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or any document, agreement or instrument entered into in connection with the Note.

(ii) Pledgor shall be entitled to receive and retain any and all cash dividends paid in respect of the Pledged Collateral; provided, however, that all other dividends and stock, property or otherwise, including dividends representing stock or

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liquidating dividends, or a distribution or return of capital upon or in respect of the Pledged Collateral, or any part thereof, or resulting from a split-up revision or reclassification of the Pledged Shares or any part thereof, or received in exchange for the Pledged Shares or any part thereof as a result of a merger, consolidation or otherwise, shall be paid, delivered and transferred directly to Secured Party immediately upon receipt thereof by Pledgor, or, if received by Secured Party, shall be retained by Secured Party as part of the Pledged Shares.

(b) Upon the occurrence and during the continuation of an event which, with the giving of notice or the lapse of time, or both, would become an Event of Default:

(i) All rights of Pledgor to exercise the voting and other consensual rights which he would otherwise be entitled to exercise pursuant to Section 5(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights.

(ii) Secured Party shall be entitled to receive and retain any and all cash dividends paid in respect of the Pledged Collateral until the Obligations shall have been paid and performed in full.

(iii) All dividends and other distributions which are received by Pledgor contrary to the provisions of this Agreement shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as payment in respect of the Obligations (with any necessary endorsements).

6. TRANSFERS AND OTHER LIENS; ADDITIONAL SHARES.

(a) Pledgor agrees that he will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, or (ii) create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interest created by this Agreement.

(b) Pledgor agrees that he will pledge hereunder, immediately upon his acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities he may acquire in connection with any stock split, stock dividend or other distribution or exchange in respect of any shares of stock or other securities pledged hereunder.

7. EVENTS OF DEFAULT. Pledgor shall be in default under this Agreement upon the happening of any of the following events (each an "Event of Default"):

(a) Pledgor fails to pay or perform when due any of the Obligations;

(b) Any representation or warranty made by Pledgor in connection with this Agreement proves to be false in any material respect when made;

(c) Pledgor makes an assignment for the benefit of creditors, admits in writing his inability to pay his debts as they mature, applies to any court for the appointment of a trustee

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or receiver of any substantial part of his properties, or commences any voluntary proceedings under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or other similar law of any jurisdiction; or

(d) Any such application or any such proceedings described in (c) above are filed or commenced against Pledgor and Pledgor indicates his approval, consent of acquiescence thereto, or an order is entered adjudicating Pledgor bankrupt or insolvent and such order remains in effect for thirty (30) days.

8. RIGHTS AND REMEDIES UPON DEFAULT. If any Event of Default shall have occurred:

(a) Secured Party shall have, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code (the "Code") in effect in the State of California at that time, and Secured Party may also, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more private sales, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Secured Party may deem commercially reasonable. Secured Party is authorized at any such sale, if Secured Party deems it advisable, to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account and not with a view to the distribution or sale of any such Pledged Collateral. Each purchaser at any such sale shall hold the Pledged Collateral acquired at such sale absolutely free from any claim or right of any kind, including any equity or right of redemption of Pledgor, and Pledgor hereby expressly waives all rights of redemption, stay or appraisement which he has or may have under any rule, law or statute now or hereafter existing. Pledgor agrees that, to the extent notice of sale shall be required by law, at least five (5) days' notice to Pledgor of the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Secured Party may, instead of exercising the powers of sale provided for herein and under the Code, proceed by a suit or suits, at law or in equity, to foreclose the pledge of this Agreement and sell the Pledged Collateral, or any portion thereof, under a judgment or decree of any court or courts of competent jurisdiction.

(b) Any cash held by Secured Party as Pledged Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from or other realization upon all or any part of the Pledged Collateral may, in the discretion of Secured Party, be held by Secured Party as collateral for, and/or then or at any time thereafter applied in whole or in part by Secured Party against, the Obligations in such order as Secured Party shall elect. Any surplus of such cash or cash proceeds held by Secured Party and remaining after payment in full of the Obligations shall be paid over to Pledgor or to whomsoever may be lawfully entitled to receive such surplus.

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(c) All rights and remedies of Secured Party expressed herein are in addition to all other rights and remedies possessed by Secured Party in any other agreement or instrument entered into in connection with or relating to the Obligation or by law.

(d) Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall, to the extent permitted by law, be deemed to have been made in a commercially reasonable manner.

(e) Pledgor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to Secured Party, and that Secured Party has no adequate remedy at law in respect of any such breach and, as a consequence, agrees that each and every covenant contained in this
Section shall be specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred.

9. CONTINUING PLEDGE. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (i) remain in full force and effect until payment in full of the Obligations, (ii) be binding upon Pledgor and his successors and assigns, and (iii) inure to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), Secured Party may assign or otherwise transfer any of its rights under this Agreement to any other person, and such person shall thereupon become vested with all the benefits in respect thereof granted to Secured Party herein or otherwise. Upon payment in full of the Obligations, Pledgor shall be entitled to the return, at Pledgor's expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof.

10. FURTHER ASSURANCES. Pledgor agrees that he will, at his own expense, promptly execute, acknowledge and deliver all such documents and instruments, and take all such actions, as the Secured Party may from time to time request in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder and otherwise to effectuate the purposes of this Agreement and carry out the terms hereof.

11. WAIVERS; REMEDIES CUMULATIVE. No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder by Secured Party preclude any other or further exercise thereof or the exercise of any other right or remedy. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

12. NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be delivered by hand or mailed by first class mail, registered or certified, return receipt requested, postage prepaid, and properly addressed, to the party at the addresses set forth below.

(a) If to Pledgor:

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(b) If to Secured Party at:

CommTouch Software Ltd.

10 Technology Avenue
Ein Vered, Israel

All such notices, requests, demands and other communications shall be effective only upon receipt. Any party may change its address for notice given in accordance with this Section 12.

13. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed in the State of California, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Pledged Collateral are governed by the laws of a jurisdiction other than the State of California. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. This Agreement shall be given a fair and reasonable construction in accordance with the intention of the parties and without regard to, or aid of, Section 1654 of the California Civil Code.

14. MISCELLANEOUS. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. The captions in this Agreement have been inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

IN WITNESS WHEREOF, the parties have executed this Stock Pledge and Security Agreement as of the date first above written.

PLEDGOR:                                     SECURED PARTY:

___________________________________          CommTouch Software Ltd.

                                             By:________________________________

                                             Its:_______________________________

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Exhibit A

PROMISSORY NOTE

$__________ ________, 19__

FOR VALUE RECEIVED, the undersigned, _______________ ("Debtor"), promises to pay to CommTouch Software Ltd., a corporation formed under the laws of Israel ("Holder"), the principal amount of $_________, together with accrued interest thereon calculated from time to time at the rate of [the applicable federal rate as determined under Section 1274 of the Internal Revenue Code] per annum, compounded annually. Accrued interest shall be paid on December 31 of each year beginning with the year in which this Note is executed. Principal and any unpaid interest shall be due and payable on the fourth anniversary of the date of this Note.

Notwithstanding anything to the contrary set forth in this note,
(i) in the event of the termination of Debtor's employment with Holder for any reason, Holder, at its option, may declare a portion of the principal balance of this Note, plus accrued interest on such portion of the principal balance, to be immediately due and payable in full, such portion of the principal to be equal to the number of Holder's vested Ordinary Shares which have been paid for by this Note, multiplied by the price per share paid by Debtor for such shares; or
(ii) in the event that Debtor sells any of Holder's Ordinary Shares, which have been paid for by this Note, Holder, at its option, may declare the principal and accrued interest then outstanding to be immediately due and payable to the extent of the cash and fair market value of any property received by Debtor in such sale.

Debtor may at any time prepay all or any portion of the amounts owing hereunder.

If any of the following events (each an "Event of Default") shall occur and be continuing, then Holder may, at its option and without notice to Debtor or any other person, declare the outstanding principal balance of this note, together with any accrued interest and/or other sums that Debtor may owe to Holder under or in connection with this note, immediately due and payable and, if Holder exercises such option, Holder shall so advise Debtor in writing and Debtor shall pay all such sums owed:

(i) Debtor fails to pay when due any principal, interest or other amounts owing hereunder;

(ii) Any representation or warranty made by Debtor in any agreement, document or instrument delivered in connection with this note or the indebtedness evidenced hereby proves to be false in any material respect when made;

(iii) Debtor violates any other covenant, agreement or condition contained in any agreement, document or instrument executed in connection with or given as security for this note, and such violation shall continue for a period of 15 days after notice of such violation is given by Holder to Debtor;

(iv) Debtor makes an assignment for the benefit of creditors;

(v) Debtor admits in writing his inability to pay his debts as they mature, applies to any tribunal for the appointment of a trustee or receiver of any substantial part of his assets, or


commences any proceedings with respect to himself under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, liquidation or other similar law of any jurisdiction; or

(vi) Any such application or any such proceedings described in
(v) above are filed or commenced against Debtor, and Debtor indicates his approval, consent or acquiescence, or an order is entered adjudicating Debtor bankrupt or insolvent, or approving the application or petition in any such proceedings, and such order remains in effect for 30 days.

Debtor hereby waives grace (except as expressly provided herein), demand, presentment for payment, notice of demand, notice of nonpayment or dishonor, protest and notice of protest and shall pay all costs of collection when incurred, including without limitation, reasonable attorneys' fees, costs and other expenses. Neither any failure to exercise, nor any delay in exercising, any right under this note on the part of Holder shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this note preclude any other or further exercise thereof or the exercise of any other right. No waiver or amendment of this note shall be effective unless made in a writing, specifying such waiver or amendment signed by the party hereto against which such waiver or amendment is being enforced.

All payments shall be in lawful money of the United States of America. Holder shall be entitled to set off any amounts owed by Holder to Debtor against any payments due and payable from Debtor to Holder. The rights and duties of the parties hereunder shall be interpreted and construed pursuant to and in accordance with the laws of the State of California.

This note is secured by a Share Pledge and Security Agreement of even date herewith by and between Debtor and Holder.


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EXHIBIT 10.2

SHARE OPTION AGREEMENT

This SHARE OPTION AGREEMENT (the "Agreement") is between COMMTOUCH SOFTWARE LTD., an Israeli company (the "Company"), and the Grantee whose name appears on the attached Schedule (the "Grantee").

In order to provide an incentive to the Grantee to exert his or her utmost efforts on behalf of the Company, the Grantee has been awarded one or more Options on the terms and conditions set forth in this Agreement and in the attached Schedule, which forms an integral part of this Agreement. For purposes of United States taxation, if applicable, it is intended that the Options constitute "Non-Qualified Share Options" that are not "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

SECTION 1 OPTIONS

The Grantee is hereby granted Options to purchase the number of Ordinary Shares, nominal value NIS 1 per share, of the Company (the "Shares") specified in the Schedule. The Options are exercisable at the exercise price per Share as determined by the company from time to time.

SECTION 2 EXERCISE OF RIGHTS

2.1 Times when Shares can be Purchased

Subject to the terms and conditions of this Agreement, the Options will become exercisable at such times, and shall remain exercisable for such periods, as are specified in the Schedule. Without derogating from the provisions of Section 3 of this Agreement, if any Option has not been exercised and the Shares covered thereby not paid for by the expiration date specified in the Schedule, such Option and the right to acquire such Shares shall terminate, and all interests and rights of the Grantee in and to the same shall ipso facto expire. Notwithstanding any provision of this Agreement or the Schedule to the contrary, upon any change of control of the Company one-half of all unvested Options then held by the Grantee shall immediately vest and become exercisable, with the remaining unvested Options to be subject to the regular vesting provisions of the Schedule. For purposes of this Section 2.1, a "change of control" shall mean the sale or other disposition of a majority of the outstanding Shares or a sale or other disposition of a majority of the Company's assets, within any 18-month period.

2.2 Notice

If the Grantee of an Option wishes to exercise any of the Grantee's rights, the Grantee must give notice of exercise to the Company at the Company's principal office. The Grantee must give the notice in writing, in form satisfactory to the Company, in respect of a whole number of Shares. The Grantee must include with the notice full payment for any Shares being purchased and any taxes and other mandatory payments due under Section 2.3 hereof.


2.3 Payment

2.3.1 Payment of the option price for any Shares being purchased under an Option, as specified in the Schedule, must be made in cash or by bank check, or in such other manner as the Company determines.

2.3.2 The Grantee cannot buy any Shares under an Option unless, at the time the Grantee gives notice of exercise to the Company, the Grantee includes with such notice payment in cash or by bank check of all withholding taxes due, and any other mandatory payments, if any, on account of his or her buying Shares under the Option or gives other assurance satisfactory to the Company of the payment of those withholding taxes.

2.4 Certificates for Shares

2.4.1 The Company shall deliver certificates for Shares bought under an Option as soon as practicable after receiving payment for the Shares and for any taxes under Section 2.3 hereof, and all documents required under this Agreement. The certificates will be made out in the name of the Grantee.

2.4.2 If any law, regulation or interpretation requires the Company to take any action regarding the Shares before the Company issues certificates for the Shares being purchased, the Company may delay delivering the certificates for the Shares for the period necessary to take that action.

SECTION 3 TERMINATION OF EMPLOYMENT

3.1 In General

Subject to the provisions of Section 3.2 hereof, if a Grantee should, for any reason, cease to be employed by the Company on a full-time basis, all of his or her rights, if any, in respect of all Options previously granted to him or her under this Agreement that are not exercisable then or within two weeks after such cessation of employment shall ipso facto terminate; all of his or her rights in respect of such Options that are exercisable then or within two weeks after such cessation of employment on a full-time basis, but which are not exercised within two weeks after such cessation of employment on a full-time basis, shall terminate upon the expiration of such two-week period. In the event of resignation or discharge of a Grantee from the employ of the Company or a subsidiary thereof, his or her employment shall, for the purposes of this
Section 3.1, be deemed to have ceased upon the delivery to the employer of notice of resignation, or upon the delivery to the employee of notice of discharge, as the case may be, irrespective of the effective date of such resignation or discharge. In the event the employment of a Grantee is terminated by the Company for cause, such Grantee shall not be entitled to exercise the Options subsequent to the time of delivery of the notice of discharge.

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3.2 Death, Disability, Retirement Anything herein to the contrary notwithstanding:

(a) If a Grantee should die, the estate or other successors to whom the rights of a Grantee in respect of Options or Shares purchasable pursuant to the exercise thereof are transferred (by operation of law or by will) shall be entitled to exercise such Options (or portions thereof) that were exercisable on dates after the death of such Grantee and purchase Shares pursuant to the exercise thereof (or pursuant to the exercise of Options previously exercised by the Grantee) to the same extent and on the same terms as the deceased Grantee could have done but for his or her death; except that, so long as the rights in such Options or to purchase such Shares did not expire prior to the date of death of the Grantee, (i) the estate or such successor may exercise any such Options that were otherwise exercisable on a date after the date of death of such Grantee and purchase such Shares, at any time within 3 months from the date of death of the Grantee, and (ii) the rights in any such Options or Shares purchasable pursuant to the exercise thereof shall ipso facto terminate to the extent they are not exercised and such Shares are not paid for by the estate or successors within 3 months from the date of death of such Grantee.

(b) If a Grantee is unable to continue to be employed by the Company by reason of his or her becoming incapacitated while in the employ of the Company as a result of an accident or illness or other cause, which incapacitation is approved by the Company, such Grantee shall, subject to approval of the Company (which shall not unreasonably be withheld), continue to enjoy rights under this Agreement on such terms and conditions as the Company in its discretion may determine.

(c) If a Grantee should retire upon reaching mandatory retirement age, he or she shall, subject to the approval of the Company, continue to enjoy such rights, if any, under this Agreement and on such terms and conditions as the Company in its discretion may determine.

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SECTION 4 RIGHT OF PURCHASE

Should the holders of more than 50% of the outstanding shares of the Company (the "Selling Shareholders") determine to sell their shares to an unaffiliated third party, and should they wish to sell the Shares which the Grantee then holds or to which the Grantee may be entitled upon the exercise of Options, then the Selling Shareholders shall have the right, for this purpose, to purchase (i) any Shares then held by the Grantee pursuant to the previous exercise of Options, and (ii) any unexpired but unexercised (whether or not yet exercisable) Options then held by the Grantee. Such right may be exercised only concurrently with or immediately prior to the sale by the Selling Shareholders of their shares in the Company. The purchase price for each Share or Option shall be equivalent to the purchase price per share to be received by the Selling Shareholders, less any component of such price per share attributable to a control premium. The determination of the purchase price per Share or Option to be paid to the Grantee shall be made by the Company's independent certified public accountant, whose determination shall be final and binding. In order to secure the Grantee's obligation under this section, the Grantee shall deposit share transfer deeds, signed in blank, with the Company. The Grantee acknowledges that the provisions of this section are designed to create rights in favor of the Selling Shareholders and agrees to their enforcement hereof. The provisions of this section shall cease to have effect upon the consummation of the Company's initial public offering.

SECTION 5 ADJUSTMENTS

5.1 Upon the occurrence of any of the following described events, a Grantee's rights to purchase Shares under this Agreement shall be adjusted as hereinafter provided:

5.2 Upon the Company's initial public offering, the exercise of the options will be subject to any regulations and restrictions issued by any securities regulatory or stock exchange authority.

5.3 In the event the shares of the Company shall be subdivided or combined into a greater or smaller number of shares or if, upon a merger, consolidation, reorganization, recapitalization or the like, the shares of the Company shall be exchanged for other securities of the Company or of another corporation, each Grantee shall be entitled, subject to the conditions herein stated, to purchase such number of Shares or amount of other securities of the Company or such other corporation as were exchangeable for the number of Shares of the Company that such Grantee would have been entitled to purchase on such date except for such action, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or exchange; provided, however, that any fractional shares so resulting shall be cancelled.

5.4 In the event that the Company shall issue any of its shares or other securities as bonus shares (or stock dividends) upon or with respect to any shares, each Grantee upon subsequently exercising an Option shall be entitled to receive (for the purchase price payable upon such exercise), the Shares as to which he or she is exercising his or her right and, in addition thereto (at no additional cost), such number of shares as is equal to the amount of Shares which he or she would have received had he or she been the holder of the

4

Shares as to which he or she is exercising his or her said right at all times between the date of the granting of such right and the date of its exercise; provided, however, that any fractional shares so resulting shall be cancelled.

5.5 The Company shall determine the specific adjustments to be made under this Section 5, and its determination shall be conclusive.

SECTION 6 VOTING, ASSIGNABILITY AND SALE OF SHARES

6.1 The Grantee shall have no voting rights as a shareholder of the Company until the consummation of the initial public offering of Shares (the "IPO"). Until the IPO, the Grantee's Shares shall be voted by a proxy pursuant to the direction of the Board of Directors of the Company. Simultaneously with each exercise of an Option, the Grantee shall execute an irrevocable proxy in a form acceptable to the Board of Directors of the Company, to the person or persons then designated by the Board of Directors, to vote the Shares acquired upon the exercise of the Option, with such proxy to remain in effect (or be renewed) until the Company consummates its IPO. In addition, until the consummation of the Company's IPO, and unless and until released by the Board of Directors for particular action, the Grantee's right as a shareholder to consent to or approve action by the Company (whether such right is expressly granted by the Articles of Association or is otherwise implied by virtue of the nature of the action to be taken) shall be exercised pursuant to the direction of the Board of Directors by a power of attorney issued by the Grantee as set forth herein. Simultaneously with each exercise of an Option, the Grantee shall execute an irrevocable power of attorney in a form acceptable to the Board of Directors of the Company, to the person or persons then designated by the Board of Directors, to act on behalf of the Grantee as a shareholder, with such power of attorney to remain in effect (or be renewed) until the Company consummates its IPO. The Grantee may not transfer or sell Shares issued upon the exercise of an Option to any third party unless such third party furnishes the Company with an irrevocable proxy and an irrevocable power of attorney as described in this section, prior to such sale or transfer.

6.2 No Options, and no Shares purchasable under this Agreement that were not fully paid for, shall be assignable or transferable by the Grantee; and during the lifetime of the Grantee each and all of his or her rights to purchase shares under this Agreement shall be exercisable only by him or her. For avoidance of doubt, the foregoing shall not be deemed to restrict the transfer of a Grantee's rights in respect of Options or Shares purchasable pursuant to the exercise thereof upon the death of such Grantee to his or her estate or other successors by operation of law or will, whose rights therein shall be governed by Section 3.2 hereof.

6.3 Until such time as the Company consummates its IPO, the Grantee shall not be allowed to sell or transfer any Shares purchased pursuant to the exercise of Options granted under this Agreement, except in accordance with the Company's Articles of Association and the following provisions:

6.3.1 The sale or transfer shall be subject to a right of first refusal, in favor of such person or persons as the Company may indicate. The Grantee shall be advised whether or not the right of first refusal is being exercised within 30 days of his or her

5

notification to the Company of the intention to sell or transfer and the terms of the proposed sale or transfer.

6.3.2 In the event the right of first refusal is not exercised, the Grantee may sell or transfer the Shares within 7 days. If the Grantee does not sell or transfer the Shares within 7 days, all of the provisions of this section shall again apply to any subsequent sale or transfer.

6.3.3 In any case, the sale or transfer shall not directly or indirectly be to a competitor of the Company, shall be allowed only if the Grantee is not then in breach of any of his or her obligations to the Company, shall be with respect to all of the Shares then held by the Grantee, and shall be subject to the approval of the Company's Board of Directors (which shall not unreasonably be withheld).

SECTION 7 REPRESENTATIONS, WARRANTIES AND COVENANTS

The Grantee hereby represents, warrants and covenants that until such time as the Company consummates its initial public offering, upon the Company's request the Grantee will consent to any resolution requested or approved by the Company, will sign any document and will take any other action which may be necessary or desirable to the consummation of an offering, whether public or private. The Grantee hereby authorizes the Company to sign any document on his or her behalf in order to implement the foregoing, and the Grantee will not assert any claim against the Company or anyone else in this regard.

SECTION 8 MISCELLANEOUS

8.1 Entire Agreement

This Agreement contains all of the understandings between the Company and the Grantee concerning all Options granted under this Agreement, and include all earlier negotiations and understandings. The Company and the Grantee have made no promises, agreements, conditions or understandings, either orally or in writing, that are not included in this Agreement.

8.2 Interpretation

The interpretation and construction by the Company of any provision of this Agreement or of any Option thereunder shall be final and conclusive.

8.3 Employment

By granting Options under this Agreement, the Company does not give the Grantee any right to continue to be employed by the Company or to be entitled to any remuneration or benefits not set forth in this Agreement. None of the provisions of this Agreement will interfere with or limit the right of the Company to end the Grantee's employment at any time. Furthermore, it is agreed by the parties that no income or any other benefit flowing from this Agreement will be taken in account in respect of the Grantee's social rights or any other rights deriving from his or her being an employee.

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8.4 Captions

The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of this Agreement.

8.5 Counterparts

This Agreement may be executed in counterparts, each of which when signed by the Company and the Grantee will be deemed an original and all of which together will be deemed the same agreement.

8.6 Notice

Any notice or communication having to do with this Agreement must be given by personal delivery or by registered mail, return receipt requested, addressed - if to the Company, to the principal office of the Company and, if to the Grantee, to the Grantee's last known address on the personnel records of the Company.

8.7 Succession and Transfer

Each and all of the provisions of this Agreement are binding upon and shall inure to the benefit of the Company and the Grantee (and, to the extent specifically provided in this Agreement, the Grantee's heirs). The Grantee may not sell, give, transfer, encumber or assign, or use as collateral, any of the holder's rights under this Agreement.

8.8 Governing Law

This Agreement shall be governed by and construed exclusively in accordance with the law of the State of Israel applicable to agreements to be performed in the State of Israel.

8.9 Tax Consequences

Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company or the Grantee) hereunder, shall be borne solely by the Grantee. Furthermore, the Grantee shall agree to indemnify the Company and hold it harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Grantee.

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IN WITNESS WHEREOF the Company and the Grantee have caused this Agreement to be signed and delivered as of the date set forth below.

COMMTOUCH SOFTWARE LTD.

By: __________________________


GRANTEE

Effective Date: _________________

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COMMTOUCH SOFTWARE LTD.

SHARE OPTION AGREEMENT SCHEDULE

Identification:

1. Name of Grantee: ___________________________________

2. Address of Grantee: ________________________________

3. Date of Option Agreement: __________________________

Terms of Option Awards:

1. Number of Ordinary Shares: _________________________

2. Option Exercise Price per Ordinary Share: __________

3. Time(s) at which Options become exercisable: __________________________

4. Expiration Date: ____________________

5. Special Conditions, if any:



9

EXHIBIT 10.3

3(i) OPTION AGREEMENT

(the "OPTION AGREEMENT")

Made as of the ______________ day of ______, 1999

By and between

COMMTOUCH SOFTWARE LTD.

an Israeli Company located at
10 Technology Avenue
Ein Vered, Israel
(the "COMPANY")

of the first part

AND


ID______________________
(the "OPTIONEE")

of the second part

PREAMBLE

WHEREAS          In _____, 1999, the Company adopted its 1999 Section 3(i) Share
                 Option Plan (the "OPTION PLAN"), a copy of which is attached
                 hereto as EXHIBIT A, forming an integral part hereof; and

WHEREAS          The Company has determined that the Optionee be granted Options
                 under the Option Plan to buy Shares of the Company, and the
                 Optionee has agreed to such grant, all on the terms and subject
                 to the conditions set forth in the Option Plan and in this
                 Option Agreement.

NOW, THEREFORE, it is agreed as follows:

1. PREAMBLE AND DEFINITIONS

1.1        The preamble to this Option Agreement constitutes an
           integral part hereof.

1.2        Unless otherwise defined herein, capitalized terms used
           herein shall have the meaning ascribed to them in the
           Option Plan.

Page 1 of 21

2. GRANT OF OPTION

2.1        The Company hereby grants the Optionee the number of
           Options set forth in Section 2 of EXHIBIT B attached
           hereto to purchase Shares at the price per Share set forth
           in Section 3 of EXHIBIT B attached hereto (the "OPTION
           PRICE"), on the terms and subject to the conditions
           hereinafter provided.

           The Option Price will be paid in NIS in accordance with
           the representative rate of exchange of the U.S. dollar,
           last published by the Bank of Israel and known at the time
           of giving the notice of exercise (as set forth in Section
           5.1 below).

2.2        The Optionee is aware that the Company intends to issue
           additional shares in the future to various entities and
           individuals, as the Company in its sole discretion shall
           determine.

3. PERIOD OF OPTION AND CONDITIONS OF EXERCISE

3.1        The term of this Option Agreement shall commence on the
           date hereof (the "DATE OF GRANT") and terminate on the
           Expiration Date (as defined in Section 6 below), or at the
           time at which all of the Options have expired or been
           terminated pursuant to the terms of the Option Plan or
           pursuant to this Option Agreement.

3.2        The Options may be exercised by the Optionee in whole at
           any time or in part from time to time, as determined by
           the Board, and to the extent that the Options become
           vested in accordance with Section 4 of Exhibit B, prior to
           the Expiration Date, and provided that, subject to the
           provisions of Section 3.4 below, the Optionee is an
           employee of the Company or a Subsidiary of the Company or
           a company or a Parent or a subsidiary company of such
           company issuing or assuming the Options in a transaction
           described in Section 7.1 of the Agreement (the foregoing
           collectively, the "GROUP" ), or continuing to provide
           services to the Group, at all times during the period
           beginning with the granting of the Option and ending upon
           the date of exercise.

           The term "PARENT" shall mean for the purposes of the
           Option Agreement and the Option Plan: any company (other
           than the Company) in an unbroken chain of companies ending
           with the Company if, at the time of granting an Option,
           each of the companies (other than the Company), owns stock
           possessing fifty percent (50%) or more of total combined
           voting power of all classes of stock in one of the other
           companies in such chain.

3.3        Subject to the provisions of Section 3.4 below, in the
           event of termination of the Optionee's employment with the
           Company the Group, or, if applicable, the termination of
           the provision of services by the Optionee to the Group,
           all Options granted to the Optionee will immediately
           expire. A notice of termination of employment or services
           by either the Group or the Optionee shall be deemed to
           constitute termination of employment or services.

Page 2 of 21

           3.4        Notwithstanding anything to the contrary previously
                      stated, an Option may be exercised after the date of
                      termination of the Optionee's service or employment with
                      Group, during an additional period of time beyond the date
                      of such termination, but only with respect to the number
                      of Options already vested at the time of such termination
                      according to the Vesting Dates, if:

                      3.4.1      termination is without Cause, in which event
                                 any Options still in force and unexpired may be
                                 exercised within a period of 90 (ninety) days
                                 from the date of such termination.

                      3.4.2      termination is the result of death or
                                 disability of the Optionee, in which event any
                                 Options still in force and unexpired may be
                                 exercised within a period of 90 (ninety) days
                                 from the date of termination.

                      3.4.3      prior to the date of such termination, the
                                 Committee shall authorize an extension of the
                                 terms of all or part of the Options beyond the
                                 date of such termination for a period not to
                                 exceed the period during which the Options by
                                 their terms would otherwise have been
                                 exercisable.

                                 The term "CAUSE" shall mean any action,
                                 omission or state of affairs related to the
                                 Optionee which the Committee or the Boards
                                 decides, in its sole discretion, is against the
                                 interests of the Company.

           3.5        The Options may be exercised only to purchase whole
                      Shares, and in no case may a fraction of a Share be
                      purchased. If any fractional Shares would be deliverable
                      upon exercise, such fraction shall be rounded up if
                      one-half or more, or otherwise rounded down, to the
                      nearest whole number.

4.         VESTING

Subject to the requirements as to the number of Shares for which an Option is exercisable as set forth in Section 2.1 above, and unless EXHIBIT B hereto provides otherwise, one-fourth (1/4) of the Options shall vest (i.e., Options shall become exercisable) at the end of the first year of the Optionee's continuous service or employment with the Group and one-thirty-sixth (1/36) of the remaining Options shall vest at the end of each month of such continuous service or employment over the next thirty-six months

5. METHOD OF EXERCISE

5.1        The Options shall be exercised by the Optionee by giving
           written notice to the Company, in such form and method as
           may be determined by the Company and the Trustee (the
           "EXERCISE NOTICE"), which exercise shall be effective upon
           receipt of the Exercise Notice by the Company at its
           principal office. The Exercise Notice shall specify the
           number of Shares with respect to which the Options are
           being exercised.

Page 3 of 21

5.2        The Shares shall immediately be issued to the Trustee and
           be held by the Trustee in accordance with the provisions
           of Section 5 of the Option Plan. The Trustee shall not
           transfer any Options to the Optionee prior to the exercise
           of the Options into Shares, and thereafter, the Trustee
           will transfer the Shares to the Optionee upon demand. If
           any law or regulation requires the Company to take any
           action with respect to the Shares so demanded before the
           issuance thereof, then the date of their issuance shall be
           extended for the period necessary to take such action. The
           Optionee hereby authorizes the Trustee to sign an
           agreement with the Company whereby Shares will not be
           transferred without deduction of taxes at source. The
           Optionee hereby undertakes to exempt the Trustee from any
           liability in respect of any action or decision duly taken
           and bona fide executed in relation with the Option Plan,
           or any Option or Share granted to the Optionee thereunder.

6. TERMINATION OF OPTION

           6.1        Except as otherwise stated in this Option Agreement, the
                      Options, to the extent not previously exercised, shall
                      terminate forthwith upon the earlier of: (i) the date set
                      forth in Section 4 of EXHIBIT B hereto; and (ii) the
                      expiration of any extended period in any of the events set
                      forth in Section 3.4 above (and such earlier date shall be
                      hereinafter referred to as the "EXPIRATION DATE").

           6.2        Without derogating from the above, the Committee may, with
                      the prior written consent of the Optionee, from time to
                      time cancel all or any portion of the Options then subject
                      to exercise, and the Company's obligation in respect of
                      such Options may be discharged by (i) payment to the
                      Optionee of an amount in cash equal to the excess, if any,
                      of the Fair Market Value of the Shares pertaining to such
                      canceled Options, at the date of such cancellation, over
                      the aggregate purchase price of such Shares, (ii) the
                      issuance or transfer to the Optionee of Shares of the
                      Company with a Fair Market Value at the date of such
                      transfer equal to any such excess, or (iii) a combination
                      of cash and Shares with a combined value equal to any such
                      excess, all determined by the Committee in its sole
                      discretion.

7.         ADJUSTMENTS

           7.1        In the event of a merger of the Company with or into
                      another corporation, or the sale of substantially all of
                      the assets of the Company while unexercised Options remain
                      outstanding under the Option Plan the successor
                      corporation or a Parent or subsidiary of such successor
                      corporation or the purchasing corporation may assume the
                      unexercised Options outstanding under the Option Plan or
                      may substitute for the Shares subject to the unexercised
                      portions of such outstanding Options an appropriate number
                      of shares of each class of shares or other securities of
                      the successor or

Page 4 of 21

           purchasing corporation or cash or property which were
           distributed to the shareholders of the Company in respect
           of such shares. In the event of substitution of shares or
           securities appropriate adjustments shall be made to the
           purchase price per share to reflect such action, all as
           will be determined by the Committee whose determination
           shall be final. In the event that the successor or
           purchasing corporation does not agree to assume or
           substitute as described in this section 7.1, the Options
           shall terminate as of the date of the closing the above
           merger or sale, as applicable.

7.2        In the event of the proposed liquidation or dissolution of
           the Company, the Company shall notify the Optionee at
           least fifteen (15) days prior to such proposed action. To
           the extent not previously exercised, the Options shall
           terminate immediately prior to the consummation of such
           proposed action.

7.3        If the outstanding shares of the Company shall at any time
           be changed or exchanged by declaration of a stock
           dividend, stock split, combination or exchange of shares,
           re-capitalization, or any other like event by or of the
           Company, and as often as the same shall occur, then the
           number, class and kind of Shares subject to the Option
           therefore granted, and the Option Price, shall be
           appropriately and equitably adjusted so as to maintain the
           proportionate number of Shares without changing the
           aggregate Option Price; provided, however, that no
           adjustment shall be made by reason of the distribution of
           subscription rights on outstanding stock, all as will be
           determined by the Board who's determination shall be
           final.

7.4        Anything herein to the contrary notwithstanding, if prior
           to the consummation of an initial public offering of the
           securities of the Company all or substantially all of the
           shares of the Company are to be sold, or upon a merger or
           reorganization or the like, the shares of the Company, or
           any class thereof, are to be exchanged for securities of
           another Company, then in such event, the Optionee shall be
           obliged to sell or exchange (in accordance with the value
           of his Shares in accordance with the deal) as the case may
           be, the Shares such Optionee purchased hereunder, in
           accordance with the instructions then issued by the Board,
           whose determination shall be final.

8. RIGHTS PRIOR TO EXERCISE OF OPTION; LIMITATIONS AFTER PURCHASE OF SHARES

8.1        Subject to the provisions of Sections 8.2 and 8.4 below,
           the Optionee shall not have any of the rights or
           privileges of shareholders of the Company in respect of
           any Shares purchasable upon the exercise of any part of an
           Option unless and until, following exercise, but in case
           of Options and Shares held by the Trustee, subject always
           to the provisions of Section 5 of the Option Plan,
           registration of the Optionee as holder of such Shares in
           the Company's register of members.

8.2        With respect to all Shares )contrary to unexercised
           Options) issued upon the exercise of Options purchased by
           the Optionee and held by the Trustee, the Optionee shall
           be entitled to receive dividends in accordance with the
           quantity of such Shares, and subject to any applicable
           taxation on distribution of dividends. During the period
           in which Shares issued to the Trustee on behalf of the
           Optionee are held by the Trustee, the cash dividends paid
           with respect thereto shall be paid directly to the
           Optionee.

Page 5 of 21

8.3        No Option purchasable hereunder, whether fully paid or
           not, shall be assignable, transferable or given as
           collateral or any right with respect to them given to any
           third party whatsoever, and during the lifetime of the
           Optionee each and all of the Optionee's rights to purchase
           Shares hereunder shall be exercisable only by the
           Optionee.

           As long as the Shares are held by the Trustee in favor of
           the Optionee, all rights the Optionee possesses over the
           Shares are personal, can not be transferred, assigned,
           pledged or mortgaged, other than by will or laws of
           descent and distribution.

           Any such action made directly or indirectly, whether for
           immediate or future validity, shall be void.

8.4        Until the consummation of an IPO, Shares shall be voted by
           a proxy pursuant to the directions of the Board, such
           proxy to be to the person or persons designated by the

Board. A copy of the proxy is attached hereto as EXHIBIT C.

8.5        The Optionee acknowledges that once the Company's shares
           will be traded in any public market, his right to sell his
           Shares may be subject to some limitations, as required by
           the Company's underwriters. In such event, the Optionee
           will unconditionally agree to any such limitations.

8.6        The Optionee shall not dispose of any Shares in
           transactions which violate, in the opinion of the Company,
           any applicable rules and regulations.

8.7        The Optionee agrees that the Company shall have the
           authority to endorse upon the certificate or certificates
           representing the Shares such legends referring to the
           foregoing restrictions, and any other applicable
           restrictions, as it may deem appropriate (which do not
           violate the Optionee's rights according to this Option
           Agreement).

9. GOVERNMENT REGULATIONS

The Option Plan, and the granting and exercise of the Options thereunder, and the Company's obligation to sell and deliver Shares or cash under the Option Plan, are subject to all applicable laws, rules and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required.

10. CONTINUANCE OF EMPLOYMENT

Nothing in this Option Agreement shall be construed to impose any obligation on the Company or a subsidiary, consultant or contractor thereof to continue the Optionee's employment with it, to confer upon the Optionee any right to continue in the employ of the

Page 6 of 21

Company or a subsidiary thereof, or to restrict the right of the Company or a subsidiary thereof to terminate such employment at any time.

11. GOVERNING LAW & JURISDICTION

This Option Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to this Option Agreement.

12. TAX CONSEQUENCES

Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or the Trustee shall withhold taxes according to the requirements under applicable laws, rules, and regulations, including the withholding of taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee.

The Committee and/or the Trustee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made.

13. FAILURE TO ENFORCE NOT A WAIVER

The failure of any party to enforce at any time any provisions of this Option Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

14. PROVISIONS OF THE OPTION PLAN

The Options provided for herein are granted pursuant to the Option Plan, and said Options and this Option Agreement are in all respects governed by the Option Plan and subject to all of the terms and provisions whether such terms and provisions are incorporated in this Option Agreement solely by reference or are expressly cited herein. Any interpretation of this Option Agreement will be made in accordance with the Option Plan but in the event of any contradiction between the provisions of this Option Agreement and the Option Plan, the provisions of this Option Agreement will prevail.

15. BINDING EFFECT

This Option Agreement shall be binding upon the heirs, executors, administrators, and successors of the parties hereof.

Page 7 of 21

16. NOTICES

Any notice required or permitted under this Option Agreement shall be deemed to have been duly given if delivered, faxed or mailed, if delivered by certified or registered mail or return receipt requested, either to the Optionee at his or her address set forth above or such other address as he or she may designate in writing to the Company, or to the Company at the address set forth above or such other address as the Company may designate in writing to the Optionee, within one week.

17. ENTIRE AGREEMENT

This Option Agreement and the Option Plan exclusively concludes all of the terms of the Optionee's option plan and, subject to the provisions of Section 19 of the Option Plan, annuls and supersedes any other agreement, arrangement or understanding whether oral or in writing, relating to the grant of options in the Company to the Optionee. Any change of any kind to this Option Agreement will be valid only if made in writing and signed by both the Optionee and the Company's authorized representative and approved by the Board.

Page 8 of 21

IN WITNESS WHEREOF, the Company has executed this Option Agreement in duplicate on the day and year first above written.

COMMTOUCH SOFTWARE LTD.

By:______________________

The undersigned hereby accepts, and agrees to, all terms and provisions of the foregoing Option Agreement.


The Optionee

Page 9 of 21

EXHIBIT A TO THE OPTION AGREEMENT

COMMTOUCH SOFTWARE LTD.

THE 1999
SECTION 3(I) SHARE OPTION PLAN

Page 10 of 21

COMMTOUCH SOFTWARE LTD.

THE 1999
SECTION 3(i) SHARE OPTION PLAN

1. NAME

This share option plan, as amended from time to time, shall be known as the CommTouch Software Ltd. 1999 Section 3(i) Share Option Plan
(the "OPTION PLAN").

2. PURPOSE OF THE OPTION PLAN

The Option Plan is intended as an incentive to retain in the employ of CommTouch Software Ltd. (the "COMPANY") or a Subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, persons of training, experience, and ability, to attract new directors, employees, consultants and contractors, whose services are considered valuable, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company (the "OPTIONS"), pursuant to this Option Plan approved by the Board of Directors of the Company (the "BOARD").

The term "PARENT" shall mean for the purposes of the Option Agreement and the Option Plan: any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an Option, each of the companies (other than the Company), owns stock possessing fifty percent (50%) or more of total combined voting power of all classes of stock in one of the other companies in such chain.

The term "SUBSIDIARY" shall mean for the purposes of the Plan: any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chains.

3. ADMINISTRATION OF THE OPTION PLAN

The Board or a share option committee appointed and maintained by the Board for such purpose (the "COMMITTEE") shall have the power to administer the Option Plan. Notwithstanding the above, the Board shall automatically have a residual authority if no Committee shall be constituted or if such Committee shall cease to operate for any reason whatsoever.

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The Committee shall consist of such number of members (not less than two (2) in number) as may be fixed by the Board. The Committee shall select one of its members as its chairman (the "CHAIRMAN") and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

Any member of such Committee shall be eligible to receive Options under the Option Plan while serving on the Committee, unless otherwise specified herein.

The Committee shall have full power and authority to:

3.1        Designate participants.

3.2        Determine the terms and provisions of respective Option
           agreements (which need not be identical) including, but
           not limited to, the number of shares in the Company to be
           covered by each Option, provisions concerning the time or
           times when and the extent to which the Options may be
           exercised and the nature and duration of restrictions as
           to transferability or restrictions constituting
           substantial risk of forfeiture.

3.3        Accelerate the right of an Optionee to exercise, in whole
           or in part, any previously granted Option.

3.4        Interpret the provisions and supervise the administration
           of the Option Plan;

3.5        Determine the Fair Market Value (as defined below) of the
           Shares (as defined below).

3.6        Determine any other matter which is necessary or desirable
           for, or incidental to administration of the Option Plan.

The Committee shall have the authority to grant, in its discretion, to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price equal to, lower than or higher than the purchase price provided in the Option so surrendered and canceled, and containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the Option Plan.

All decisions and selections made by the Board or the Committee pursuant to the provisions of this Option Plan shall be made by a majority of its members except that no member of the Board or the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held.

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The interpretation and construction by the Committee of any provision of the Option Plan or of any Option thereunder shall be final and conclusive unless otherwise determined by the Board.

Subject to the Company's decision, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Option Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise.

"FAIR MARKET VALUE" shall mean in the Plan, as of any date, the value of a Share determined as follows:

(i) If the Shares are listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market system, or The Nasdaq SmallCap Market of the Nasdaq Stock Market , the Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading day prior to time of determination, as reported in the Wall Street Journal, or such other source as the Administrator deems reliable.

(ii) If the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported , the Fair Market Value shall be the mean between the high bid and low asked prices for the Shares on the last market trading day prior to the day of determination, or;

(iii) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the committee.

4. DESIGNATION OF PARTICIPANTS

The persons eligible for participation in this Option Plan as recipients of Options may include any employees, directors and consultants of the Company, or a Subsidiary of the Company or a company or a Parent or a subsidiary company of such company issuing or assuming the Options in a transaction described in Section 9.1 of this Option Plan (the foregoing collectively, the "GROUP"). The grant of an Option hereunder shall neither entitle the recipient thereof to participate nor disqualify him from participating in any other grant of Options pursuant to this Option Plan or any other option or stock plan of the Company or any of its affiliates.

Anything in the Option Plan to the contrary notwithstanding, all grants of Options to directors and office holders ("NOSEI MISRA" - as such term is defined in the Companies

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Ordinance (New Version), 1983 (the "COMPANIES ORDINANCE")) shall be authorized and implemented only in accordance with the provisions of the Companies Ordinance, as in effect from time to time.

5. TRUSTEE

The Options which shall be granted to employees consultants and contractors of the Group or any Shares (as defined below) issued upon exercise of such Options and/or other shares received subsequently following any realization of rights, shall be issued to a Trustee nominated by the Committee (the "TRUSTEE") and held for the benefit of the Optionees from the date of grant.

Anything to the contrary notwithstanding, the Trustee shall not release any Options and/or any Shares issued upon exercise of Options, prior to the full payment of the Optionee's tax liabilities arising from Options which were granted to him and/or any Shares issued upon exercise of such Options.

Upon receipt of the Option, the Optionee will sign an undertaking to exempt the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Option Plan, or any Option or Share granted to him thereunder.

6. SHARES RESERVED FOR THE OPTION PLAN; RESTRICTION THEREON

6.1        The Company has reserved 250,000 authorized but unissued
           Ordinary Shares nominal value NIS 1.00 per share, of the
           Company (the "SHARES"), for purposes of the Option Plan
           (subject to adjustment as set forth in paragraph 9 below),
           the 1996 CommTouch Software, Inc. Stock Option Plan and
           Israeli Option Agreements previously issued to Israeli
           employees. Any of such Shares which may remain unissued
           and which are not subject to outstanding Options at the
           termination of the Option Plan shall cease to be reserved
           for the purpose of the Option Plan, but until termination
           of the Option Plan the Company shall at all times reserve
           sufficient number of Shares to meet the requirements of
           the Option Plan. Should any Option for any reason expire
           or be canceled prior to its exercise or relinquishment in
           full, the Shares subject to such Option may again be
           subjected to an Option under the Option Plan.

6.2        An optionee who purchased Shares hereunder upon exercise
           of Options shall have no voting rights as a shareholder
           (in any and all matters whatsoever) until the consummation
           of an initial public offering of the Company's securities
           (an "IPO"). Until an IPO, such Shares shall be voted by a
           proxy pursuant to the directions of the Board, such proxy
           to be to the person or persons designated by the Board.
           All Shares issued upon exercise of the Options shall
           entitle the holder thereof to receive dividends and other
           distributions thereon.

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7. VESTING

Unless Exhibit B to the Option Agreement provides otherwise, one-fourth (1/4) of the Options shall vest (i.e., Options shall become exercisable) at the end of the first year of an Optionee's continuous services or employment with the group, and one-thirty-sixth (1/36) of the remaining Options shall vest per month of such continuous employment over the next thirty-six months (the "VESTING DATES").

8. OPTION PRICE

           8.1        The purchase price of each Share subject to an Option or
                      any portion thereof shall be determined by the Committee
                      in its sole and absolute discretion in accordance with
                      applicable law, subject to any guidelines as may be
                      determined by the Board from time to time.

           8.2        The Option price shall be payable upon the exercise of the
                      Option in a form satisfactory to the Committee, including
                      without limitation, by cash or check. The Committee shall
                      have the authority to postpone the date of payment on such
                      terms as it may determine.

9.         ADJUSTMENTS

Upon the occurrence of any of the following described events, the Optionee's rights to purchase Shares under the Option Plan shall be adjusted as hereafter provided:

9.1        In the event of a merger of the Company with or into
           another corporation, or the sale of substantially all of
           the assets of the Company while unexercised Options remain
           outstanding under the Option Plan the successor
           corporation or a Parent or subsidiary of such successor
           corporation or the purchasing corporation may assume the
           unexercised Options outstanding under the Option Plan or
           may substitute for the Shares subject to the unexercised
           portions of such outstanding Options an appropriate number
           of shares of each class of shares or other securities of
           the successor or purchasing corporation or cash or
           property which were distributed to the shareholders of the
           Company in respect of such shares. In the event of
           substitution of shares or securities appropriate
           adjustments shall be made to the purchase price per share
           to reflect such action, all as will be determined by the
           Committee whose determination shall be final. In the event
           that the successor or purchasing corporation does not
           agree to assume or substitute as described in this Section
           9.1, the Options shall terminate as of the date of the
           closing of the above merger or sale, as applicable.

9.2        In the event of the proposed liquidation or dissolution of
           the Company, the Company shall notify the Optionee at
           least fifteen (15) days prior to such proposed action. To
           the extent not previously exercised, the Options shall
           terminate immediately prior to the consummation of such
           proposed action.

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9.3        If the outstanding shares of the Company shall at any time
           be changed or exchanged by declaration of a stock
           dividend, stock split, combination or exchange of shares,
           recapitalization, or any other like event by or of the
           Company, and as often as the same shall occur, then the
           number, class and kind of Shares subject to this Option
           Plan or subject to any Options therefore granted, and the
           Option prices, shall be appropriately and equitably
           adjusted so as to maintain the proportionate number of
           Shares without changing the aggregate Option price,
           provided, however, that no adjustment shall be made by
           reason of the distribution of subscription rights on
           outstanding shares. Upon the occurrence of any of the
           foregoing, the class and aggregate number of Shares
           issuable pursuant to this Option Plan (as set forth in
           Section 6 hereof), in respect of which Options have not
           yet been exercised, shall be appropriately adjusted, all
           as may be determined by the Board who's determination
           shall be final.

9.4        Anything herein to the contrary notwithstanding, if prior
           to the completion of an IPO, all or substantially all of
           the shares of the Company are to be sold, or upon a merger
           or reorganization or the like, the shares of the Company,
           or any class thereof, are to be exchanged for securities
           of another Company, then in such event, each Optionee
           shall be obliged to sell or exchange, as the case may be,
           the shares such Optionee purchased under the Option Plan,
           in accordance with the instructions then issued by the
           Board whose determination shall be final.

10. TERM AND EXERCISE OF OPTIONS

10.1 The Options shall be exercised by the Optionee by giving written notice to the Company, in such form and method as may be determined by the Company and the Trustee, which exercise shall be effective upon receipt of such notice by the Company at its principal office. The notice shall specify the number of Shares with respect to which Options are being exercised.

10.2 Each Option granted under this Option Plan shall be exercisable following the exercise dates and for the number of Shares as shall be provided in EXHIBIT B to the Option Agreement. However no Option shall be exercisable after the Expiration Date, as defined for each Optionee in his Option Agreement.

10.3 Options granted under the Option Plan shall not be transferable by Optionees other than by will or laws of descent and distribution, and during an Optionee's lifetime shall be exercisable only by that Optionee.

10.4 The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested, prior to the Expiration Date, and provided that, subject to the provisions of Section 10.6 below, the Optionee is an employee a consultants or a contractor of the Group at all times during the period beginning with the granting of the Option and ending upon the date of exercise.

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10.5 Subject to the provisions of Section 10.6 below, in the event of termination of the Optionee's employment or services with the Group , c all Options granted to the Optionee will immediately expire. A notice of termination of employment or services shall be deemed to constitute termination of employment or services with Group.

10.6 Notwithstanding anything to the contrary previously stated, an Option may be exercised after the date of termination of the Optionee's services or employment with the Group during an additional period of time beyond the date of such termination, but only with respect to the number of Options already vested according to the Vesting Dates, if:

10.6.1     termination is without Cause, in which event
           any Options still in force and unexpired may be
           exercised within a period of 90 (ninety) days
           from the date of such termination.

10.6.2     termination is the result of death or
           disability of the Optionee, in which event any
           Options still in force and unexpired may be
           exercised within a period of 90 (ninety) days
           from the date of termination.

10.6.3     prior to the date of such termination, the
           Committee shall authorize an extension of the
           terms of all or part of the Options beyond the
           date of such termination for a period not to
           exceed the period during which the Options by
           their terms would otherwise have been
           exercisable.

           The term "CAUSE" shall mean any action,
           omission or state of affairs related to the
           Optionee which the Committee or the Boards
           decides, in its sole discretion, is against the
           interests of the Company.

10.7 To avoid doubt, the holders of Options shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any part of an Option, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of the operation of section 233 of the Companies Ordinance or any successor to such section, until registration of the Optionee as holder of such Shares in the Company's register of members.

10.8 Any form of Option Agreement authorized by this Option Plan may contain such other provisions as the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Committee may, with the consent of the Optionee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by
(i) payment to the Optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the Shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such Shares, (ii) the issuance or transfer to the Optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or
(iii) a combination of

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cash and shares with a combined value equal to any such excess, all as determined by the Committee in its sole discretion.

11. DIVIDENDS

With respect to all Shares (but not unexercised Options) issued upon the exercise of Options purchased by the Optionee and held by the Trustee, the Optionee shall be entitled to receive dividends in accordance with the quantity of such Shares, and subject to any applicable taxation on distribution of dividends. During the period in which Shares issued to the Trustee on behalf of a Optionee are held by the Trustee, the cash dividends paid with respect thereto shall be paid directly to the Optionee.

12. ASSIGNABILITY AND SALE OF OPTIONS

No Option, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to them given to any third party whatsoever, and during the lifetime of the Optionee each and all of such Optionee's rights to purchase Shares hereunder shall be exercisable only by the Optionee.

As long as the Shares are held by the Trustee in favor of the Optionee, then all rights the Optionee possesses over the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or laws of descent and distribution.

13. TERM OF THE OPTION PLAN

The Option Plan shall be effective as of the day it was adopted by the Board and shall terminate at the end of 60 months from such day of adoption.

14. AMENDMENTS OR TERMINATION

The Board may, at any time and from time to time, subject to the written consent of the Trustee, amend, alter or discontinue the Option Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Option therefore granted, without his consent.

15. GOVERNMENT REGULATIONS

The Option Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver Shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required.

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16. CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES

Neither the Option Plan nor the Option Agreement with the Optionee shall impose any obligation on the Group, to continue any Optionee in its employ or the hiring by the Group of the Optionee's services, and nothing in this Option Plan or in any Option granted pursuant thereto shall confer upon any Optionee any right to continue in the employ or service of the Group or restrict the right of the Group to terminate such service or employment at any time.

17. GOVERNING LAW & JURISDICTION

This Option Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to this Option Plan.

18. TAX CONSEQUENCES

Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee. The Committee and/or the Trustee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made.

19. NON-EXCLUSIVITY OF THE OPTION PLAN

The adoption of the Option Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Option Plan or under the Share Option Agreements previously issued to Israeli employees, and such arrangements may be either applicable generally or only in specific cases.

20. MULTIPLE AGREEMENTS

The terms of each Option may differ from other Options granted under this Option Plan at the same time, or at any other time. The Committee may also grant more than one Option to a given Optionee during the term of this Option Plan, either in addition to, or in substitution for, one or more Options previously granted to that Optionee.

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EXHIBIT B TO THE OPTION AGREEMENT

TERMS OF THE OPTION

1. NAME OF THE OPTIONEE: _______________________________________

2. NUMBER OF OPTIONS GRANTED: _______________________________________

3. PRICE PER SHARE: _______________________________________

4. EXPIRATION DATE: _______________________________________

5. DATE OF GRANT: _______________________________________

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EXHIBIT C TO THE OPTION AGREEMENT

PROXY

Mr.____________ and Mr. ______________, or any of them, with power of substitution in each, are hereby authorized to represent the undersigned at any and all general meetings of CommTouch Software Ltd. )the "Company") (including general meetings convened for the purpose of adopting extraordinary resolutions) and to vote thereat on any and all matters the same number of Ordinary Shares of the Company as the undersigned would be entitled to vote if then personally present.


NAME DATE


SIGNATURE

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EXHIBIT 10.4

COMMTOUCH SOFTWARE LTD.

1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN

1. PURPOSE.

The purpose of this Plan is to offer Nonemployee Directors of CommTouch Software Ltd. an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Ordinary Shares of the Company. This Plan provides for the grant of Options to purchase Shares. Options granted hereunder shall be "Nonstatutory Options," and shall not include "incentive stock options" intended to qualify for treatment under Sections 421 and 422 of the Internal Revenue Code of 1986, as amended.

2. DEFINITIONS.

As used herein, the following definitions shall apply:

(a) "ADMINISTRATOR" shall mean the entity, either the Board or the committee of the Board, responsible for administering this Plan, as provided in
Section 3.

(b) "AFFILIATE" means a parent or subsidiary corporation as defined in Sections 424(e) and (f) of the Code.

(c) "ANNUAL OPTION" shall have the meaning set forth in Section 6(b).

(d) "BOARD" shall mean the Board of Directors of the Company, as constituted from time to time.

(e) "CHANGE IN CONTROL" shall mean the occurrence of any one of the following:

(i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, an Affiliate, or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities;

(ii) the election of any director of the Company who was not a candidate proposed by a majority of the Board in office prior to the time of such election; or

(iii) the dissolution or liquidation (partial or total) of the Company or a sale of assets involving 50% or more of the assets of the Company, or any merger or reorganization of the Company, whether or not another entity is the survivor, or other transaction


pursuant to which the holders, as a group, of all of the shares of the Company outstanding prior to the transaction hold, as a group, less than 50% of the shares of the Company outstanding after the transaction.

(f) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute.

(g) "COMPANY" shall mean CommTouch Software Ltd., an Israeli corporation.

(h) "DISABILITY" means permanent and total disability as determined by the Administrator in accordance with the standards set forth in Section 22(e)(3) of the Code.

(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute.

(j) "EXPIRATION DATE" shall mean the last day of the term of an Option established under Section 6(e).

(k) "FAIR MARKET VALUE" means as of any given date (a) the closing price of the Ordinary Shares as reported by the Nasdaq National Market; (b) if the Ordinary Shares are no longer quoted on the Nasdaq National Market but are listed on an established stock exchange or quoted on any other established interdealer quotation system, the closing price for the Ordinary Shares on such exchange or system, as reported in the Wall Street Journal; or (c) if the Ordinary Shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of an Ordinary Share as determined by the Board in good faith. Such determination shall be conclusive and binding on all persons.

(l) "INITIAL OPTION" shall have the meaning set forth in Section 6(a).

(m) "NONEMPLOYEE DIRECTOR" shall mean any person who is a member of the Board but is not an employee of the Company or any Affiliate of the Company and has not been an employee of the Company or any Affiliate of the Company at any time during the preceding 12 months. Service as a director does not in itself constitute employment for purposes of this definition.

(n) "OPTION" shall mean a stock option granted pursuant to this Plan. Each Option shall be a nonstatutory option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(o) "OPTION AGREEMENT" shall mean the written agreement described in
Section 6 evidencing the grant of an Option to a Nonemployee Director and containing the terms, conditions and restrictions pertaining to such Option.

(p) "OPTIONEE" shall mean a Nonemployee Director who holds an Option.

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(q) "ORDINARY SHARES" shall mean the Ordinary Shares of the Company.

(r) "PLAN" shall mean this CommTouch Software Ltd. 1999 Nonemployee Directors Stock Option Plan, as it may be amended from time to time.

(s) "SECTION" unless the context clearly indicates otherwise, shall refer to a Section of this Plan.

(t) "SHARES" shall mean the Ordinary Shares subject to an Option granted under this Plan.

(u) "TAX DATE" means the date defined in Section 7(c).

(v) "TERMINATION" means, for purposes of the Plan, with respect to an Optionee, that the Optionee has ceased to be, for any reason, a director of the Company.

3. ADMINISTRATION.

(a) ADMINISTRATOR. The Plan shall be administered by the Board or, upon delegation by the Board, by a committee consisting of not fewer than two non-employee directors (as such term is defined in Rule 16b-3(b)(3)(i) of the Exchange Act) (in either case, the "Administrator"). The Administrator shall have no authority, discretion or power to select the Nonemployee Directors who will receive Options hereunder or to set the number of shares to be covered by each Option granted hereunder, the exercise price of such Option, the timing of the grant of such Option or the period within which such Option may be exercised; provided, however, that the Administrator shall have the discretion to change the exercise price of an outstanding option granted under the Plan or to issue new options under the Plan with a lower exercise price in exchange for outstanding options granted under the Plan in connection with a general repricing by the Company of outstanding options. In connection with the administration of the Plan, the Administrator shall have the powers possessed by the Board. The Administrator may act only by a majority of its members. The Administrator may delegate administrative duties to such employees of the Company as it deems proper, so long as such delegation is not otherwise prohibited by Rule 16b-3 under the Exchange Act. The Board at any time may terminate the authority delegated to any committee of the Board pursuant to this
Section 3(a) and revest in the Board the administration of the Plan.

(b) ADMINISTRATOR DETERMINATIONS BINDING. Subject to the limitations set forth in Section 3(a), the Administrator may adopt, alter and repeal administrative rules, guidelines and practices governing the Plan as it from time to time shall deem advisable, may interpret the terms and provisions of the Plan, any Option and any Option Agreement and may otherwise supervise the administration of the Plan. All decisions made by the Administrator under the Plan shall be binding on all persons, including the Company and Optionees. No member of the Administrator shall be liable for any action that he or she has in good faith taken or failed to take with respect to this Plan or any Option.

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4. ELIGIBILITY.

Only Nonemployee Directors may receive Options under this Plan.

5. SHARES SUBJECT TO PLAN.

(a) AGGREGATE NUMBER. Subject to Section 9, the total number of Ordinary Shares reserved and available for issuance pursuant to Options under this Plan shall be 180,000 shares. Such shares may consist, in whole or in part, of authorized and unissued shares or shares reacquired in private transactions or open market purchases, but all shares issued under the Plan regardless of source shall be counted against the 180,000 share limitation. If any Option terminates or expires without being exercised in full, the shares issuable under such Option shall again be available for issuance in connection with other Options. If Ordinary Shares issued pursuant to an Option are repurchased by the Company, such Ordinary Shares shall not again be available for issuance in connection with Options. To the extent the number of Ordinary Shares issued pursuant to an Option is reduced to satisfy withholding tax obligations, the number of shares withheld to satisfy the withholding tax obligations shall not be available for later grant under the Plan.

(b) NO RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a shareholder with respect to any Shares covered by his or her Option until an electronic transfer (as evidenced by the appropriate entry on the books of the Company or its duly authorized transfer agent) of such Shares is effected. Subject to Section 9, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions, or other rights for which the record date is prior to the date the certificate is issued.

6. GRANT OF OPTIONS.

(a) MANDATORY INITIAL OPTION GRANTS. Subject to the terms and conditions of this Plan, if any person who is not, and has not been in the preceding 12 months, an officer or employee of the Company and who has not previously been a member of the Board is elected or appointed a member of the Board, then on the effective date of such appointment or election the Company shall grant to such new Nonemployee Director an Option to purchase 10,000 shares at an exercise price equal to the Fair Market Value of such Shares on the date of such option grant. Any Option granted pursuant to this Section 6(a) shall be referred to as an "Initial Option."

(b) MANDATORY ANNUAL OPTION GRANTS. Subject to the terms and conditions of this Plan, on May 17 the date of the first meeting of the Board immediately following the annual meeting of shareholders of the Company (even if held on the same day as the meeting of shareholders) commencing in 1999, the Company shall grant to each Nonemployee Director then in office (other than a Nonemployee Director who received a grant under Section 6(a) on or after the record date for such annual meeting) an Option to purchase 10,000 shares at an exercise price equal to the Fair Market Value of such shares on the date of such option grant; provided, however, the grant date for grants made in connection with the annual shareholders meeting in

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1999 shall be May 17, 1999; provided, however, that all grants under this Plan shall be null and void if the shareholders of the Company do not approve the Plan on or before April 18, 2000. Any Option granted pursuant to this Section 6(b) shall be referred to as an "Annual Option."

(c) VESTING OF INITIAL OPTION AND ANNUAL OPTION. Each Option granted under Section 6(a) or 6(b) shall become exercisable with respect to one fourth of the number of Shares covered by such Option three months after the date of grant and with respect to one third of the remaining shares subject to the Option every three months thereafter, so that the Option shall be fully exercisable on the first anniversary of the date such Option was granted.

(d) TERM. Subject to the other provisions of this Plan, each Option granted pursuant to this Plan shall have a term of ten years.

(e) LIMITATION ON OTHER GRANTS. The Administrator shall have no discretion to grant Options under this Plan other than as set forth in Sections 6(a) and 6(b).

(f) OPTION AGREEMENT. As soon as practicable after the grant of an Option, the Optionee and the Company shall enter into a written Option Agreement which specifies the date of grant, the number of Shares, the option price, and the other terms and conditions applicable to the Option.

(g) TRANSFERABILITY. No Option shall be transferable otherwise than by will or the laws of descent and distribution, and an Option shall be exercisable during the Optionee's lifetime only by the Optionee.

(h) LIMITS ON EXERCISE. Subject to the other provisions of this Plan, an Option shall be exercisable in such amounts as are specified in the Option Agreement.

(i) EXERCISE PROCEDURES. To the extent the right to purchase Shares has accrued, Options may be exercised, in whole or in part, from time to time, by written notice from the Optionee to the Company stating the number of Shares being purchased, accompanied by payment of the exercise price for the Shares, and other applicable amounts, as provided in Section 7.

(j) TERMINATION. In the event of Termination, Options held at the date of Termination, to the extent then exercisable, may be exercised in whole or in part at any time within three months after the date of Termination, (but in no event after the Expiration Date), but not thereafter. Notwithstanding the foregoing, if Termination is due to death or Disability, Options held at the date of Termination, to the extent then exercisable, may be exercised in whole or in part at any time within two years from the date of Termination (but in no event after the Expiration Date) by the Optionee or by the Optionee's guardian or legal representative in the case of Disability or in the case of death, by the person to whom the Option is transferred by will or the laws of descent and distribution.

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7. PAYMENT AND TAXES UPON EXERCISE OF OPTIONS.

(a) PURCHASE PRICE. The purchase price of Shares issued under this Plan shall be paid in full at the time an Option is exercised.

(b) DELIVERY OF PURCHASE PRICE. Optionees may make all or any portion of any payment due to the Company upon exercise of an Option or with respect to federal, state, local or foreign tax payable in connection with the exercise of an Option, by delivery of cash or check. Exercise of an Option may be made pursuant to a "cashless exercise/sale" procedure pursuant to which funds to pay for exercise of the Option are delivered to the Company by a broker upon receipt of stock from the Company, or pursuant to which Optionees obtain margin loans from brokers to fund the exercise of the Option.

(c) TAX WITHHOLDING. The Optionee shall pay to the Company in cash, promptly upon exercise of an Option or, if later, the date that the amount of such obligations becomes determinable (in either case, the "Tax Date"), all applicable federal, state, local and foreign withholding taxes that the Administrator, in its discretion, determines will result upon exercise of an Option or from a transfer or other disposition of the Ordinary Shares acquired upon exercise of an Option or otherwise related to an Option or the Ordinary Shares acquired in connection with an Option.

A person who has exercised an Option may make an election to have the Ordinary Shares to be obtained upon exercise of the Option withheld by the Company on behalf of the Optionee, to pay the amount of tax that the Administrator, in its discretion, determines to be required to be withheld by the Company.

Any Ordinary Shares tendered to or withheld by the Company will be valued at Fair Market Value on such date. The value of the Ordinary Shares tendered or withheld may not exceed the required federal, state, local and foreign withholding tax obligations as computed by the Company.

8. USE OF PROCEEDS.

Proceeds from the exercise of Options pursuant to this Plan shall be used for general corporate purposes.

9. ADJUSTMENT OF SHARES.

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split or other change in corporate structure affecting the Ordinary Shares, appropriate adjustments shall be made by the Administrator in the aggregate number and kind of shares of stock reserved for issuance under the Plan and in the number, kind and exercise price of shares subject to outstanding Options; provided, however, that the number of shares subject to any Option shall always be a whole number.

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10. EFFECT OF CHANGE IN CONTROL.

In the event of a "Change in Control," any Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested.

11. NO RIGHT TO DIRECTORSHIP.

Neither this Plan nor any Option granted hereunder shall confer upon any Optionee any right with respect to continuation of the Optionee's membership on the Board or shall interfere in any way with provisions in the Company's Memorandum of Association and Articles of Association relating to the election, appointment, terms of office, and removal of members of the Board.

12. LEGAL REQUIREMENTS.

The Company shall not be obligated to offer or sell any Shares upon exercise of any Option unless the Shares are at that time effectively registered or exempt from registration under the federal securities laws and the offer and sale of the Shares are otherwise in compliance with all applicable securities laws and the regulations of any stock exchange on which the Company's securities may then be listed. The Company shall have no obligation to register the securities covered by this Plan under the federal securities laws or take any other steps as may be necessary to enable the securities covered by this Plan to be offered and sold under federal or other securities laws. Upon exercising all or any portion of an Option, an Optionee may be required to furnish representations or undertakings deemed appropriate by the Company to enable the offer and sale of the Shares or subsequent transfers of any interest in the Shares to comply with applicable securities laws. Certificates or records of electronic transfers evidencing Shares acquired upon exercise of Options shall bear any legend required by, or useful for purposes of compliance with, applicable securities laws, this Plan or the Option Agreements.

13. DURATION AND AMENDMENTS.

(a) DURATION. This Plan shall become effective upon the closing of the Company's initial public offering, provided that it has been adopted by the Board and approved by the shareholders of the Company, either by written consent or by approval of shareholders voting at a validly called shareholders' meeting. The Plan shall terminate automatically on the tenth anniversary of its effective date.

(b) AMENDMENT AND TERMINATION. The Board may amend, alter or discontinue the Plan or any Option, but no amendment, alteration or discontinuance shall be made which would impair the rights of an Optionee under an outstanding Option without the Optionee's consent. No amendment shall require shareholder approval except (i) an increase in the total number of shares reserved for issuance under the Plan, (ii) to the extent required by applicable laws, rules or regulations or (iii) to the extent that the Board otherwise concludes that shareholder approval is advisable.

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(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or sold under this Plan after the termination hereof, except upon exercise of an Option granted before termination. Termination or amendment of this Plan shall not affect any Shares previously issued and sold or any Option previously granted under this Plan.

14. RULE 16B-3.

With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with the applicable conditions of Rule 16b-3 under the Exchange Act. To the extent any provision of this Plan or action by the Administrator fails to so comply, it shall be adjusted to comply with Rule 16b-3, to the extent permitted by law and deemed advisable by the Administrator. It shall be the responsibility of persons subject to Section 16 of the Exchange Act, not of the Company or the Administrator, to comply with the requirements of Section 16 of the Exchange Act; and neither the Company nor the Administrator shall be liable if this Plan or any transaction under this Plan fails to comply with the applicable conditions of Rule 16b-3, or if any such person incurs any liability under
Section 16 of the Exchange Act.

Approved by the Board of Directors on ___________ __, 1999.

Approved by the Shareholders of the Company on ___________ __, 1999, to be effective on the date of the closing of the Company's initial public offering of its ordinary shares.

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COMMTOUCH SOFTWARE LTD.

1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN

STOCK OPTION AGREEMENT

Capitalized terms used without definition in this Stock Option Agreement (the "OPTION AGREEMENT") shall have the meanings given such terms in the CommTouch Software Ltd. 1999 Nonemployee Directors Stock Option Plan (the "PLAN").

I.

NOTICE OF STOCK OPTION GRANT

[Name of Optionee]

OPTION. You have been granted an option to purchase ordinary shares of CommTouch Software Ltd., an Israeli company (the "ORDINARY SHARES"), subject to the terms and conditions of the Plan and this Option Agreement, as follows:

Date of Grant:                              __________________

Exercise Price per Share:                   $_______

Total Number of Ordinary Shares Granted:      10,000

Total Exercise Price:                       $_______

Type of Option:                             NSO

Expiration Date:                            __________________

VESTING; TERMINATION. This Option will vest with respect to 2,500 ordinary shares three months after the date of grant and will vest with respect to 2,500 ordinary shares every three months thereafter, provided that the Optionee continues to serve as a Director of the Company. This Option may be exercised, in whole or in part, with respect to any vested shares, on or before
[_______________].

II.

AGREEMENT

1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli company (the "COMPANY"), hereby grants to the Optionee (the "OPTIONEE") named in the Notice of Stock Option Grant set forth above (the "NOTICE OF GRANT") an option (the "OPTION") to purchase the total number of Ordinary Shares set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE"), subject to the terms, definitions and provisions of the Plan, which is incorporated herein by reference. Capitalized terms used without definition in this Option Agreement shall have the meanings given such terms in the Plan.


2. EXERCISE OF OPTION.

(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in accordance with the Vesting schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement.

(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice (in the form attached hereto as Exhibit A), which shall state the election to exercise the Option, the number of Ordinary Shares with respect to which the Option is being exercised, and such other representations and agreements as to the Optionee's investment intent with respect to the Ordinary Shares as may be required by the Company pursuant to the provisions of the Plan. The written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price.

(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to the exercise of any Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Ordinary Shares may then be listed. Assuming such compliance, for income tax purposes the Ordinary Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such shares.

3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or check or by a combination thereof, at the election of the Optionee. Optionee shall also deliver a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option. Exercise of an Option may be made pursuant to a "cashless exercise/sale" procedure pursuant to which funds to pay for exercise of the Option are delivered to the Company by a broker upon receipt of stock from the Company, or pursuant to which Optionee obtains a margin loan from a broker to fund the exercise of the Option.

4. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5. TERM OF OPTION. This Option may be exercised only in accordance with the terms set out in the Notice of Grant, and may be exercised prior to its expiration date only, in accordance with the Plan and the terms of this Option Agreement.

6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. In case of conflict between the provisions in the Plan and this Option Agreement, the provisions in the Plan shall prevail. This Option Agreement is governed by California law except for that body of law pertaining to conflict of laws.


7. ACKNOWLEDGMENTS OF OPTIONEE.

(a) NO RIGHT TO CONTINUATION OF BOARD MEMBERSHIP. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING BOARD MEMBERSHIP AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING APPOINTED TO THE BOARD OF DIRECTORS, BEING GRANTED THIS OPTION OR ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. 1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF BOARD MEMBERSHIP BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S BOARD MEMBERSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.

(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated above.

Date:                                     COMMTOUCH SOFTWARE LTD.
     -----------------


                                          --------------------------------------
                                          Gideon Mantel
                                          Chief Executive Officer

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


                                          [Name of Optionee]


EXHIBIT 10.5

COMMTOUCH SOFTWARE LTD.

1999 EMPLOYEE STOCK PURCHASE PLAN


TABLE OF CONTENTS

                                                                             Page
                                                                             ----
Section 1.     Establishment of the Plan...................................   1

Section 2.     Definitions.................................................   1

Section 3.     Shares Authorized...........................................   2

Section 4.     Administration..............................................   3

Section 5.     Eligibility and Participation...............................   3

Section 6.     Offering and Purchase Periods...............................   4

Section 7.     Purchase Price..............................................   4

Section 8.     Employee Contributions......................................   4

Section 9.     Plan Accounts; Purchase of Shares...........................   5

Section 10.    Withdrawal From the Plan....................................   5

Section 11.    Taxes.......................................................   6

Section 12.    Effect of Termination of Employment or Death................   6

Section 13.    Rights Not Transferable.....................................   6

Section 14.    Recapitalization, Etc.......................................   7

Section 15.    Limitation on Stock Ownership...............................   7

Section 16.    No Rights as an Employee....................................   7

Section 17.    Rights as a Shareholder.....................................   7

Section 18.    Use of Funds................................................   8

Section 19.    Amendment or Termination of the Plan........................   8

Section 20.    Governing Law...............................................   8


COMMTOUCH SOFTWARE LTD.

1999 EMPLOYEE STOCK PURCHASE PLAN

SECTION 1. ESTABLISHMENT OF THE PLAN.

The CommTouch Software Ltd. qualified 1999 Employee Stock Purchase Plan (the "Plan") was established to provide Eligible Employees with an opportunity to purchase the Company's Ordinary Shares so that they may increase their proprietary interest in the success of the Company. The Plan, which provides for the purchase of stock through after-tax payroll withholding, is intended to qualify under Section 423 of the Code.

SECTION 2. DEFINITIONS.

(a) "Board of Directors" or "Board" means the Board of Directors of the Company, or an authorized committee of the Board.

(b) "Code" means the Internal Revenue Code of 1986, as amended.

(c) "Company" means CommTouch Software Ltd., a corporation formed under the laws of the State of Israel.

(d) "Compensation" means the base compensation paid to a Participant in cash, including overtime and shift differential; provided, however, that for purposes of determining a Participant's compensation, any election by such Participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Incentive compensation, commissions and other bonuses and other forms of compensation for work outside the regular work schedule are excluded.

(e) "Eligible Employee" means any Employee of a Participating Company
(i) who is employed by the Participating Company on or prior to the Offering Date, (ii) who is customarily employed for more than 20 hours per week, and
(iii) who is customarily employed for more than five months per calendar year.

In the event an Eligible Employee fails to remain in the continuous employ of a Participating Company customarily for at least 20 hours per week during an Offering Period or at least five months per calendar year, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his or her account will be returned to him or her; provided that a Participant who goes on an unpaid leave of absence shall be permitted to remain in the Plan with respect to an Offering Period which commenced prior to such leave of absence. If such Participant is not guaranteed reemployment by contract or statute and the leave of absence extends beyond 90 days, such Participant shall be deemed to have terminated employment on the 91st day of such leave of absence. Payroll deductions for a Participant who has been on an unpaid leave of absence will resume at the same rate as in effect prior to such leave upon return to work unless changed by such Participant or unless the Participant has been on an unpaid leave of absence either throughout an entire Offering Period or for more than 90 days, in which case the Participant shall not be permitted to re-enter the Plan until a


participation agreement is filed with respect to a subsequent Offering Period that commences after such Participant has returned to work from the unpaid leave of absence.

(f) "Employee" means any employee of a Participating Company.

(g) "Fair Market Value" shall mean (i) the closing price of an Ordinary Share on the principal exchange on which the Ordinary Shares are trading, or
(ii) if the Ordinary Shares are not traded on an exchange but are quoted on the Nasdaq National Market or a successor quotation system, the closing price on the Nasdaq National Market or such successor quotation system, or (iii) if the Ordinary Shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of an Ordinary Share as determined by the Plan Administrator in good faith. Such determination shall be conclusive and binding on all persons.

(h) "Offering Date" means the first day of an Offering Period.

(i) "Offering Period" means a period during which contributions may be made toward the purchase of Ordinary Shares under the Plan, as determined pursuant to Section 6.

(j) "Ordinary Shares" means the Ordinary Shares, par value NIS 1.0, of the Company.

(k) "Participant" means an Eligible Employee who elects to participate in the Plan, as provided in Section 5.

(l) "Participating Company" means the Company and such present or future Subsidiaries of the Company as the Board of Directors shall from time to time designate.

(m) "Plan Account" means the account established for each Participant pursuant to Section 9(a).

(n) "Plan Administrator" means the administrator appointed by the Board pursuant to Section 4.

(o) "Purchase Price" means the price at which Participants may purchase Ordinary Shares under Section 5 of the Plan, as determined pursuant to Section 7.

(p) "Purchase Date" means the last day of each Purchase Period.

(q) "Purchase Period" means a period commencing on the Offering Date or on the day after a Purchase Date and ending on a Purchase Date, as described in
Section 6.

(r) "Subsidiary" means a subsidiary corporation as defined in Section 424 of the Code.

SECTION 3. SHARES AUTHORIZED.

Subject to adjustment as provided in Section 14, the maximum aggregate number of Ordinary Shares that may be offered under the Plan shall initially be 150,000; provided, however, that the number of Ordinary Shares that may be offered under the Plan shall be increased as of January 1 of each year by 110 percent of the number of shares purchased under the Plan in the previous calendar year.

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SECTION 4. ADMINISTRATION.

(a) The Plan shall be administered by a Plan Administrator appointed by the Board of Directors. The interpretation and construction by the Plan Administrator of any provision of the Plan or of any right to purchase Ordinary Shares hereunder shall be conclusive and binding on all persons.

(b) No member of the Board or the Plan Administrator shall be liable for any action or determination made in good faith with respect to the Plan or the right to purchase Ordinary Shares hereunder. The Plan Administrator shall be indemnified by the Company against the reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which it may be a party by reason of any action taken or failure to act under or in connection with the Plan or any stock purchased thereunder, and against all amounts paid by it in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by it in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that the Plan Administrator is liable for gross negligence or misconduct in the performance of its duties; provided that within 60 days after institution of any such action, suit or proceeding, the Plan Administrator shall in writing offer the Company the opportunity, at the Company's own expense, to handle and defend the same.

(c) All costs and expenses incurred in administering the Plan shall be paid by the Company. The Board or the Plan Administrator may request advice for assistance or employ such other persons as are necessary for proper administration of the Plan.

SECTION 5. ELIGIBILITY AND PARTICIPATION.

(a) Any person who qualifies or will qualify as an Eligible Employee on the Offering Date with respect to an Offering Period may elect to participate in the Plan for such Offering Period. An Eligible Employee may elect to participate by executing the participation agreement prescribed for such purpose by the Plan Administrator. The participation agreement shall be filed with the Plan Administrator no later than two weeks prior to the applicable Offering Date or such other deadline as is prescribed by the Plan Administrator. The Eligible Employee shall designate in the participation agreement the percentage of his or her Compensation which he or she elects to have withheld for the purchase of Ordinary Shares, which may be any percentage of the Participant's Compensation up to a maximum of 15 percent. In the event that the Fair Market Value of Ordinary Shares on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period, unless the Participant elects to withdraw during the current Offering Period by delivering a written notice, in form satisfactory to the Board, to the Plan Administrator. When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period.

(b) By enrolling in the Plan, a Participant shall be deemed to have elected to purchase the maximum number of whole Ordinary Shares that can be purchased with the amount of the Participant's Compensation which is withheld during each Purchase Period.

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(c) Once enrolled, a Participant will continue to participate in the Plan for each succeeding Purchase and Offering Period until he or she terminates participation or ceases to qualify as an Eligible Employee. A Participant who withdraws from the Plan in accordance with Section 10 may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Section 5(a).

SECTION 6. OFFERING AND PURCHASE PERIODS.

The Plan shall be implemented by one or more Offering Periods of not more than 24 months each. The Board of Directors may determine the duration of each Offering Period and the commencement dates. The Board may determine to include one or more Purchase Periods within an Offering Period. The first Offering Period shall commence on the first business day on which price quotations for the Company's Ordinary Shares are available on the Nasdaq National Market and shall end on August 14, 2001, and shall contain four Purchase Periods commencing on the first day of the first Offering Period, February 15, 2000, August 15, 2000 and February 15, 2001. Thereafter, unless changed by the Board, the duration of each subsequent Offering Period shall be two years, commencing on February 15 or August 15 and ending 24 months later on February 14 or August 14, and shall contain four Purchase Periods commencing on each February 14 and August 14 during each such Offering Period.

SECTION 7. PURCHASE PRICE.

The Purchase Price for each Ordinary Share shall be the lesser of (i) 85% of the Fair Market Value of such Ordinary Share on the last trading day before the Offering Date (provided, however, in the case of the first Offering Period, this number shall be 85% of the price per share at which the Company's Ordinary Shares are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Ordinary Shares pursuant to a registration statement filed with the SEC) or (ii) 85% of the Fair Market Value of such Ordinary Share on the last trading day of the applicable Purchase Period.

SECTION 8. EMPLOYEE CONTRIBUTIONS.

A Participant may purchase Ordinary Shares under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Section 5(a), shall commence with the first paycheck issued during the Offering Period and shall be deducted from each subsequent paycheck throughout the Offering Period. If a Participant desires to change the rate of payroll withholding during the Offering Period, he or she may do so, if permitted by the Plan Administrator, only one time during an Offering Period by filing a new participation agreement with the Plan Administrator. Such a change may be either an increase or a decrease and will be effective no later than the first day of the second payroll period which begins following the receipt of the new participation agreement. If a Participant desires to increase or decrease the rate of payroll withholding more than one time during the participation period, he or she may do so effective for the next Offering Period by filing a new participation agreement with the Plan Administrator on or before the date specified by the Plan Administrator, and if none is stated, then no later than the first day of the Offering Period for which such change is to be effective.

SECTION 9. PLAN ACCOUNTS; PURCHASE OF SHARES.

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(a) The Company will maintain a Plan Account on its books in the name of each Participant. At the close of each pay period, the amount deducted from the Participant's Compensation will be credited to the Participant's Plan Account. No interest shall accrue on any amounts held in the Participant's Plan Account.

(b) As of the last day of each Purchase Period, the amount then in the Participant's Plan Account will be divided by the Purchase Price, and the number of whole shares which results (subject to the limitations described in Sections
5(b), 9(c) and 15) shall be purchased from the Company with the funds in the Participant's Plan Account. Foreign currencies will be converted to U.S. dollars based on the foreign currency exchange rate as quoted in the Wall Street Journal on the Purchase Date, or such other reasonable method selected by the Plan Administrator that does not prevent the Plan from satisfying the requirements of
Section 423 of the Code. Shares representing the number of Ordinary Shares so purchased shall be electronically delivered to a brokerage account designated by the Plan Administrator and kept in such account pursuant to a participation agreement between each Participant and the Company and subject to the conditions described therein, which may include a requirement that Ordinary Shares be held and not sold for certain time periods.

(c) In the event that the aggregate number of Ordinary Shares that all Participants elect to purchase during a Purchase Period shall exceed the number of shares remaining available for issuance under the Plan, then the number of shares to which each Participant shall become entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the sum of the number of shares the Participant has elected to purchase during that Purchase Period pursuant to Section 5, and the denominator of which is the sum of the number of shares which all employees have elected to purchase during that Purchase Period pursuant to Section 5. Any cash amount remaining in the Participant's Plan Account under these circumstances shall be refunded to the Participant.

(d) Any amount remaining in the Participant's Plan Account caused by a surplus due to fractional shares after deducting the amount of the Purchase Price for the number of whole shares issued to the Participant shall be carried over in the Participant's Plan Account for the succeeding Purchase Period, without interest. Any amount remaining in the Participant's Plan Account caused by anything other than a surplus due to fractional shares shall be refunded to the Participant in cash, without interest.

(e) As soon as practicable following the end of each Purchase Period, the Company shall deliver to each Participant a Plan Account statement setting forth the amount of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any.

SECTION 10. WITHDRAWAL FROM THE PLAN.

A Participant may elect to withdraw from participation in a Purchase Period at any time up to the last day of the Purchase Period by filing the prescribed form with the Plan Administrator. A Participant may elect to withdraw (or not withdraw) from participation in an Offering Period at any time up to the last day of the Offering Period by filing the prescribed form with the Plan Administrator. As soon as practicable after a withdrawal, payroll deductions shall cease and all amounts credited to the Participant's Plan Account will be refunded in cash, without interest. A Participant who has

5

withdrawn from an Offering Period shall not be a Participant in future Offering Periods, unless he or she again enrolls in accordance with the provisions of
Section 5.

SECTION 11. TAXES.

The Participant shall make such arrangements as the Company may require for the satisfaction of any federal, state, local or foreign tax obligations that may arise in connection with the disposition of the Ordinary Shares acquired under the Plan. If required by the applicable tax authority, these arrangements may include withholding (or tendering back) of Ordinary Shares, or withholding amounts from the Participant's compensation.

SECTION 12. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.

(a) Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under
Section 10. A transfer from one Participating Company to another shall not be treated as a termination of employment.

(b) A Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's Plan Account in the event of such Participant's death prior to the last day of a Purchase Period. A Participant may also file a written designation of a beneficiary who is to receive shares and cash, if any, from the Participant's Plan Account in the event of such Participant's death subsequent to the purchase of shares but prior to delivery to his or her account of such shares and cash.

(c) A designation of beneficiary may be changed by the Participant at any time by written notice. In the event of the death of a Participant in the absence of a valid designation of a beneficiary who is living at the time of such Participant's death, the Company shall deliver such cash and/or shares to the executor or administrator of the estate of the Participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such cash and/or shares to the spouse or to any one or more dependents or relatives of the Participant; or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

SECTION 13. RIGHTS NOT TRANSFERABLE.

The rights or interests of any Participant in the Plan, or in any Ordinary Shares or money to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or by any other manner other than as permitted by the Code or by will or the laws of descent and distribution. If a Participant attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than as permitted by the Code or by will or the laws of descent and distribution, such act shall be treated as an automatic withdrawal under Section 10.

SECTION 14. RECAPITALIZATION, ETC.

(a) The aggregate number of Ordinary Shares offered under the Plan, the number and price of shares which any Participant has elected to purchase pursuant to Section 5 and the maximum number of shares which a Participant may elect to purchase under the Plan in any Offering Period shall be

6

proportionately adjusted for any increase or decrease in the number of issued Ordinary Shares resulting from a subdivision or consolidation of shares or any other capital adjustment, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt of consideration by the Company.

(b) In the event of a dissolution or liquidation of the Company, or a merger or consolidation to which the Company is a constituent corporation, this Plan shall terminate unless the plan of merger, consolidation or reorganization provides otherwise, and all amounts paid by each Participant toward the Purchase Price of Ordinary Shares hereunder shall be refunded, without interest.

(c) The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.

SECTION 15. LIMITATION ON STOCK OWNERSHIP.

Notwithstanding any provision herein to the contrary, no Participant shall be permitted to elect to participate in the Plan (i) if such Participant, immediately after his or her election to participate, would own stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company, or (ii) if under the terms of the Plan the right of the Employee to purchase Ordinary Shares under this Plan and all other qualified employee stock purchase plans of the Company or its Subsidiaries would accrue at a rate that exceeds $25,000 of the Fair Market Value of such Ordinary Shares (determined at the time such right is granted) for each calendar year for which such right is outstanding at any time. For purposes of this Section 15, ownership of stock shall be determined by the attribution rules of Section 424(d) of the Code, and Participants shall be considered to own any Ordinary Shares which they have a right to purchase under this or any other stock plan.

SECTION 16. NO RIGHTS AS AN EMPLOYEE.

Nothing in the Plan shall be construed to give any person the right to remain in the employ of a Participating Company. Each Participating Company reserves the right to terminate the employment of any person at any time and for any reason.

SECTION 17. RIGHTS AS A SHAREHOLDER.

A Participant shall have no rights as a shareholder with respect to any shares he or she may have a right to purchase under the Plan until the date of issuance of the stock to the brokerage account designated by the Plan Administrator for Ordinary Shares issued pursuant to the Plan.

SECTION 18. USE OF FUNDS.

All payroll deductions received or held by the Company under the Plan may be used by the Company for general corporate purposes, and the Company shall not be obligated to segregate such payroll deductions in separate accounts.

SECTION 19. AMENDMENT OR TERMINATION OF THE PLAN.

7

The Board of Directors shall have the right to amend, modify or terminate the Plan at any time without notice. An amendment of the Plan shall be subject to shareholder approval only to the extent required by applicable laws, regulations or rules. Amendments to the Plan to comply with the requirements of a foreign country may be adopted by the Plan Administrator to the extent those amendments do not prevent the Plan from satisfying the requirements of Section 423 of the Code.

SECTION 20. GOVERNING LAW.

The Plan shall be governed by, and construed and interpreted in accordance with, the laws of the State of California.

* * * *

Approved by the Board of Directors on _____________ __, 1999.

Approved by the Shareholders of the Company on _____________ __, 1999.

8

COMMTOUCH SOFTWARE LTD.

1999 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT

_____ Original Application Enrollment Date: _______________

_____ Change of Beneficiary(ies) Offering Period: _______________

1. ________________________ hereby elects to participate in the CommTouch Software Ltd. (the "Company") 1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase the Company's Ordinary Shares in accordance with this Subscription Agreement and the Employee Stock Purchase Plan.

2. I hereby authorize payroll deductions from each paycheck in the amount of (1% up to 15%, whole percentage only) _____% of my Compensation on each payday during the indicated Offering Period in accordance with the Employee Stock Purchase Plan.

3. I understand that said payroll deductions shall be accumulated for the purchase of Ordinary Shares at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an indicated Offering Period, any accumulated payroll deductions will be used to automatically purchase shares for me.

4. I have received a copy of the complete "Employee Stock Purchase Plan." I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan.

5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse Only):


(Names)

6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the first day of the indicated Offering Period during which I purchased such shares, or within 1 year after the date on which such shares were purchased by me, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I


hereby agree to notify the Company in writing within 30 days after the date of any disposition of shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Ordinary Shares. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) the excess of the fair market value of the shares on the first day of the Offering Period or Purchase Period over the purchase price that I paid for the shares. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain.

7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan.

8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan:

NAME: (Please print)
                    ------------------------------------------------------------
                            (First)            (Middle)              (Last)

-------------------------           --------------------------------------------
Relationship
                                    --------------------------------------------
                                    (Address)

NAME: (Please print)
                    ------------------------------------------------------------
                            (First)            (Middle)              (Last)

-------------------------           --------------------------------------------
Relationship
                                    --------------------------------------------
                                    (Address)

Employee's Social Security Number:
                                    --------------------------------------------

Employee's Address:
                                    --------------------------------------------

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


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

I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.

Dated:
       ---------------------        --------------------------------------------
                                    Signature of Employee

                                    --------------------------------------------
                                    Spouse's Signature (If beneficiary other
                                    than spouse)


COMMTOUCH SOFTWARE LTD.

1999 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF WITHDRAWAL

The undersigned participant in the Offering Period or Purchase Period (circle one) of the CommTouch Software Ltd. Employee Stock Purchase Plan which began on _______________ 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period or Purchase Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credits to his or her account with respect to such Offering Period or Purchase Period. The undersigned understands and agrees that his or her option for such Offering Period or Purchase Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period or Purchase Period and the undersigned shall be eligible to participate in succeeding Offering Periods or Purchase Periods only by delivery to the Company a new Subscription Agreement.

Name and Address of Participant:            Signature:

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

------------------------------              -----------------------------------
                                            Date:


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


EXHIBIT 10.6

SUBLEASE

This Sublease ("Sublease") is made this 14TH day of NOVEMBER, 1998 by and between ASCII OF AMERICA, INC., a CALIFORNIA corporation ("Sublandlord") and COMMTOUCH, INC., a CALIFORNIA corporation ("Subtenant").

RECITALS

A. Sublandlord, as Tenant, is leasing from MCCANDLESS TOWERS, PHASE I ("Landlord") those certain premises located at 3945 FREEDOM CIRCLE, SUITE 730, SANTA CLARA, California ("Premises") pursuant to that certain lease dated JANUARY 13, 1996 ("Master Lease"). Subtenant acknowledges having received and reviewed a copy of the Master Lease.

B. Sublandlord desires to lease to Subtenant and Subtenant desires to lease from Sublandlord a portion of the Premises consisting of approximately 3,275 square feet (the "Sublease Premises") as shown on Exhibit A attached hereto, on the terms and conditions set forth in this Sublease.

NOW, THEREFORE, the parties hereto agree as follows:

1. PREMISES

Sublandlord leases to Subtenant and Subtenant hires from Sublandlord the Premises, together with the appurtenances thereto.

2. INCORPORATION OF MASTER LEASE

This Sublease is subject to all of the terms and conditions of the Master Lease and Subtenant hereby accepts, assumes and agrees to perform all the obligations of Sublandlord as Tenant under the Master Lease and all of the terms and conditions of this Sublease (with each reference therein to Landlord and Tenant to be deemed to refer to Sublandlord and Subtenant, respectively), excepting only paragraphs: 2, 4 (a), 4(c), 4(d), 4(e), 5(a) 54 AND 55. Subtenant shall not commit or permit to be committed on the Sublease Premises any act or omission which shall violate any term or condition of the Master Lease. In the event of the termination for any reason of Sublandlord's interest as Tenant under the Master Lease, then this Sublease shall terminate therewith without any liability of Sublandlord to Subtenant; except that if this Sublease terminates as a result of a default of one of the parties hereto, whether under this Sublease, the Master Lease, or both, the defaulting party shall be liable to the non-defaulting party for all damages suffered by the non-defaulting party resulting from such termination.

3. TERM

The term of this Sublease shall be for a period of FORTY-TWO (42) MONTHS commencing on JANUARY 1, 1999 and ending on JUNE 30, 2002. In the event Sublandlord is unable to deliver possession of the Sublease Premises at the commencement of the term, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable nor shall the term hereof be extended by such delay; provided, however, that Subtenant shall not be liable for rent until such time as Sublandlord offers to deliver possession of the Sublease Premises to Subtenant. Notwithstanding the foregoing, should the Premises be undelivered by January 15, 1999, then Subtenant shall have the right, but not the obligation, to terminate this Sublease Agreement and all deposits and prepaid rent shall be returned within five (5) business days.


4. USE

Subtenant shall use the Sublease Premises for GENERAL OFFICE USES AND for no other purpose.

5. RENTAL

(a) Subtenant shall pay to Sublandlord as rent for the Sublease Premises, in advance, on the first day of each calendar month of the term of this Sublease, without deduction, offset, prior written notice or demand; in lawful money of the United States, the sum of TEN THOUSAND FOUR HUNDRED EIGHTY AND NO/100 DOLLARS ($10,480.00). Of this sum, SEVEN THOUSAND TWO HUNDRED FIVE AND NO/100 DOLLARS ($7,205.00) shall be payable and subject to fixed increases of ONE HUNDRED SIXTY THREE AND 75/100 DOLLARS ($163.75) as defined in the attached rent schedule "I" (Addendum). Approximately THREE THOUSAND TWO HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($3,275.00) shall be applied to Subtenant's estimated pro-rata share of direct expenses as defined in Master Lease Paragraph 4, Sub-Paragraph (b), and reconciled with Sublandlord's annual reconciliation on a pro-rata basis. If the commencement and/or termination date is not the first day of the month, a prorated monthly installment shall be paid at the then current rate for the fractional month during which the Sublease commences and/or terminates.

(b) Sublandlord acknowledges receipt from Subtenant, on the execution hereof, the sum of TEN THOUSAND FOUR HUNDRED EIGHTY AND NO/100 DOLLARS ($10,480.00) to be applied against rent for the first full month of the term.

(c) Concurrently with Subtenant's execution of this Sublease, Subtenant shall deposit with Sublandlord the sum of ELEVEN THOUSAND AND NO/100 DOLLARS ($11,000.00) as a non-interest bearing security deposit for Subtenant's performance under this Sublease. In the event Subtenant has performed all of the terms and conditions of this Sublease throughout the term, the amount paid as security deposit shall be returned to Subtenant upon Subtenant vacating the Premises, after first deducting any sums owing to Sublandlord.

6. SURRENDER AT END OF TERM

Subtenant agrees to surrender the Sublease Premises on expiration or earlier termination of the term hereof, in good condition and repair, reasonable wear and tear excepted.

7. LANDLORD'S WRITTEN CONSENT

This Sublease is conditioned upon and effective only upon obtaining the written consent of Landlord.

8. NOTICES

All notices and demands of any kind required to be given by Sublandlord or Subtenant hereunder shall be in writing and effective twenty-four (24) hours after depositing same in the United States mail, postage prepaid, and addressed to Sublandlord or Subtenant, as the case may be, at the address set forth below their respective signature or at such other address as they may designate from time to time.

9. INSURANCE

Insurance requirements pertaining to Sublandlord as Tenant under paragraph 11 of the Master Lease shall also apply to Subtenant.


10. BROKER

Upon execution of this Sublease, Sublessor shall pay Wayne Mascia Associates, a licensed real estate broker, fees set forth in a separate agreement between Sublessor and Broker for brokerage services rendered by Broker to Sublessor in this transaction. Contingent on lease becoming effective.

SUBLANDLORD: SUBTENANT:

ASCII OF AMERICA, INC., COMMTOUCH, INC.,

a California corporation                a California   corporation

By: /s/ SADA CHIDAMBARAM                By: /s/ GIDEON MANTEL
    ------------------------------          -------------------------------

Name: Sada Chidambaram                  Name: Gideon Mantel
      ----------------------------            -----------------------------

Title: President                        Title: Chief Executive Officer
       ---------------------------             ----------------------------

Date: December 4, 1998                  Date: 12/1/98
      ----------------------------            -----------------------------


By:                                     By:
    ------------------------------          -------------------------------

Name:                                   Name:
      ----------------------------            -----------------------------

Title:                                  Title:
       ---------------------------             ----------------------------

Date:                                   Date:
      ----------------------------            -----------------------------

Address:                                Address:
        --------------------------              ---------------------------


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


ADDENDUM TO THE SUBLEASE DATED NOVEMBER 14, 1998 BY AND BETWEEN ASCII OF AMERICA, INC. AS SUBLESSOR, AND COMMTOUCH, INC., A CALIFORNIA CORPORATION AS SUBLESSEE FOR THE APPROXIMATELY 3,275 RENTABLE SQUARE FEET OF PROPERTY FURTHER DESCRIBED AS SUITE 730 AT 3945 FREEDOM CIRCLE, SANTA CLARA, CALIFORNIA.

I. RENTAL SCHEDULE*

      Period          Price/SF     Rent/Month
      ------          --------     ----------
01/01/99 - 06/30/99     $3.20      $10,480.00
07/01/99 - 06/30/00     $3.25      $10,643.75
07/01/00 - 06/30/01     $3.30      $10,807.50
07/01/01 - 06/30/02     $3.35      $10,971.25

* Lessee shall share any other expenses described in Master Lease on a pro rata basis.

II. CONDITION OF PREMISES

Sublessee shall take the space on an "as is" basis subject to the carpet being vacuumed and the space being left in a clean and tenantable condition.

III. OPTIONS TO EXPAND

Sublessee shall have two (2) options to expand into the adjoining Suite
740 (as shown on Exhibit A) of approximately 1,555 square feet during the term of the sublease at the same terms and conditions as the original transaction. The first option shall be exercisable on January 1, 2000 and if not exercised, the second option shall be exercisable on January 1, 2001. Options require Sublessee to notify Sublessor in writing at least 120 days prior to the exercise date. Both parties agree that these notices therefore must be dated October 1, 1999 and October 1, 2000 or prior.

IV. ADDITIONAL PARKING

Sublandlord hereby assigns its two additional underground parking cards to Subtenant, at Subtenant's sole cost.

V. FUNDING CONTINGENCY

This sublease is conditional upon Sublessee receiving additional funding of approximately $3M by December 24, 1998. Should funding not be received by this date, then Sublandlord shall have the right, but not the obligation, to terminate this agreement and all deposits, and prepaid rent shall be returned within five (5) business days.

[INIT]


APPROXIMATELY 3,275 RENTABLE SQUARE FEET
SUITE 730

EXHIBIT A

[SUITE 730 DIAGRAM]

Approx. 1,555 Sq. Ft. = Suite 740
Approx. 3,275 Sq. Ft.

[MAP]

o AVAILABLE NOW

o $3.20 PSF Fully Serviced

o Sublease Term through 6/30/02

o Longer Term Available Through Landlord

o Full Athletic Club

o Conference Facility

o Indoor Lap Pool and Jacuzzi

o Aerobics Classes

o Underground Parking

o Private Helipad

o 24-Hour Security

o On-Site Management

[INIT]


LANDLORD'S CONSENT TO SUBLEASE

THIS CONSENT ("Consent") is given by MCCANDLESS TOWERS, PHASE-I, ("Landlord") to that certain Sublease dated November 14th, 1998 (the "Sublease") by and between ASCII OF AMERICA, INC. a California corporation ("Sublandlord") and COMMTOUCH, INC., a California corporation ("Subtenant"), subject to the following terms and conditions:

1. All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Sublease.

2. Landlord is not a party to the Sublease and has no obligations or duties to Subtenant or Sublandlord under the Sublease and any provisions therein purporting to obligate and/or bind Landlord or limit Landlord's rights under the Master Lease in any way are deemed null and void. Notwithstanding any provision to the contrary in the Sublease, Subtenant shall have no greater rights than Sublandlord has as Tenant under the Master Lease.

3. This Consent shall only apply to this Sublease and shall not be deemed to be a consent to any other or further sublease or a waiver of any of the provisions of the Master Lease.

4. By consenting to the Sublease, Landlord waives none of its rights against the Sublandlord as Tenant under the Master Lease. The Sublease is and shall remain at all times subject to and subordinate in all respects to the Lease.

5. This Consent shall not modify or amend or be deemed to modify or amend the Lease in any way, or to impose on Landlord any obligation to provide notice to, or obtain consent from, Subtenant with respect to amendments, defaults, waivers or any other matters pertaining to the Master Lease or to the Premises covered by the Master Lease. Any waiver by Landlord of its rights shall be made only in writing and signed by Landlord.

6. Upon the expiration or earlier termination of the Master Lease, the Sublease shall automatically and without notice or demand, terminate and Subtenant agrees promptly to surrender the Sublease Premises to Landlord upon such termination without compensation from Landlord.

7. This Consent shall not be effective until receipt by Landlord of a counterpart or counterparts of this Consent duly executed by Sublandlord and Subtenant, each acknowledging its agreement to the terms and conditions specified in this Consent.


Landlord:

McCANDLESS TOWERS, PHASE-I
a California limited partnership

By: McCandless Group (MTI),
a California general partnership
a General Partner

By: /s/ BIRK S. MCCANDLESS
    -------------------------------
    Birk S. McCandless, as Trustee
    under the Birk S. McCandless
    and Mary McCandless Inter
    Vivos Trust Agreement dated
    February 17, 1982,
    a General Partner

EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGE THAT IT HAS READ AND UNDERSTANDS THE TERMS AND CONDITIONS SPECIFIED IN THE FOREGOING CONSENT AND AGREES TO ALL SUCH TERMS AND CONDITIONS.

SUBLANDLORD:                           SUBTENANT:

ASCII OF AMERICA, INC.                 COMMTOUCH, INC.
a California corporation               a California corporation


By: /s/ Sada Chidambaram               By:  /s/ Gideon Mantel
   ---------------------------              --------------------------
Name: Sada Chidambaram                 Name: Gideon Mantel
     -------------------------              --------------------------
Title: President                       Title: President
      ------------------------               -------------------------
Date: December 10, 1998                Date:
     -------------------------              --------------------------

By:                                    By:
   ---------------------------              --------------------------
Name:                                  Name:
     -------------------------              --------------------------
Title: Secretary                       Title: Secretary
      ------------------------               -------------------------
Date:                                  Date:
     -------------------------              --------------------------


EXHIBIT

McCANDLESS TOWERS, PHASE I

AND

ASCII OF AMERICA, INC.

LEASE


SUMMARY OF LEASE

MCCANDLESS TOWERS, PHASE I

1.   DATE OF LEASE:                      1/13/96

2.   LANDLORD:                           McCandless Towers, Phase I
                                         3945 Freedom Circle, Suite 640
                                         Santa Clara, California 95054

3.   TENANT:                             ASCII of America, Inc.,
                                         a California corporation

4.   PREMISES:                           3945 Freedom Circle, Suites 730 and 740
                                         Santa Clara, California 95054

5.   SQUARE FEET:                        4,830 sq. ft.

6.   PERMITTED USE:                      General office

7.   TERM:                               Five (5) years

     (a) SCHEDULED COMMENCEMENT DATE:    July 1, 1997

     (b) SCHEDULED EXPIRATION DATE:      June 30, 2002

8.   RENT:

     (a) BASIC RENT:                     $ 9,080.40 per month (Lease months 1-12) $2.75
                                         $ 9,321.90 per month (Lease months 13-24) $2.80
                                         $ 9,563.40 per month (Lease months 25-36) $2.85
                                         $ 9,804.90 per month (Lease months 37-48) $2.90
                                         $10,046.40 per month (Lease months 49-60) $2.95

     (b) TENANT'S ESTIMATED SHARE OF
         COMMON AREA CHARGES:            $ 4,202.10 per month

9.   SECURITY DEPOSIT:                   $14,248.50

10.  PARKING SPACES PROVIDED:            Seventeen (17)

11.  OTHER IMPORTANT PROVISIONS:         Tenant Improvement Allowance
                                         Early Access

THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE ATTACHED LEASE. IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL GOVERN.


TABLE OF CONTENTS

ITEM                                                       PAGE
----                                                       ----
1.   USE
2.   TERM
3.   POSSESSION
4.   MONTHLY RENT
5.   ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
6.   RESTRICTION ON USE
7.   COMPLIANCE WITH LAWS
8.   ALTERATIONS
9.   REPAIR AND MAINTENANCE
10.  LIENS
11.  INSURANCE
12.  UTILITIES AND SERVICE
13.  TAXES AND OTHER CHARGES
14.  ENTRY BY LANDLORD
15.  COMMON AREA; PARKING
16.  DAMAGE BY FIRE; CASUALTY
17.  INDEMNIFICATION
18.  ASSIGNMENT AND SUBLETTING
19.  DEFAULT
20.  LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
21.  EMINENT DOMAIN
22.  NOTICE AND COVENANT TO SURRENDER
23.  TENANT'S QUITCLAIM
24.  HOLDING OVER
25.  SUBORDINATION
26.  CERTIFICATE OF ESTOPPEL
27.  SALE BY LANDLORD
28.  ATTORNMENT TO LENDER OR THIRD PARTY
29.  DEFAULT BY LANDLORD
30.  CONSTRUCTION CHANGES
31.  MEASUREMENT OF PREMISES
32.  ATTORNEY FEES
33.  SURRENDER
34.  WAIVER
35.  EASEMENTS; AIRSPACE RIGHTS
36.  RULES AND REGULATIONS
37.  NOTICES
38.  NAME
39.  GOVERNING LAW; SEVERABILITY
40.  DEFINITIONS
41.  TIME
42.  INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
43.  ENTIRE AGREEMENT
44.  CORPORATE AUTHORITY
45.  RECORDING
46.  REAL ESTATE BROKERS
47.  EXHIBITS AND ATTACHMENTS
48.  ENVIRONMENTAL MATTERS
49.  SIGNAGE
50.  SUBMISSION OF LEASE
51.  PREMISES TAKEN "AS IS"
52.  ADDITIONAL RENT
53.  LANDLORD'S OPTION TO RELOCATE PREMISES
54.  TENANT IMPROVEMENT ALLOWANCE
55.  EARLY ACCESS


McCANDLESS TOWERS
OFFICE LEASE

THIS LEASE is made this 13th day of January, 1996 by and between McCANDLESS TOWERS, PHASE I, a California limited partnership ("Landlord"), and ASCII OF AMERICA, INC., a California corporation ("Tenant").

W I T N E S S E T H :

Landlord leases to Tenant and Tenant leases from Landlord those certain premises outlined in red on Exhibit A (the "Premises"), which Premises are commonly known as 3945 Freedom Circle, Suites 730 and 740, Santa Clara, California and, which Landlord and Tenant hereby agree consists of approximately four thousand eight hundred thirty (4,830) square feet on the seventh floor. As used herein the term "Project" shall mean and include all of the land as outlined in red on Exhibit B and all the buildings, improvements, fixtures and equipment now or hereafter situated on said land.

Tenant covenants, as a material part of the consideration of this lease, to perform and observe each and all of the terms, covenants and conditions set forth below, and this lease is made upon the condition of such performance and observance.

1. USE. Subject to the restrictions contained in paragraph 6, Tenant shall use the Premises for general office use and shall not use or permit the Premises to be used for any other purpose.

2. TERM. The term shall be for five (5) years and, subject to paragraph 3, shall commence on the date (the "Lease Commencement Date") that is the later of (i) July 1, 1997 or (ii) twenty-one (21) days after the date that Landlord is able to permit Tenant early occupancy as provided in paragraph 55 of this lease and shall terminate five (5) years after the Lease Commencement Date.

3. POSSESSION
(a) If Landlord for any reason cannot deliver possession of the Premises to Tenant by the scheduled commencement date set forth in paragraph 2, this lease shall not be void or voidable, Landlord shall not be liable to Tenant for any loss or damage on account thereof and Tenant shall not be liable for rent until Landlord delivers possession of the Premises to Tenant. The expiration date of the term shall be extended by the same number of days that Tenant's possession of the Premises was delayed from that set forth in paragraph 2. If the term commences on a date other than specified in paragraph 2 above, then the parties shall immediately execute an amendment to this lease stating the actual date of commencement and the revised expiration date.

(b) Tenant's inability or failure to take possession of the Premises when delivery is tendered by Landlord shall not delay the commencement of the term of this lease or Tenant's obligation to pay rent. Tenant acknowledges that Landlord shall incur significant expenses upon the execution of this lease, even if Tenant never takes possession of the Premises, including without limitation brokerage commissions and fees, legal fees and other professional fees. Tenant acknowledges that all of said expenses shall be included in measuring Landlord's damages should Tenant breach the terms of this lease.

4. MONTHLY RENT
(a) Basic Rent. Tenant shall pay to Landlord as basic rent for the premises, in advance and subject to adjustment as provided in paragraph 5, the sum of Nine Thousand Eighty and 40/100 Dollars ($9,080.40) on or before the first day of the first full calendar month of the term and on or before the first day of each and every successive calendar month. Basic rent for any partial month shall be payable in advance and shall be prorated based on the actual number of days during the lease term occurring in such month divided by the total number of days in such month.

(b) Direct Expenses. In addition to the above basic rent Tenant shall pay to Landlord as additional rent, subject to adjustment and reconciliation as provided in paragraph 5(b) of this lease, the sum of Four Thousand Two Hundred Two and 10/100 Dollars ($4,202.10) on or before the first day of the first full calendar month of the term and on the first day of each and every successive calendar month, said sum representing Tenant's estimated payment of its proportionate share of direct expenses as provided for in paragraph 5(b) to this lease. Payment for direct expenses for any partial month shall be payable in advance and shall be prorated based on the actual number of days during he lease term occurring in each month divided by the total number of days in such month.

(c) Manner and Place of Payment. All payments of basic rent and direct expenses shall be paid to Landlord, without deduction or offset, in lawful money of the United States of America, at the office of Landlord at 3945 Freedom Circle, Suite 640, Santa Clara, California, 95054, or to such other person or place as Landlord may from time to time designate in writing.

1

(d) First Month's Rent. Concurrently with Tenant's execution of this lease, Tenant shall deposit with Landlord the sum of Thirteen Thousand Two Hundred Eighty-two and 50/100 Dollars ($13,282.50) to be applied against the basic rent and direct expenses for the first lease month of the term.

(e) Security Deposit. Concurrently with Tenant's execution of this lease, Tenant shall deposit with Landlord the sum of Fourteen Thousand Two Hundred Forty-Eight and 50/100 Dollars ($14,246.50), which sum shall be held by Landlord as a security deposit for the faithful performance by Tenant of all of the terms, covenants and conditions of this lease to be kept and performed by Tenant. If defaults with respect to any provision of this lease, including but not limited to the provisions relating to the payment of basic rent and direct expenses, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used, Tenant shall, within ten
(10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the security deposit to its original amount; Tenant's failure to do so shall be a material breach of this lease.

Landlord shall not be required to keep this security deposit separate from its general funds and Tenant shall not be entitled to interest on such deposit. If Tenant is not in default at the expiration or termination of this lease, the security deposit or any balance thereof shall be returned to Tenant after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this lease, Landlord shall transfer said deposit to Landlord's successor in interest, and Tenant agrees that Landlord shall thereupon be released from liability for the return of such deposit or any accounting therefor.

5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES

(a) Adjustments to Basic Rent

The basic rent provided for in paragraph 4(a) shall be adjusted periodically and the monthly basic rent for each period shall be as set forth below:

Lease months 1-12        $ 9,080.40 per month

Lease months 13-24       $ 9,321.90 per month

Lease months 25-36       $ 9,563.40 per month

Lease months 37-48       $ 9,804.90 per month

Lease months 49-60       $10,046.40 per month

(b) Adjustments to Direct Expenses. Tenant's proportionate share of direct expenses shall be two and forty-eight one-hundredths percent (2.48%) of all direct expenses as defined below.

Tenant shall be required to pay to Landlord, as additional rent in accordance with paragraph 4(b) of this lease, Tenant's proportionate share of direct expenses for each calendar year (or portion thereof) during the term of this lease. Tenant's estimated share of the monthly direct expenses payable by Tenant during the calendar year in which the term commences is set forth in paragraph 4(b) of this lease. A written estimate of Tenant's monthly share of direct expenses for each succeeding calendar year shall be delivered to Tenant prior to the commencement of each such succeeding calendar year (or as soon as practicable thereafter). Tenant shall pay to Landlord in accordance with paragraph 4(b) of this lease its monthly share of direct expenses as estimated by Landlord. Landlord reserves the right to revise such written estimate during a calendar year if Landlord's actual or projected direct expenses shows an increase or decrease in excess of ten percent (10%) from that of an earlier written estimate delivered to Tenant, and if Landlord elects to revise the earlier estimate, Landlord shall deliver the revised estimate to Tenant, together with an explanation of the reasons therefor, and Tenant shall revise its payments accordingly. Statements of the actual direct expenses for the calendar year in which the term commences and for each succeeding calendar year (herein called "statement of actual direct expenses") shall be delivered to Tenant within one hundred twenty (120) days following the expiration of each such calendar year (or as soon as practicable thereafter). If the statement of actual direct expenses for any such calendar year shows that Tenant's proportionate share of actual direct expenses for the year is in excess of the aggregate amount Tenant has paid as direct expenses for that calendar year, Tenant shall pay such excess to Landlord within ten (10) days after receipt of the statement of actual direct expenses. If Tenant fails to pay such excess amount due within said ten (10) day period, Tenant shall pay an additional ten percent (10%) of the amount due as a penalty. In the event that any statement of actual direct expenses shall show that Tenant has paid Landlord an aggregate amount in excess of the actual direct expenses for the preceding calendar year and Tenant is not in default in the performance or observance of any of the terms, covenants or conditions of this lease at the time such statement of actual direct expenses is delivered, Landlord shall, at its option, promptly either refund such excess to Tenant or credit the amount thereof to the monthly direct expenses next becoming due from Tenant. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of this lease.

As used in this lease, "direct expenses" shall include, but not be limited to, (i) real property taxes, assessments, and other costs identified as direct expenses in paragraph 13; (ii) insurance premiums and other costs identified as direct expenses in paragraph 11, (iii) the cost of all utilities and services including water, gas and sewer charges, electricity, heat, air conditioning, refuse collection, and janitorial services identified as direct expenses in paragraph 12; (iv) the costs of operating and maintaining the Common Area identified as direct expenses in paragraph 15, including, but not limited to, the landscaping, elevators, parking lots, paving, sidewalks, health club facilities (including the pool, spa, showers, locker rooms, exercise rooms and exercise equipment) and security and exterminator services; (v) the costs and expenses of maintaining and repairing the Project identified as direct expenses in paragraph 9, including, but not limited to, mechanical, electrical, plumbing, and sewage systems, windows, glazing, gutters, downspouts, heating

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and ventilating and air conditioning systems, walls, floorcoverings and the cost of maintenance contracts and supplies, materials, equipment and tools used in connection therewith; (vi) the cost of alterations identified as direct expenses in paragraph 8; (vii) amortization of such capital improvements having a useful life greater than one year as Landlord may have installed for the purpose of reducing operating costs and/or to comply with all laws, rules and regulations of federal, state, county, municipal and other governmental authorities now or hereafter in effect (Tenant's share of such capital improvement shall equal Tenant's proportionate share of the fraction of the cost of such capital improvement equal to the remaining term of the lease over the useful life of such capital improvement); (viii) wages, salaries, employee benefits (including union benefits) and related expenses of all on-site and off-site personnel directly engaged in the operation, management and maintenance of the Project (or the building in which the Premises are located), payroll taxes applicable thereto and all costs incurred to maintain a management office in or near the Project (including, without limitation, rental payments therefor or the reasonable rental value of the space so occupied); (ix) a management cost recovery as determined by Landlord equal to three percent (3%) of the sum of the basic rent and the aggregate of all other direct expenses for the Project; (x) supplies, materials, equipment and tools used or required in connection with the operation and maintenance of the Project; (xi) licenses, permits and inspection fees; (xii) a reasonable reserve for repairs and replacement of equipment used in the maintenance and operation of the Project; and (xiii) all other costs which Landlord shall pay or become obligated to pay because of or in connection with the ownership, maintenance and operation of the Project and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary to the Project; provided, however, that direct expenses shall not include any such costs or expenses to the extent they are billed or metered directly to Birk's Restaurant, (or, if not separately billed or metered, the extent they contribute to the restaurant's allocable share of such costs and expenses, as determined by Landlord). Notwithstanding anything above to the contrary, direct expenses shall not include leasing commissions paid to any real estate broker, salesman or agent.

6. RESTRICTION ON USE. Tenant shall not do or permit to be done in or about the Premises or the Project, nor bring or keep or permit to be brought or kept in or about the Premises or Project, anything which is prohibited by or will in any way increase the existing rate of, or otherwise affect, fire or any other insurance covering the Project or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Project or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in or about the Premises or the Project which will constitute waste or which will in any way obstruct or interfere with the rights of other tenants or occupants of the Project or injure or annoy them, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance on or about the Premises or the Project. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not use the Premises for sleeping, washing clothes, cooking or in any manner that will cause or emit any objectionable odor, noise or light into the adjoining premises or Common Area. Tenant shall not do anything on the Premises that will cause damage to the Project and Tenant shall not overload the floor capacity of the Premises or the Project. No machinery, apparatus or other appliance shall be used or operated in or on the Premises that will in any manner injure, vibrate or shake the Premises. Landlord shall be the sole judge of whether such odor, noise, light or vibration are such as to violate the provisions of this paragraph 6. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or the Project except in trash containers placed inside exterior enclosures designated for that purpose by Landlord, or where otherwise designated by Landlord; and no toxic or hazardous materials shall be disposed of through the plumbing or sewage system. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored or permitted to remain outside of the building proper. No retail sales shall be made on the Premises.

7. COMPLIANCE WITH LAWS. Tenant shall, in connection with its use and occupation of the Premises, at its sole cost and expense, promptly observe and comply with (i) all laws, statutes, ordinances and governmental rules, regulations and requirements of federal, state, county, municipal and other governmental authorities, now or hereafter in effect, which shall impose any duty upon Landlord or Tenant with respect to the use, occupancy or alteration of the Premises, (ii) with the requirements of any board of fire underwriters or other similar body now or hereafter constituted and (iii) with any direction or occupancy certificate issued pursuant to law by any public authority; provided, however, that no such failure shall be deemed a breach of those provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant (whether or not Landlord is a party thereto), that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This lease shall remain in full force and effect notwithstanding any loss of use or other effect on Tenant's enjoyment of the Premises by reason of any governmental laws, statutes, ordinances, rules, regulations and requirements now or hereafter in effect.

8. ALTERATIONS. Tenant shall not make or suffer to be made any alteration, addition or improvement to or of the Premises or any part thereof (collectively referred to herein as "alterations") without (i) the prior written consent of Landlord, (ii) a valid building permit issued by the appropriate governmental authority and (iii) otherwise complying with all applicable laws, regulations and requirements of governmental agencies having jurisdiction and with the rules, regulations and requirements of any board of fire underwriters or similar body. Landlord's consent to any alteration shall not create on the part of Landlord or cause Landlord to incur any responsibility or liability for such alteration's compliance with all laws, rules and regulations of federal, state, county, municipal and other governmental authorities. Any alteration made by Tenant (excluding moveable furniture and trade fixtures not attached to the Premises) shall at once become a part of the Premises and belong to Landlord. Without limiting the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery, window covering and carpet installations made by Tenant, regardless of how attached to the Premises, shall be and become part of the Premises and belong to Landlord upon installation and shall not be deemed trade fixtures and, subject to Landlord's right to require removal and restoration as specified herein, shall remain upon and be surrendered with the Premises at the termination of the lease.

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If Landlord consents to the making of any alteration by Tenant, the same shall be made by Tenant at its sole risk, cost and expense and only after Landlord's written approval of any contractor or person selected by Tenant for that purpose, and the same shall be made at such time and in such manner as Landlord may from time to time designate. Tenant shall, if required by Landlord, secure at Tenant's cost a completion and lien indemnity bond for such work. Upon the expiration or sooner termination of the term, Landlord may, at its sole option, require Tenant, at Tenant's sole cost and expense, to promptly remove any such alteration made by Tenant and designated by Landlord to be removed, repair any damage to the Premises caused by such removal and restore the Premises to their condition prior to Tenant's alteration. Any moveable furniture and equipment or trade fixtures remaining on the Premises at the expiration or other termination of the term shall become the property of the Landlord; provided, however, in addition to all other remedies available to Landlord at law or in equity, Landlord may (i) require Tenant to remove same or
(ii) remove same at Tenant's cost, and Tenant shall be liable to Landlord for all damages incurred by Landlord related thereto.

If during the term any alteration, addition or change of the Premises is required by law, regulation, ordinance or order of any public authority, Tenant, at its sole cost and expense, shall promptly make the same. If during the term any alterations, additions or changes to the Common Area or to the Project in which the Premises is located is required by law, regulation, ordinance or order of any public or quasi-public authority, and it is impractical, in Landlord's judgment, for the affected Tenants to individually make such alterations, additions or changes Landlord shall make such alterations, additions or changes and the cost thereof shall be a direct expense and Tenant shall pay its percentage share of such cost to Landlord as provided in paragraphs 4 and 5.

9. REPAIR AND MAINTENANCE. Subject to paragraph 16, Landlord shall maintain and keep in good repair the Common Area, as defined in paragraph 40, and the mechanical, electrical, plumbing and sewage systems, windows, window frames, plate glass glazing, elevators, gutters and downspouts, structural elements and the heating, ventilating and air conditioning systems (excepting special air conditioning of Tenant's computer room(s) as set forth below); provided, however, that Landlord shall not be required to perform repairs made necessary by the negligence or abuse of such improvements or property by Tenant or its employees, agents, subtenants or permittees. The cost of all maintenance and repairs made by Landlord pursuant to this paragraph 9, including without limitation maintenance contracts and supplies, materials, equipment and tools used in such repairs and maintenance, shall be direct expenses and Tenant shall pay its percentage share of such cost to Landlord as provided in paragraphs 4 and 5.

By entry hereunder Tenant accepts the Premises and being in good and sanitary order, condition and repair. Subject to paragraphs 16 and 21, and excepting repairs and maintenance required by this paragraph 9 to be made by Landlord, Tenant at its cost shall keep the Premises and every part thereof in good and sanitary order, condition and repair, and Tenant shall be solely responsible for the cost and maintenance of, and electricity supplied to, any special air conditioning for Tenant's computer facilities. Further, Tenant shall repair (or, at the option of Landlord, reimburse Landlord if Landlord elects to repair) damage to improvements or other property located on or about the Project where such repairs are made necessary by the negligence of, or abuse of such improvement or other property by, Tenant or its employees, agents, subtenants or permittees. Tenant waives all rights and benefits under California Civil Code Sections 1932(1), 1941, and 1942 and under any similar law, statute or ordinance now or hereafter in effect.

10. LIENS. Tenant shall keep the Premises and the Project free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant, its agents, employees or contractors. Upon Tenant's receipt of a preliminary twenty (20) day notice filed by a claimant pursuant to California Civil code Section 3097, Tenant shall immediately provide Landlord with a copy of such notice. Should any lien be recorded against the Project, Tenant shall give immediate notice of such lien to Landlord. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purposes and all expenses (including attorney fees) incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the rate of twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper for the protection of Landlord, the Premises and the Project and any other party having an interest therein, from mechanics' and materialmen's liens and like liens. Tenant shall give Landlord at least fifteen (15) days' prior notice of the date of commencement of any construction on the Premises in order to permit the posting of such notices. In the event Tenant is required to post an improvement bond with a public agency in connection with any work performed by Tenant on or to the Premises, Tenant shall include Landlord as an additional obligee.

11. INSURANCE. Tenant, at its sole cost and expense, shall keep in force during the term (i) commercial general liability and property damage insurance with a combined single limit of at least $2,000,000 per occurrence insuring against personal or bodily injury to or death of persons occurring in, on or about the Premises or Project and any and all liability of the insureds with respect to the Premises or arising out of Tenant's maintenance, use or occupancy of the Premises and all areas appurtenant thereto, (ii) direct physical loss-special insurance covering the leasehold improvements in the Premises and all of Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and personal property from time to time located in, on or about the Premises, with coverage in the amount of the full replacement cost thereof, and (iii) Worker's Compensation Insurance as required by law, together with employer's liability coverage with a limit of not less than $1,000,000 for bodily injury for each accident and for bodily injury by disease for each employee. Tenant's commercial general liability and property damage insurance and Tenant's Workers Compensation Insurance shall be endorsed to provide that said insurance shall not be cancelled or reduced except upon at least thirty
(30) days prior written notice to Landlord. Further, Tenant's commercial general liability and property damage insurance shall be primary and shall be endorsed to provide that Landlord and McCandless Management Corporation, and their respective partners, officers, directors and employees and such other persons or entities as directed from time to time by Landlord shall be named as additional insureds for all liability using ISO Bureau Form

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CG20111185 (or a successor form) or such other endorsement form reasonably acceptable to Landlord; shall contain a severability of interest clause and a cross-liability endorsement; shall be endorsed to provide that the limits and aggregate apply per location using ISO Bureau Form CG25041185 (or a successor form) or such other endorsement form reasonably acceptable to Landlord; and shall be issued by an insurance company admitted to transact business in the State of California and rated A+VIII or better in Best's Insurance Reports (or successor report). The deductibles for all insurance required to be maintained by Tenant hereunder shall be satisfactory to Landlord. The commercial general liability insurance carried by Tenant shall specifically insure the performance by Tenant of the indemnification provisions set forth in paragraph 17 of this lease provided, however, nothing contained in this paragraph 11 shall be construed to limit the liability of Tenant under the indemnification provisions set forth in said paragraph 17. If Landlord or any of the additional insureds named on any of Tenant's insurance, have other insurance which is applicable to the covered loss on a contributing, excess or contingent basis, the amount of the Tenant's insurance company's liability under the policy of insurance maintained by Tenant shall not be reduced by the existence of such other insurance. Any insurance carried by Landlord or any of the additional insureds named on Tenant's insurance policies shall be excess and non-contributing with the insurance so provided by Tenant.

Tenant shall, prior to the commencement of the term and at least thirty (30) days prior to any renewal date of any insurance policy required to be maintained by Tenant pursuant to this paragraph, provide Landlord with a completed Certificate of Insurance, using a form acceptable in Landlord's reasonable judgment, attaching thereto copies of all endorsements required to be provided by Tenant under this lease. Tenant agrees to increase the coverage or otherwise comply with changes in connection with said commercial general liability, property damage, direct physical loss and Worker's Compensation Insurance as Landlord or Landlord's lender may from time to time require.

Landlord shall obtain and keep in force a policy of policies of insurance covering loss or damage to the Premises and Project, in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risk" insurance, with increased cost of reconstruction and contingent liability (including demolition), plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months' rent (including sums paid as additional rent) and such other insurance as Landlord or Landlord's lender may from time to time require. Landlord may, but shall not be obligated to, obtain flood and/or earthquake insurance. Landlord shall have no liability to Tenant if Landlord elects not to obtain flood and/or earthquake insurance. The cost of all such insurance purchased by Landlord, plus any charges for deferred payment of premiums and the amount of any deductible incurred upon any covered loss within the Project, shall be direct expenses and Tenant shall pay to Landlord its percentage share of such costs as provided in paragraphs 4(b) and 5(b). If the cost of insurance is increased due to Tenant's use of the Premises, then Tenant shall pay to Landlord upon demand the full cost of such increase.

Landlord and Tenant hereby mutually waive any and all rights of recovery against one another for real property loss or damage occurring to the Premises or the Project, or any part thereof, or to any personal property therein, from perils insured against under fire and extended insurance and any other property insurance policies existing for the benefit of the respective parties so long as such insurance permits waiver of liability and contains a waiver of subrogation without additional premiums.

If Tenant does not take out and maintain insurance as required pursuant to this paragraph 11, Landlord may, but shall not be obligated to, take out the necessary insurance and pay the premium therefor, and Tenant shall repay to Landlord promptly on demand, as additional rent, the amount so paid. In addition, Landlord may recover from Tenant and Tenant agrees to pay, as additional rent, any and all reasonable expenses (including attorney fees) and damages which Landlord may sustain by reason of the failure of Tenant to obtain and maintain such insurance, it being expressly declared that the expenses and damages of Landlord shall not be limited to the amount of the premiums thereon.

12. UTILITIES AND SERVICE. Landlord shall furnish to the Premises and to the Project, during reasonable hours on generally recognized business days, to be determined by Landlord, and subject to the rules and regulations of the Project, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and the Project, heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises and the Project, and refuse collection and janitorial services. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the heating, ventilating and air conditioning systems. The cost of all utilities and services furnished by Landlord to the Premises and to the Project pursuant to this paragraph 12 shall be direct expenses and Tenant shall pay its percentage share of such costs to Landlord as provided in paragraphs 4 and 5.

Landlord shall not be liable for, and Tenant shall not be entitled to any abatement or reduction of rent by reason of, Landlord's failure to furnish any of the foregoing services when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, governmental moratoriums, regulations or other governmental actions, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. In addition, Tenant shall not be relieved from the performance of any covenant or agreement in this lease because of any such failure, and no eviction of Tenant shall result from such failure.

Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation, electronic data processing machines, punch card machines or machines using current in excess of 110 volts) which will in any way increase the amount of electricity, water or air conditioning usually furnished or supplied to Premises in the Project being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises) or with water pipes any apparatus or device for the purpose of using electric current or water. If Tenant shall require water or electric current in excess of that usually furnished or supplied to premises in the Project being used as general office space, then Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld, and Tenant shall pay to Landlord promptly on demand the full cost of such excess use.

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Landlord may cause an electric current or water meter to be installed in the Premises in order to measure the amount of electric current or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof, and all charges for such excess water and electric current consumed (as shown by meters and at the rates then charged by the furnishing public utility) plus any additional expense incurred by Landlord in keeping account of electric current or water so consumed, shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. Whenever heat-generating machines or equipment are used in the Premises by Tenant which affect the temperature otherwise maintained, supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord, as additional rent, upon demand by Landlord.

13. TAXES AND OTHER CHARGES. All real estate taxes and assessments and other taxes, fees and charges of every kind or nature, foreseen or unforeseen, which are levied, assessed or imposed upon Landlord and/or against the Premises, building, Common Area or Project or any part thereof by any federal, state, county, regional, municipal or other governmental or quasi-governmental or special district authority, together with any increases therein whether resulting from increased rate and/or valuation, shall be a direct expense and Tenant shall pay its percentage share of such costs to Landlord as provided in paragraphs 4 and 5. By way of illustration and not limitation, "other taxes, fees and charges" as used herein include any and all taxes payable by Landlord (other than state and federal personal or corporate income taxes measured by the net income of Landlord from all sources, premium taxes, and Landlord's franchise, estate, inheritance and gift taxes), whether or not now customary or within the contemplation of the parties hereto, (i) upon, allocable to, or measured by the rent payable hereunder, including, without limitation, any gross income or excise tax levied by the local, state or federal government with respect to the receipt of such rent, (ii) upon or with respect to the possession, leading, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any part thereof, (iii) upon or measured by the value of Tenant's personal property or leasehold improvements located in the Premises, (iv) upon this transaction or any document to which Tenant is a party creating or transferring an interest or estate in the Premises, (v) upon or with respect to vehicles, parking or the number of persons employed in or about the Project, and (vi) any tax, license, franchise fee or other imposition upon Landlord which is otherwise measured by or based in whole or in part upon the Project or any portion thereof. If Landlord contests any such tax, fee or charge, the cost and expense incurred by Landlord thereby (including, but not limited to, costs of attorneys and experts) shall also be direct expenses and Tenant shall pay its percentage share of such costs to Landlord as provided in paragraph 4 and 5.

In the event the Premises and any improvements installed therein by Tenant or Landlord are valued by the assessor disproportionately higher than those of other tenants in the building or Project or in the event alterations or improvements are made to the Premises, Tenant's percentage share of such taxes, assessments, fees and/or charges shall be readjusted upward accordingly and Tenant agrees to pay such readjusted share. Such determination shall be made by Landlord from the respective valuation assigned in the assessor's work sheet or such other information as may be reasonably available and Landlord's determination thereof shall be conclusive.

Tenant agrees to pay, before delinquency, any and all taxes levied or assessed during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property located in the Premises, including carpeting and other property installed by Tenant notwithstanding that such carpeting or other property has become a part of the Premises. If any of Tenant's personal property shall be assessed with the Project, Tenant shall pay to Landlord, as additional rent, the amounts attributable to Tenant's personal property within ten (10) days after receipt of a written statement from Landlord setting forth the amount of such taxes, assessments and public charges attributable to Tenant's personal property.

14. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times have, the right to enter the premises (i) to inspect the Premises, (ii) to supply services to be provided by Landlord hereunder, (iii) to show the Premises with reasonable advance notice of not less than 24 hours to prospective purchasers, lenders or tenants and to put "for sale" or "for lease" signs thereon, (iv) to post notice required or allowed by this lease or by law, (v) to alter, improve or repair the Premises and any portion of the Project, and (vi) to erect scaffolding and other necessary structures in or through the Premises or the Project where reasonably required by the character of the work to be performed. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance or other damage arising from Landlord's entry and acts pursuant to this paragraph 14 and Tenant shall not be entitled to an abatement or reduction of rent if Landlord exercises any rights reserved in this paragraph 14. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, on and about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance), and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry by Landlord to the Premises pursuant to this paragraph 14 shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof.

15. COMMON AREA; PARKING. Subject to the terms and conditions of this lease and such rules and regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees and invitees shall, in common with other occupants of the Project and their respective employees and invitees and others entitled to the use thereof, have the nonexclusive right to use those areas of the Common Area provided and designated by Landlord for the general use and convenience of the occupants of the Project (which areas and facilities shall include but not be limited to common lobbies, corridors, restrooms and showers, telephone, electrical, janitorial and mechanical rooms, elevators, stairwells, vertical duct shafts, sidewalks, parking, refuse, landscaping and place areas, roofs, building exteriors, electrical, mechanical and HVAC systems, and storage areas, which areas are referred to herein as "common area". This right shall terminate upon the termination of this lease.

Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of the Common Area. Landlord shall also have the right at any time to change the name, number

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or designation by which the Project is commonly known. Landlord further reserves the right to promulgate such rules and regulations relating to the use of the Common Area, and any part thereof, as Landlord may deem appropriate for the best interests of the occupants of the Project. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by them and cooperate in their observance. Such rules and regulations may be amended by Landlord from time to time, with or without advance notice.

Tenant shall have the nonexclusive use of seventeen (17) parking spaces (8 on the plaza level and 9 on the lower level) in the Common Area as designated from time to time by Landlord. Landlord reserves the right at its sole option to assign and label parking spaces, but it is specifically agreed that Landlord is not responsible for policing any such parking spaces. Tenant shall not at any time park or permit the parking of Tenant's trucks or other vehicles, or the trucks or other vehicles of others, adjacent to loading areas so as to interfere in any way with the use of such areas; nor shall Tenant at any time park or permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or others, in any portion of the Common Area not designated by Landlord for such use by Tenant. Tenant shall not park or permit any inoperative vehicle or equipment to be parked on any portion of the Common Area.

Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be operated, managed and maintained and the expenditures for such operation, management and maintenance shall be at the sole discretion of Landlord. The cost of such maintenance, operation and management of the Common Area, together with the costs of security and exterminator services and salaries and employee benefits (including union benefits) of on-site and accounting personnel engaged in such maintenance and operations management, shall be a direct expense and Tenant shall pay to Landlord its percentage share of such cost as provided in paragraphs 4 and 5.

16. DAMAGE BY FIRE; CASUALTY. In the event the Premises are damaged by any casualty which is covered under an insurance policy required to be maintained by Landlord pursuant to paragraph 11, Landlord shall be entitled to the use of all insurance proceeds and shall repair such damage as soon as reasonably possible and this lease shall continue in full force and effect.

In the event the Premises are damaged by any casualty not covered under an insurance policy required to be maintained pursuant to paragraph 11, Landlord may, at Landlord's option, either (1) repair such damage, at Landlord's expense, as soon as reasonably possible, in which event this lease shall continue in full force and effect, or (ii) give written notice to Tenant within thirty (30) days after the date of the occurrence of such damages of Landlord's intention to cancel and terminate this lease as of the date of the occurrence of the damages; provided, however, that if such damage is caused by an act or omission by Tenant or its agent, servants or employees, then Tenant shall repair such damage promptly at its sole cost and expense. In the event Landlord elects to terminate this lease pursuant hereto, Tenant shall have the right within ten (10) days after receipt of the required notice to notify Landlord in writing of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event this lease shall continue in full force and effect and Tenant shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such notice within the ten (10) day period, this lease shall be cancelled and terminated as of the date of the occurrence of such damage. Under no circumstances shall Landlord be required to repair any injury or damage to (by fire or other cause), or to make any restoration or replacement of, any of Tenant's personal property, trade fixtures or property leased from third parties, whether or not the same is attached to the Premises.

If the Premises are totally destroyed during the term from any cause (including any destruction required by any authorized public authority), whether or not covered by the insurance required under paragraph 11, this lease shall automatically terminate as of the date of such total destruction; provided, however, that if the Premises can reasonably and lawfully be repaired or restored within twelve (12) months of the date of destruction to substantially the condition existing prior to such destruction and if the proceeds of the insurance payable to the Landlord by reason of such destruction are sufficient to pay the cost of such repair or restoration, then the said insurance proceeds shall be so applied, Landlord shall promptly repair and restore the Premises and this lease shall continue, without interruption, in full force and effect. If the Premises are totally destroyed during the last twelve (12) months of the term, Landlord may at Landlord's option cancel and terminate this lease as of the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within thirty (30) days after the occurrence of such damage.

If the Premises are partially or totally destroyed or damaged and Landlord or Tenant repair them pursuant to this lease, the rent payable hereunder for the period during which such damage and repair continues shall be abated only in proportion to the square footage of the Premises rendered untenantable to Tenant by such damage or destruction. Tenant shall have no claim against Landlord for any damage, loss or expense suffered by reason of any such damage, destruction, repair or restoration. The parties waive the provisions of California Civil Code Sections 1932(2) and 1933(4) (which provisions permit the termination of a lease upon destruction of the leased premises), and hereby agree that the provisions of this paragraph 16 shall govern in the event of such destruction.

17. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person to or destruction of property in or about the Premises or the Project by or from any cause whatsoever except the failure of Landlord to perform its obligations under the lease where such failure has persisted for an unreasonable period of time after notice of such failure. Without limiting the foregoing, Landlord shall not be liable to Tenant for any injury to or death of any person or damages to or destruction of property by reason of, or arising from, any latent defect in the Premises or Project or the act or negligence of any other tenant of the Project. Tenant shall immediately notify Landlord of any defect in the Premises or Project.

Except as to injury to persons or damage to property the principal cause of which is the failure by Landlord to observe any of the terms and conditions of this lease, Tenant shall hold Landlord

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harmless from and indemnify and defend Landlord against any claim, liability, loss, damage or expense (including attorney fees) arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises from any cause whatsoever or on account of the use, condition, occupational safety or occupancy of the Premises. Tenant shall further hold Landlord harmless from and indemnify and defend Landlord against any claim, liability, loss, damage or expense (including attorney fees) arising
(i) from Tenant's use of the Premises or from the conduct of its business or from any activity or work done, permitted or suffered by Tenant or its agents or employees in or about the Premises or Project, (ii) out of the failure of Tenant to observe or comply with Tenant's obligation to observe and comply with laws or other requirements as set forth in paragraph 7, (iii) by reason of Tenant's use, handling, storage, or disposal of toxic or hazardous materials or waste, (iv) by reason of any labor or service performed for, or materials used by or furnished to, Tenant or any contractor engaged by Tenant with respect to the Premises, or (v) from any other act, neglect, fault or omission of Tenant or its agents or employees.

The provisions of this paragraph 17 shall survive the expiration or earlier termination of this lease.

18. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily assign, encumber or otherwise transfer its interest in this lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld, and otherwise complying with the requirements of this paragraph 18. Any assignment, encumbrance or sublease without Landlord's consent, shall constitute a default.

If Tenant desires to sublet or assign all or any portion of the Premises, Tenant shall give Landlord written notice thereof, specifying the projected commencement date of the proposed sublet or assignment (which date shall be not less than thirty (30) days or more than ninety (90) days after the date of Landlord's receipt of such notice), the portions of the Premises proposed to be sublet or assigned, the terms and conditions of the proposed assignment or sublease (including the rent to be paid by the proposed assignee or subtenant) and the name, address and telephone number of the proposed assignee or subtenant. Tenant shall further provide Landlord with such other information concerning the proposed assignee or subtenant, as requested by Landlord. For a period of thirty (30) days after Landlord's receipt of Tenant's written notice, Landlord shall have the option, exercisable by delivering written notice to Tenant, to terminate this lease as of the date specified in Landlord's written notice to Tenant, which date shall not be less than thirty
(30) days nor more than ninety (90) days after the date of Landlord's written notice to Tenant. If Landlord exercises its option to terminate this lease as provided in the foregoing sentence, Landlord may, if it so elects, enter into a new lease for the Premises or any portion thereof with the proposed assignee or subtenant or any other third party on such terms as Landlord and such proposed assignee or subtenant or other third party may agree; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting.

If Landlord does not elect to terminate this lease as provided hereinabove in this paragraph 18 and if Landlord consents in writing to the proposed assignment or sublet, Tenant shall be free to assign or sublet all or a portion of the Premises subject to the following conditions: (i) any sublease shall be on the same terms set forth in the notice given to Landlord; (ii) no sublease shall be on the same terms set forth in the notice given to Landlord;
(ii) no sublease shall be valid and not subtenant shall take possession of the sublet premises until an executed counterpart of such sublease has been delivered to Landlord; (iii) no subtenant shall have a further right to sublet;
(iv) any sums or other economic consideration received by Tenant as a result of such assignment or sublet (except rental or other payments received which are attributable to the amortisation over the term of this lease of the cost of leasehold improvement constructed for such assignees or subtenant, and brokerage fees) whether denominated rentals or otherwise, which exceed, in the aggregate, the total sums which Tenant is obligated to pay Landlord under this lease (prorated to reflect obligations allocable to that portion of the Premises subject to such sublease), shall be payable to Landlord as additional rent under this lease without affecting or reducing any other obligations of Tenant hereunder; (v) no sublet or assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder; and (vi) any assignee or subtenant must expressly agree to assume and perform all of the covenants and conditions of Tenant under this lease. Tenant shall pay to Landlord promptly upon demand as additional rent, Landlord's actual attorneys' fees and other costs incurred for reviewing, processing or documenting any requested assignment or sublease, whether or not Landlord's consent is granted. Tenant shall not be entitled to assign this lease or sublease all or any part of the Premises (and any attempt to do so shall be voidable by Landlord) during any period in which Tenant is in default under this lease.

If Tenant is a partnership, a withdrawal or change, voluntary or involuntary or by operation of law, of any general partner or the dissolution of the partnership shall be deemed an assignment of this lease subject to all the conditions of this paragraph 18. If Tenant is a corporation any dissolution, merger, consolidation or other reorganization of Tenant or the sale or other transfer of a controlling percentage of the capital stock of Tenant or the sale of more than fifty percent (50%) of the value of Tenant's assets shall be an assignment of this lease subject to all the conditions of this paragraph 18. The term "controlling percentage" means the ownership of, and the right to vote, stock possessing more than 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote. This paragraph shall not apply if Tenant is a corporation the stock of which is traded through an exchange.

The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or sublet shall not be deemed consent to any subsequent assignment or sublet. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. Landlord may consent to subsequent assignments or sublets of this lease or amendments or modifications to this lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and such action shall not relieve Tenant of liability under this lease.

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No interest of Tenant in this lease shall be assignable by operation of law (including, without limitation, the transfer of this lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors or institutes a proceeding under the Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; (ii) if a writ of attachment or execution is levied on this lease; or (iii) if, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An involuntary assignment shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this lease, in which case this lease shall not be treated as an asset of Tenant.

Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this lease, all rent from any subletting of all or a part of the Premises as permitted by this lease, and Landlord, as assignee and as attorney-in-fact for Tenant, or a receiver of Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this lease; except that, until the occurrence of an act or default by Tenant, Tenant shall have the right to collect such rent, subject to promptly forwarding to Landlord any portion thereof to which Landlord is entitled pursuant to this paragraph 18.

19. DEFAULT. The occurrence of any of the following shall constitute a default by Tenant: (i) failure of Tenant to pay any rent or other sum payable hereunder within three (3) days of when due; (ii) abandonment of the Premises (Tenant's failure to occupy and conduct business in the Premises for fourteen
(14) consecutive days shall constitute an abandonment of the Premises); (iii) failure of Tenant to deliver to Landlord any instrument, assurance, financial statement, subordination agreement or certificate of estoppel required under this Lease within the time period specified for such performance if the failure continues for five (5) days after written notice of the failure from Landlord to Tenant; or (iv) failure of Tenant to perform any other obligation under this lease if the failure to perform is not cured within thirty (30) days after written notice thereof has been given to Tenant (provided that if such default cannot reasonably be cured within thirty (30) days, Tenant shall not be in default if Tenant commences to cure such failure to perform within the thirty
(30) day period and diligently and in good faith continues to cure the failure to perform). The notice referred to in clauses (iii) and (iv) above shall specify the failure to perform and the applicable lease provision and shall demand that Tenant perform the provisions of this lease within the applicable period of time. No notice shall be deemed a forfeiture or termination of this lease unless Landlord so elects in the notice. No notice shall be required the event of abandonment or vacation of the Premises.

In addition to the above, the occurrence of any of the following events shall also constitute a default by Tenant: (i) Tenant fails to pay its debts as they become due or admits in writing its inability to pay its debts, or makes a general assignment for the benefit of creditors (for purposes of determining whether Tenant is not paying its debts as they become due, a debt shall be deemed overdue upon the earliest to occur of the following: thirty
(30) days from the date a statement therefor has been rendered; the date on which any action or proceeding therefor is commenced; or the date on which a formal notice of default or demand has been sent); (ii) Tenant fails to furnish to Landlord a schedule of Tenant's aged accounts payable within ten
(10) days after Landlord's written request; (iii) any financial statements given to Landlord by Tenant, any assignee of Tenant, subtenant of Tenant, any guarantor or successor in interest of Tenant (including, without limitation, any schedule of Tenant's aged accounts payable) are materially false; or (iv) any financial statement or other financial information furnished by Tenant pursuant to the provisions of this lease or at the request of Landlord evidences that either Tenant's net worth or its net assets are at least twenty-five percent (25%) less than the net worth or net assets shown in either the immediately prior financial statement or the financial statement of Tenant furnished at the time of execution of this lease, and Tenant fails to furnish promptly to Landlord, after notice from Landlord to Tenant, an additional security deposit in cash equivalent to the aggregate of the basic rent and direct expense, (without regard to any rent abatement) payable hereunder for the twelve (12) full calendar months immediately preceding such notice. At any time during the term of this lease Landlord, at Landlord's option, shall have the right to receive from Tenant, upon Landlord's request, a current annual balance sheet for Landlord's review.

In the event of a default by Tenant, then Landlord, in addition to any other rights and remedies of Landlord at law or in equity, shall have the right either to terminate Tenant's right to possession of the Premises (and thereby terminate this lease) or, from time to time and without termination of this lease, to relet the Premises or any part thereof for the account and in the name of Tenant for such term and on such terms and conditions as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises.

Should Landlord elect to keep this lease in full force and effect, Landlord shall have the right to enforce all of Landlord's rights and remedies under this lease, including but not limited to the right to recover and to relet the Premises and such other rights and remedies as Landlord may have under California Civil Code Section 1951.4 (or successor Code section) or any other California statute. If Landlord relets the Premises, then Tenant shall pay to Landlord, as soon as ascertained, the costs and expenses incurred by Landlord in such reletting and in making alterations and repairs. Rentals received by Landlord from such reletting shall be applied (i) to the payment of any indebtedness due hereunder, other than basic rent and direct expenses, from Tenant to Landlord; (ii) to the payment of the cost of any repairs necessary to return the Premises to good condition, normal wear and tear excepted, including the cost of alterations and the cost of storing any of Tenant's property left on the Premises at the time of reletting; and (iii) to the payment of basic rent or direct expenses due and unpaid hereunder. The residue, if any, shall be held by Landlord and applied in payment of future rent or damages in the event of termination as the same may become due and payable hereunder and the balance, if any at the end of the term of this lease, shall be paid to Tenant. Should the basic rent and direct expenses received from time to time from such reletting during any month be less than that agreed to be paid during that month by Tenant hereunder, Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such reletting of the Premises by Landlord shall be construed as an election

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on its part to terminate this lease unless a notice of such intention is given to Tenant or unless the termination hereof is decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this lease for such previous breach, provided it has not been cured.

Should Landlord at any time terminate this lease for any breach, in addition to any remedy it may have, it shall have the immediate right of entry and may remove all persons and property from the Premises and shall have all the rights and remedies of a landlord provided by California Civil Code Section 1951.2 or any successor code section. Upon such termination, in addition to all its other rights and remedies, Landlord shall be entitled to recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Premises and including (i) the worth at the time of award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this lease or which in the ordinary course of events would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in (i) and (ii) above is computed by allowing interest at the rate of twelve percent (12%) per annum. The "worth at the time of award" of the amount referred to in (iii) above shall be computed by discounting such amount at the discount rate at the federal reserve bank of San Francisco at the time of award plus one percent (1%). Tenant waives the provisions of Section 1179 of the California Code of Civil Procedures (which
Section allows Tenant to petition a court of competent jurisdiction for relief against forfeiture of this lease). Property removed from the Premises may be stored in a public or private warehouse or elsewhere at the sole cost and expense of Tenant. In the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of thirty (30) days or more, Landlord may sell any or all thereof at a public or private sale in such manner and at such time and place that Landlord, in its sole discretion, may deem proper, without notice to or demand upon Tenant.

20. LANDLORD'S RIGHTS TO CURE TENANT'S DEFAULT. Landlord, at any time after Tenant commits a default, may, but shall not be obligated to, cure the default at Tenant's cost. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord and shall bear interest at the rate of twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less, from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. Amounts due Landlord hereunder shall be additional rent.

21. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any public or quasi-public authority; under the power of eminent domain or conveyance in lieu thereof, this lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payments, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance. Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this lease. Notwithstanding the foregoing, Tenant shall be entitled to any compensation for depreciation to and cost of removal of Tenant's equipment and fixtures and any compensation for its relocation expenses necessitated by such taking, but in each case only to the extent the condemning authority makes a separate award therefor or specifically identifies a portion of the award as being therefor. Each party waives the provisions of Section 1245.130 of the California Code of Civil Procedure (which section allows either party to petition the Superior Court to terminate this lease in the event of a partial taking of the Premises).

If any action or proceeding is commenced for such taking of the Premises or any portion thereof or of any other space in the Project, or if Landlord is advised in writing by any entity or body having the right of power of condemnation of its intention to condemn the Premises or any portions thereof or of any other space in the Project, and Landlord shall decide to discontinue the use and operation of the Project or decide to demolish, alter or rebuild the Project, then Landlord shall have the right to terminate this lease by giving Tenant written notice thereof within sixty (60) days of the earlier of the date of Landlord's receipt of such notice of intention to condemn or the commencement of said action or proceeding. Such termination shall be effective as of the last day of the calendar month next following the month in which such notice is given or the date on which title shall vest in the condemnor, whichever occurs first.

In the event of a partial taking, or conveyance in lieu thereof, of the Premises and fifty percent or more of the number of square feet in the Premises are taken, then Tenant may terminate this lease. Any election by Tenant to so terminate shall be by written notice given to Landlord within sixty (60) days from the date of such taking or conveyance and shall be effective on the last day of the calendar month next following the month in which such notice is given or the date on which title shall vest in the condemnor, whichever occurs first.

If a portion of the Premises is taken by power of eminent domain or conveyance in lieu thereof and neither Landlord nor Tenant terminates this lease as provided above, then this lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed and all payments or rent shall be apportioned as of the date of such taking or conveyance so that thereafter the amounts to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken bears to the total area of the Premises prior to such taking.

22. NOTICE AND COVENANT TO SURRENDER. On the last day of the term or on the effective date of any earlier termination, Tenant shall surrender to Landlord the Premises in its condition existing as of the commencement of the term and, except as otherwise provided by Landlord pursuant to the terms of paragraph 8 of this lease, all of the improvements and alterations made to the Premises in their condition existing as of the date of completion of construction and/or installation (normal wear and tear excepted), with all originally painted interior walls washed or repainted if marked or damaged, interior vinyl covered walls cleaned and

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repaired or replaced if marked or damaged, all carpets shampooed and cleaned, and all floors cleaned and waxed; all to the reasonable satisfaction of Landlord. On or prior to the last day of the term or the effective date of any earlier termination, Tenant shall remove all of Tenant's personal property and trade fixtures, together with improvements or alterations that Tenant is obligated to remove pursuant to the provisions of paragraph 8 of this lease, from the Premises, and all such property not removed shall be deemed abandoned. In addition, on or prior to the expiration or earlier termination of this lease, Tenant shall remove, at Tenant's sole cost and expense, all telephone, other communication, computer and any other cabling and wiring of any sort installed in the space above the suspended ceiling of the Premises or anywhere else in the Premises and shall promptly repair any damage to the suspended ceiling, lights, light fixtures, walls and any other part of the Premises resulting from such removal.

If the Premises are not surrendered as required in this paragraph 22, Tenant shall indemnify Landlord against all loss, liability and expense (including, but not limited to, attorney fees) resulting from the failure by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenants. It is agreed between Landlord and Tenant that the provisions of this paragraph 22 shall survive termination of this lease.

23. TENANT'S QUITCLAIM. At the expiration or earlier termination of this lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required to remove the cloud or encumbrance created by this lease from the real property of which the Premises are a part. This obligation shall survive said expiration or termination.

24. HOLDING OVER. Any holding over after the expiration or termination of this lease with the written consent of Landlord shall be construed to be a tenancy from month-to-month at the monthly rent agreed upon by Landlord and Tenant, but in no event less than the monthly rent payable under this lease for the last lease month before the date of such expiration or termination. All provisions of this lease, except (i) as modified by the preceding sentence and
(ii) those provisions pertaining to the term, expansion rights and any option to extend, shall apply to the month-to-month tenancy.

If Tenant shall retain possession of the Premises or any part thereof without Landlord's written consent following the expiration or sooner termination of this lease for any reason, then Tenant shall pay to Landlord for each day of such retention one hundred fifty percent (150%) of the amount of the daily rental in effect during the last lease month prior to the date of such expiration or termination. The term "daily rental" as used in the preceding sentence shall mean the monthly rental divided by thirty. Tenant shall also indemnify and hold Landlord harmless from any loss, liability and expense (including, but not limited to, attorneys fees) resulting from delay by Tenant in surrendering the Premises, including without limitation any claims made by any succeeding tenant founded on such delay. Acceptance of rent by Landlord following expiration or termination shall not constitute a renewal of this lease, and nothing contained in this paragraph shall waive Landlord's right of re-entry or any other right. Tenant shall be only a Tenant at sufferance, whether or not Landlord accepts any rent from tenant, while Tenant is holding over without Landlord's written consent.

The provisions of this paragraph 24 are in addition to, and do not affect, Landlord's right of re-entry or other rights hereunder or provided by law. Nothing in this paragraph 24 shall be construed as implied consent by Landlord to any holding over by Tenant. Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease on expiration or other termination of this Lease. The provisions of this paragraph 24 shall not be considered to limit or constitute a waiver of any other rights or remedies of Landlord provided in this Lease or at law. The provisions of this paragraph 24 shall survive the expiration or early termination of this lease.

25. SUBORDINATION. In the event Landlord's title or leasehold interest is now or hereafter encumbered in order to secure a loan to Landlord, Tenant shall, at the request of Landlord or the lender, execute in writing an agreement subordinating its rights under this lease to the lien of such encumbrance, or, if so requested, agreeing that the lien of lender's encumbrance shall be or remain subject and subordinate to the rights of Tenant under this lease. Tenant hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute, deliver and record any such instrument or instruments for and in the name and on behalf of Tenant. Notwithstanding any such subordination, Tenant's possession under this lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all amounts due hereunder and otherwise observe and perform all provisions of this lease. In addition, if in connection with any such loan the lender shall request reasonable modifications in this lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereof, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder.

26. CERTIFICATE OF ESTOPPEL. Tenant shall, within five (5) calendar days after request thereof, execute and deliver to Landlord, in recordable form, a certificate stating that the lease is unmodified and in full force and effect, or in full force and effect as modified and stating the modifications. The certificate shall also state the amount of the monthly rent, the date to which monthly rent has been paid in advance, the amount of the security deposit and/or prepaid monthly rent, and, if the request is made by Landlord, shall include such other items as Landlord or Landlord's lender may reasonably request. Failure to deliver such certificates within such time shall constitute a conclusive acknowledgement by Tenant that the lease is in full force and effect and has not been modified except as may be represented by Landlord in the certificate. Any such certificate requested by Landlord may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or Project. If Tenant fails to execute and deliver to the Landlord a completed certificate as required by this paragraph 26, Tenant hereby appoints the Landlord as his attorney-in-fact to execute and deliver such certificate for and on behalf of the Tenant. Further, within five (5) calendar days following written request made from time to time by Landlord, Tenant shall furnish to Landlord current financial statements of Tenant.

27. SALE BY LANDLORD. In the event the original Landlord hereunder, or any successor owner of the Project or Premises, shall sell or convey the Project or Premises, all liabilities and obligations on the part

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of the original Landlord, or such successor owner, under this lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner and to look solely to such new owner for performance of any and all such liabilities and obligations.

28. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord in the land and buildings in which the Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by a lender or any other third party through judicial foreclosure or by exercise of a power or sale at a private trustee's foreclosure sale, Tenant hereby agrees to release Landlord of any obligation arising on or after any such foreclosure sale and to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this lease.

29. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion.

If Landlord is in default of this lease, Tenant's sole remedy shall be to institute suit against Landlord in a court of competent jurisdiction and Tenant shall have no right to offset any sums expended by Tenant as a result of Landlord's default against future rent and other sums due and payable pursuant to this lease. If Landlord is in default of this lease, and as a consequence Tenant recovers a money judgment against Landlord, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title and interest of Landlord in the Project of which the Premises are a part, and out of rent or other income from such real property receivable by Landlord or out of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title and interest in the Project of which the Premises are a part. Neither Landlord nor any of the partners, comprising the partnership designated as Landlord shall be personally liable for any deficiency.

30. CONSTRUCTION CHANGES. It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises and/or the improvements constructed or being constructed therein, and no such change nor any change in plans for any other portions of the Project, shall affect this lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant.

31. MEASUREMENT OF PREMISES. Tenant understands and agrees that any reference to square footage of the Premises is approximate only and includes all interior partitions and columns, one-half of exterior walls, and one-half of the partitions separating the Premises from the rest of the Project, Tenant's proportionate share of the Common Area and, if applicable, 25% of the area of the balcony adjoining the Premises. Tenant waives any claim against Landlord regarding the accuracy of any such measurement and agrees that there shall not be any adjustment in basic rent or direct expenses or other amounts payable hereunder by reason of inaccuracies in such measurement.

32. ATTORNEY FEES. If either party commences an action against the other party arising out of or in connection with this lease, the prevailing party shall be entitled to have and recover from the losing party all expenses of litigation, including, without limitation, travel expenses, attorney fees, expert witness fees, trial and appellate court costs, and deposition and transcript expenses. If either party becomes a party to any litigation concerning this lease or concerning the Premises or the Project, by reason of any act or omission of the other party or its authorized representatives, the party that causes the other party to become involved in this litigation shall be liable to the other party for all expenses of litigation, including, without limitation, travel expenses, attorney fees, expert witness fees, trial and appellate court costs, and deposition and transcript expenses.

33. SURRENDER. The voluntary or other surrender of this lease or the Premises by Tenant, or a mutual cancellation of this lease, shall not work a merger, and at the option of Landlord shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies.

34. WAIVER. No delay or omission in the exercise of any right or remedy of Landlord on any default by Tenant shall impair such right or remedy or be construed as a waiver. The receipt and acceptance by Landlord of delinquent rent or other payments shall not constitute a waiver of any other default and acceptance of partial payments shall not be construed as a waiver of the balance of such payment due. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of this lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this lease.

35. EASEMENTS; AIRSPACE RIGHTS. Landlord reserves the right to alter the boundaries of the Project and grant easements and dedicate for public use portions of the Project without Tenant's consent, provided that no such grant or dedication shall interfere with Tenant's use of the Premises or otherwise cause Tenant to incur cost or expense. From time to time, and upon Landlord's demand, Tenant shall execute, acknowledge and

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Persons: one or more human beings, or legal entities or other artificial persons, including, without limitation, partnerships, corporations, trusts, estates, associations and any combination of human being and legal entities.

Provisions: any term, agreement, covenant, condition, clause, qualification, restriction, reservation or other stipulation in the lease that defines or otherwise controls, establishes or limits the performance required or permitted by either party.

Rent: basic rent, direct expenses, additional rent, and all other amounts payable by Tenant to Landlord required by this lease or arising by subsequent actions of the parties made pursuant to this lease.

Words used in any gender include other genders. If there be more than one Tenant, the obligations of Tenant hereunder are joint and several. All provisions, whether covenants or conditions, on the part of Tenant shall be deemed to be both covenants and conditions. The paragraph headings are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof.

41. TIME. Time is of the essence of this lease and of each and all of its provisions.

42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE. Any amount due from Tenant to Landlord hereunder which is not paid when due shall bear interest at the rate of ten percent (10%) per annum from when due until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any default by Tenant under this lease. In addition, Tenant acknowledges that late payment by Tenant to Landlord of basic rent or direct expenses or of any other amount due Landlord from Tenant will cause Landlord to incur costs not contemplated by this lease, the exact amount of such costs being extremely difficult and impractical to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord; e.g., by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any such payment due from Tenant is not received by Landlord when due, Tenant shall pay to Landlord an additional sum of five percent (5%) of the overdue payment as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord. No notice to Tenant of failure to pay shall be required prior to the imposition of such interest and/or late charge. Any interest and late charge imposed pursuant to this paragraph shall be and constitute additional rent payable by Tenant to Landlord.

43. ENTIRE AGREEMENT. This lease, including any exhibits and attachments, constitutes the entire agreement between Landlord and Tenant relative to the Premises and this lease and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves or their agents or representatives relative to the leasing of the Premises are merged in or revoked by this lease.

44. CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing this lease on behalf of the corporation represents and warrants that he is duly authorized to execute and deliver this lease on behalf of the corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation and that this lease is binding upon said corporation in accordance with its terms. If Tenant is a corporation, Tenant shall deliver to Landlord, within ten (10) days of the execution of this lease, a copy of the resolution of the Board of Directors of Tenant authorizing the execution of this lease and naming the officers that are authorized to execute this lease on behalf of Tenant, which copy shall be certified by Tenant's secretary as correct and in full force and effect.

45. RECORDING. Neither Landlord nor Tenant shall record this lease or a short form memorandum hereof without the consent of the other.

46. REAL ESTATE BROKERS. Each party represents and warrants to the other party that it has not had dealings in any manner with any real estate broker, finder or other person with respect to the Premises and the negotiation and execution of this lease except Wayne Mascia Associates. Except for the commissions and fees to be paid to Wayne Mascia Associates as provided in this paragraph, each party shall indemnify and hold harmless the other party from all damage, loss, liability and expense (including attorneys' fees and related costs) arising out of or resulting from any claims for commissions or fees that have been or may be asserted against the other party by any broker, finder or other person with whom Tenant or Landlord, respectively, has dealt, or purportedly has dealt, in connection with the Premises and the negotiation and execution of this lease. Landlord shall pay broker leasing commissions to Wayne Mascia Associates in connection with the Premises and the negotiation and execution of this lease, to the extent agreed to between Landlord and Wayne Mascia Associates. Landlord and Tenant agree that Landlord shall not be obligated to pay any broker leasing commissions, consulting fees, finder fees or any other fees or commissions arising out of or relating to any extended term of this lease or to any expansion or relocation of the Premises at any time.

47. EXHIBITS AND ATTACHMENTS. All exhibits and attachments to this lease are a part hereof.

48. ENVIRONMENTAL MATTERS.

A. TENANT'S COVENANTS REGARDING HAZARDOUS MATERIALS.

(1) Hazardous Materials Handling. Tenant, its agents, invitees, employees, contractors, sublessees, assigns and/or successors shall not use, store, dispose, release or otherwise cause to be present or permit the use, storage, disposal, release or presence of Hazardous Materials (as defined below) on or about the Premises or Project. As used herein "Hazardous Materials" shall mean any petroleum or pretroleum by-products, flammable explosives, asbestos, urea formaldehyde, radioactive materials or waste and

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any "hazardous substance", "hazardous waste", "hazardous materials", "toxic substance" or "toxic waste" as those terms are defined under the provisions of the California Health and Safety Code and/or the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), as amended by the Superfund Amendments and Reauthorization Act of 1996 (42 U.S.C. Section 9601 et seq.), or any other hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or any agency thereof, or the United States Government or any agency thereof.

(2) NOTICES. Tenant shall immediately notify Landlord in writing of:
(i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any law, regulation or ordinance relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any Hazardous Materials (collectively "Hazardous Materials Laws"); (ii) any claim made or threatened by any person against Tenant, the Premises, Project or buildings within the Project relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (iii) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or removed from the Premises, Project or buildings within the Project, including any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant shall also supply to Landlord as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, with copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Premises, Project or buildings within the Project or Tenant's use thereof. Tenant shall promptly deliver to Landlord copies of hazardous waste manifests reflecting the legal and proper disposal of all Hazardous Materials removed from the Premises.

B. INDEMNIFICATION OF LANDLORD. Tenant shall indemnify, defend (by counsel acceptable to Landlord), protect, and hold Landlord, and each of Landlord's partners, employees, agents, attorneys, successors and assigns, free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including attorneys' fees) for death of or injury to any person or damage to any property whatsoever (including water tables and atmosphere), arising from or caused in whole or in part, directly or indirectly, by (i) the presence in, on, under or about the Premises, Project or buildings within the Project or discharge in or from the Premises, Project or buildings within the Project of any Hazardous Materials or Tenant's use, analysis, storage, transportation, disposal, release, threatened release, discharge or generation of Hazardous Materials to, in, on, under, about or from the Premises, Project or buildings within the Project, or (ii) Tenant's failure to comply with any Hazardous Materials Laws whether knowingly, unknowingly, intentionally or unintentionally. Tenant's obligations hereunder shall include, without limitation, and whether forseeable or unforseeable, all costs of any required or necessary repair, cleanup or detoxification or decontamination of the Premises, Project or buildings within the Project, and the preparation and implementation of any closure, remedial action or other required plans in connection therewith. In addition, Tenant shall reimburse Landlord for (i) losses in or reductions to rental income resulting from Tenant's use, storage or disposal of Hazardous Materials, (ii) all costs of refitting or other alterations to the Premises, Project or buildings within the Project required as a result of Tenant's use, storage, or disposal of Hazardous Materials including, without limitation, alterations required to accommodate an alternate use of the Premises, Project or buildings within the Project, and (iii) any diminution in the fair market value of the Premises, Project or buildings within the Project caused by Tenant's use, storage, or disposal of Hazardous Materials. For purposes of this paragraph 48, any acts or omissions of Tenant, or by employees, agents, assignees, contractors or subcontractors of Tenant or others acting for or on behalf of Tenant (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant.

c. SURVIVAL. The provisions of this paragraph 48 shall survive the expiration or earlier termination of the term of this lease.

49. SIGNAGE. Tenant shall not, without obtaining the prior written consent of Landlord, install or attach any sign or advertising material on any part of the outside of the Premises, or on any part of the inside of the Premises which is visible from the outside of the Premises, or in the halls, lobbies, windows or elevators of the building in which the Premises are located or on or about any other portion of the Common Area or Project. If Landlord consents to the installation of any sign or other advertising material, the location, size, design, color and other physical aspects thereof shall be subject to Landlord's prior written approval and shall be in accordance with any sign program applicable to the Project. In addition to any other requirements of this paragraph 49, the installation of any sign or other advertising material by or for Tenant must comply with all applicable laws, statutes, requirements, rules, ordinances and any C.C. & R.'s or other similar requirements. With respect to any permitted sign installed by or for Tenant, Tenant shall maintain such sign or other advertising material in good condition and repair and shall remove such sign or other advertising material on the expiration or earlier termination of the term of this lease. The cost of any permitted sign or advertising material and all costs associated with the installation, maintenance and removal thereof shall be paid for solely by Tenant. If Tenant fails to properly maintain or remove any permitted sign or other advertising material, Landlord may do so at Tenant's expense. Any cost incurred by Landlord in connection with such maintenance or removal shall be deemed additional rent and shall be paid by Tenant to Landlord within ten (10) days following notice from Landlord. Landlord may remove any unpermitted sign or advertising material without notice to Tenant and the cost of such removal shall be additional rent and shall be paid by Tenant within ten (10) days following notice from Landlord. Landlord shall not be liable to Tenant for any damage, loss or expense resulting from Landlord's removal of any sign or advertising material in accordance with this paragraph
49. The provisions of this paragraph 49 shall survive the expiration or earlier termination of this lease.

50. SUBMISSION OF LEASE. The submission of this lease to Tenant for examination or signature by Tenant is not an offer to lease the Premises to Tenant, nor an agreement by Landlord to reserve the Premises for Tenant. Landlord will not be bound to Tenant until this lease has been duly executed and delivered by both Landlord and Tenant.

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51. PREMISES TAKEN "AS IS". Tenant is leasing the Premises from Landlord "as is" in their condition existing as of the date hereof. Landlord shall have no obligation to alter or improve the Premises.

52. ADDITIONAL RENT. All costs, charges, fees, penalties, interest and any other payments (including Tenant's reimbursement to Landlord of costs incurred by Landlord) which Tenant is required to make to Landlord pursuant to the terms and conditions of this lease and any amendments to this lease shall be and constitute additional rent payable by Tenant to Landlord when due as specified in this lease and any amendments to this lease.

54. TENANT IMPROVEMENT ALLOWANCE. Landlord hereby grants to Tenant a tenant improvement allowance of up to Twenty-One Thousand Two Hundred Fifty-Two Dollars ($21,252) ("Allowance") to reimburse Tenant for the cost of tenant improvements ("Tenant Improvements") which Tenant installs in the Premises during the first six (6) months of the term of the Lease, subject to the following terms and conditions:

(a) The Tenant Improvements shall be deemed alterations to the Premises and subject to the terms and conditions of paragraph 8 of the Lease.

(b) The Tenant Improvements for which Tenant seeks reimbursement shall be completed within six (6) months after the Lease Commencement Date.

(c) All outstanding claims for labor, materials and fixtures relating to the Tenant Improvements shall have been paid in full by Tenant and Tenant shall have obtained lien releases from all contractors and materialmen, in form satisfactory to Landlord.

(d) The Tenant Improvements shall have been constructed in accordance with all applicable laws.

(e) Tenant shall not be in default under the Lease.

Tenant shall not be entitled to any portion of the Allowance which is not required to be disbursed in accordance with the foregoing requirements and Tenant shall not be entitled to any credit against rent or any other payment due Landlord under the Lease. No disbursement of any portion of the Allowance shall be required until all of the conditions specified in items (a) through
(e) have been satisfied.

55. EARLY ACCESS. Tenant acknowledges that the Premises are currently occupied by a third party pursuant to a lease which is scheduled to expire on June 6, 1996. Upon obtaining possession of the Premises, Landlord shall provide Tenant with limited access to the Premises for purposes of commencing installation of the Tenant Improvements. Tenant's access to the Premises pursuant to this paragraph shall be subject to all the terms and conditions of this lease, including the insurance obligations specified in paragraph 11, and as a condition precedent to Tenant's right to such access to the Premises, Tenant shall provide Landlord with proof that Tenant has satisfied said insurance requirements. Such limited access to the Premises shall not accelerate the commencement or termination dates of this lease specified in paragraph 2(a) hereof and Tenant shall not be obligated to pay basic rent or direct expenses until the commencement of the term; provided, however, if Tenant or any of Tenant's operating personnel commences operation of business in the Premises, such operations shall accelerate the Lease Commencement Date and the lease term shall commence on the date that such business operations are commenced.

[Signature on Next Page]

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IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this lease on the date first above written.

Landlord:                                 Tenant:
---------                                 -------

McCANDLESS TOWERS, PHASE I                ASCII OF AMERICA, INC.,
a California limited partnership          a California corporation

By: McCandless Group, a
    California general partnership,
    General Partner

    By: /s/ SIGNATURE                     By: /s/ SIGNATURE
       ------------------------------        ---------------------------
       Birk S. McCandless, as Trustee
       under the Birk S. McCandless       Name: Printed Name
       and Mary McCandless Inter Vivos         -------------------------
       Trust Agreement dated February
       17, 1982, a General Partner        Title: President
                                                ------------------------

       Date:                              Date: 1-13-97
            -------------------------          -------------------------

                                          By: /s/  S HYNDMAN
                                             ---------------------------

                                          Name: S HYNDMAN
                                               -------------------------

                                          Title: Secretary
                                                ------------------------

                                          Date: 1-13-97
                                               -------------------------

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deliver to Landlord, in accordance with Landlord's instructions, any and all documents, instruments, maps or plate necessary to effectuate Tenant's covenants hereunder.

This lease confers no rights either with regard to the subsurface of or airspace above the land on which the Project is located or with regard to airspace above the building of which the Premises are a part. Tenant agrees that no diminution or shutting off of light or view by a structure which is or may be erected (whether or not by Landlord) on property adjacent to the building of which the Premises are a part or to property adjacent thereto, shall in any way affect this lease, or entitle Tenant to any reduction of rent, or result in any liability of Landlord to Tenant.

36. RULES AND REGULATIONS. Landlord shall have the right from time to time to promulgate reasonable rules and regulations for the safety, care and cleanliness of the Premises, the Project, and the Common Area, or for the preservation of good order. On delivery of a copy of such rules and regulations to Tenant, Tenant shall comply with the rules and regulations, and a violation of any of them shall constitute a default by Tenant under this lease. If there is a conflict between the rules and regulations and any of the provisions of this lease, the provisions of this lease shall prevail. Such rules and regulations may be amended by Landlord from time to time with or without advance notice.

37. NOTICES. Except for legal process which may also be served as provided by law or as provided herein, all notices, demands, requests, consents and other communications ("Notices") which may be given or are required to be given by either party to the other shall be in writing and shall be deemed given to and received by the party intended to receive such Notice (i) when hand delivered, (ii) three (3) days after such Notice shall have been deposited, postage prepaid, to the United States Mail, certified return receipt requested, properly addressed to the address specified herein, or (iii) date of delivery if sent to the address specified herein by reputable overnight courier (e.g. Federal Express or other comparable service), as evidenced by such courier's records.

Prior to the commencement date, all such Notices from Landlord to Tenant shall be served or addressed to Tenant at 1731 Technology Drive, Suite 560, San Jose, California 95110. On or after the commencement date all such Notices from Landlord to Tenant shall be addressed to Tenant at the Premises.

All such Notices by Tenant to Landlord shall be sent to Landlord at its offices at 3945 Freedom Circle, Suite 640, Santa Clara, California 95054.

Either party may change its address by notifying the other of such change.

38. NAME. Tenant shall not use the name of the Project for any purpose other than as the address of the business conducted by Tenant in the Premises without the prior written consent of Landlord.

39. GOVERNING LAW; SEVERABILITY. This lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this lease shall be held or rendered invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect.

40. DEFINITIONS. As used in this lease, the following words and phrases shall have the following meanings:

AUTHORIZED REPRESENTATIVE: any officer, agent, employee or independent contractor retained or employed by either party, acting within authority given him by that party.

COMMON AREA: those areas of the Project provided and designated by Landlord for the general use and convenience of the occupants of the Project, including but not limited to common lobbies, corridors, restrooms, elevators, stairwells, conference rooms, parking areas, sidewalks, landscaped grounds, the restaurant and sundries building, helipad, health club facilities (including but not necessarily limited to the pool, spa, showers, locker rooms and exercise rooms); together with telephone, electrical, janitorial and mechanical rooms, mail rooms and storage areas, vertical duct shafts, building roofs and exterior walls, the space occupied by the mechanical, plumbing, electrical and HVAC systems, and all other areas of the Project not constituting leasable premises.

ENCUMBRANCE: any deed of trust, mortgage or other written security device or agreement affecting the Premises or the Project that constitutes security for the payment of a debt or performance of an obligation, and the note or obligation secured by such deed of trust, mortgage or other written security device or agreement.

LEASE MONTH: the period of time determined by reference to the day of the month in which the term commences and continuing to one day short of the same numbered day in the next succeeding month; e.g., the tenth day of one month to and including the ninth day in the next succeeding month.

LENDER: the beneficiary, mortgagee or other holder of an encumbrance, as defined above.

LIEN: a charge imposed on the Premises by someone other than Landlord, by which the Premises are made security for the performance of an act. Most of the liens referred to in this lease are mechanic's liens.

MAINTENANCE: repairs, replacement, repainting and cleaning.

MONTHLY RENT: the sum of the monthly payments of basic rent and direct expenses.

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EXHIBIT 10.7

THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 1 OF 10

1) DESCRIPTION OF PREMISES:

Landlord Leases to Tenant and Tenant leases from Landlord, approximately one thousand eight hundred twenty-two (1,822) rentable square feet, of that building located at 298 S. Sunnyvale Avenue, Sunnyvale, Santa Clara County, California, which premises are more particularly described in Exhibit "A" to this lease, and are hereinafter referred to as "the premises", Suite 209.

2) USE:

Tenant shall use the premises for general office use and for no other use without Landlord's consent.

Tenant shall not use or permit the use of the premises or any part thereof for any purpose or purposes other than the purposes for which the premises are leased.

3) LEASE TERM:

The Lease term shall be for thirty six months (36) commencing May 1, 1996. Tenant to have occupancy on April 1, 1996.

4) RENT:

Tenant shall pay to Landlord as minimum monthly rent, without deduction, set off, prior notice, or demand, the sum of Two Thousand Three Hundred Sixty-Eight and 60/100 Dollars ($2,368.60) per month in advance on the first day of each month commencing during the term, or the commensurate rental for any portion of a month to be prorated.

All rent shall be paid to landlord at the address to which notices to Landlord are given. In the event the monthly rent is not received by Landlord within five (5) days following the date it is due and payable, there shall be a late charge in the amount of ten (10%) percent of the monthly rental. Such late charge will be due and payable from Tenant with the late monthly rental, but nothing contained herein shall be construed as relieving Tenant from Tenant's obligation to pay the monthly rent in advance on the first day of each month. See Addendum #1 for rent schedule.

5) SECURITY DEPOSIT:

On execution of this Lease, Tenant shall deposit with Landlord as a security deposit for the performance by Tenant of the provisions of this Lease the total sum of Two Thousand Five Hundred and 00/100 Dollars ($2,500.00). If Tenant is in default, Landlord can use the security deposit, or any portion of it, to cure the default or to compensate Landlord for all damage sustained by Landlord resulting from Tenant's default. Tenant shall immediately, on demand, pay to Landlord a sum equal to the portion of the security deposit expanded or applied by Landlord as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the security to Tenant. Landlord's obligations with respect to the security deposit are those of a debtor and not a trustee. Landlord can maintain the security deposit separate and apart from Landlord's general funds or can commingle the security deposit with Landlord's general and other funds. Landlord shall not be required to pay Tenant interest on the security deposit.

6) PREPARATION OF PREMISES:

Tenant to take space in "as-is" condition. Landlord to clean and paint as described in Addendum #2.

7) TAXES AND ASSESSMENTS:

Tenant shall pay before delinquency all taxes, assessments, license fees and other charges ("taxes") that are levied and assessed against Tenant's personal property installed or located in or on the


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 2 OF 10

premises, and that become payable during the term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any taxes on Tenant's personal property are levied against Landlord or Landlord's property, or if the assessed value of the building and other improvements in which the premises are located is increased by the inclusion of a value placed on Tenants' personal property, and if Landlord pays the taxes on any of these items or the taxes based on the increased assessment of these items, Tenant, on demand, shall immediately reimburse Landlord for the sum of the taxes levied against Landlord, or the proportion of the taxes resulting from the increase in Landlord's assessment. Landlord shall have the right to pay these taxes, and shall be reimbursed therefor by Tenant, regardless of the validity of the levy.

As additional rental, Tenant shall pay its proportionate share determined as provided below of all increases in real property taxes and general and special assessments ("real property taxes"), whether the increases result from increased rate and/or valuation, levied and assessed against the building, other improvements, and land of which the premises are a part, for the base year, which is tax year 1995. Tenant's proportionate share of such real property tax increases shall be the ratio of the increase that total number of square feet in the premises bears to the total number of leasable square feet in the building and other improvements in which the premises are located. Each year Landlord shall notify Tenant of Landlord's calculation of Tenant's proportionate share of the real property taxes and together with such notice shall furnish Tenant with a copy of the tax bill, including the tax bill for the base year. Tenant shall reimburse Landlord for Tenant's proportionate share of the increase in the real property taxes semiannually not later than thirty (30) days before the taxing authority's delinquency date or ten (10) days after receipt of the tax bill from Landlord, whichever is later. Tenant's liability to pay real property taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included in the term or extended term at its commencement and expiration.

8) LIMITATIONS ON USE:

Tenant shall not use the premises in any manner that will constitute waste, nuisance or unreasonable annoyance (including, without limitation, the use of loudspeakers or sound or light apparatus that can be heard or seen outside the premises) to owners or occupants of adjacent properties or to other tenants in the building in which the premises are located. Tenant shall not use the premises for sleeping, washing clothes, cooking or the preparation, manufacture, or mixing of anything that might emit any odor or objectionable noises or lights onto adjacent properties or into the building in which the premises are located. Furthermore, there shall be no smoking in the suite or in the common areas of the building in accordance with the City of Sunnyvale smoking ordinances.

Without Landlord's written consent, Tenant shall not operate or permit to be operated in the premises any coin or token-operated vending machines or similar devices for the sale or leasing of goods, no auction, fire, or bankruptcy sale may be conducted in the premises without Landlord's written consent.

The plumbing facilities shall not be used for any other purpose than that of which they are constructed, and no foreign substance of any kind shall be thrown in the plumbing facilities. The expense of any breakage, stoppage, or damage (whether within or outside the premises) resulting from a violation of this provision, shall be borne by Tenant if Tenant or its employees, agents, or invitees shall have caused it.

Tenant shall not do anything on the premises that will cause damage to the premises or the building in which the premises are located. The premises shall not be overloaded. No machinery, apparatus, or other appliance shall be used or operated in or on the premises that will in any manner injure, vibrate or shake the premises. In addition, there shall be no freestanding electric heaters or large refrigerators allowed in the units.

9) ALTERATIONS:

Tenant shall not make, or suffer to be made, any alterations to the premises without Landlord's


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 3 OF 10

written consent. Any alterations made shall remain on and be surrendered with the premises on expiration or termination of the term, except that Landlord can elect, within thirty (30) days before expiration of the term, or within ten (10) days after termination of the term, to require Tenant to remove any alterations that Tenant has made to the premises.

If Landlord so elects, Tenant, at its cost, shall restore the premises to the condition designated by Landlord in its election, before the last day of the term, or within thirty (30) days after notice of election is given, whichever is later.

If Tenant makes any alterations to the premises as provided in this paragraph, the alterations shall not be commenced until three (3) days after Landlord has received notice from Tenant stating the date the installation of the alterations is to commence so that Landlord can post and record an appropriate notice of non-responsibility.

10) UTILITIES AND SERVICES:

Landlord is to provide all water, electricity, heating, venting, air-conditioning and lighting (but not telephone and the like) and janitorial services. Air-conditioning, heating and lighting to be supplied from 8 a.m. to 5 p.m. Monday through Friday. Landlord is responsible for Building maintenance including landscaping, and landscaping in patio area.

Landlord shall not be liable for failure to furnish utilities or services to the premises when the failure results from causes beyond Landlord's reasonable steps to restore the interrupted utilities and services.

Landlord can discontinue, without notice to Tenant, any of the utilities or services to the premises for which Tenant fails to pay as provided in this paragraph, and no such discontinuance shall be deemed an actual or a constructive eviction.

11) INDEMNITY AND EXCULPATION:

Tenant agrees to hold Landlord free of all liabilities and claims for damage by reason of any injury or death to any person or persons, including Tenant, or property of any kind whatsoever (except any liability and claim caused solely by the negligent acts of Landlord, Landlord's agents, or Landlord's servants) while in, upon, or connected in any way with the premises, during the term of this Lease or any extended term thereof, or any occupancy hereunder. Tenant hereby agrees to indemnify, save harmless and defend Landlord from all liability, damages, loss, costs and obligations, including court costs and counsel fees, on account of or arising out of or alleged to have arisen out of, directly or indirectly, any such injuries, death or losses, however occurring. Tenant agrees to include within the insurance policy obtained under paragraph 12 hereinbelow a provision providing that the contractual obligation of indemnification set forth in this paragraph 11 is covered in said policy.

12) INSURANCE:

Tenant, at its cost, shall maintain public liability and property damage insurance with liability limits of not less than $100,000.00 per person and $300,000.00 per occurrence, and property damage limits of not less than $50,000.00 per occurrence, insuring against all liability of Tenant and Tenant's authorized representatives arising out of and in connection with Tenant's use or occupancy of the premises. All public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of paragraph 11 hereinabove. Both parties to this lease shall be named as coinsured, and the policy shall contain cross liability endorsements.

Not more frequently than each two (2) years, if, in the opinion of Landlord's lender or of the insurance broker retained by Landlord, the amount of public liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord's lender or Landlord's insurance broker.


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 4 OF 10

13) DESTRUCTION:

In the event of damage causing a partial destruction of the premises or the building and other improvements in which the premises are located during the term or extended term of this Lease from any cause and repairs can be made within one hundred twenty (120) days from the date of the damage under the applicable laws and regulations of governmental authorities, Landlord shall repair said damage promptly and within a reasonable time, but such partial destruction shall in no way void this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the portion of the premises usable by Tenant bears to the total area of the premises. If such repairs cannot be made in one hundred twenty (120) days, Landlord may, at Landlord's option, make the same within a reasonable time, this lease continuing in full force and effect and the rent to be proportionately rebated as provided in the previous sentence. In the event that Landlord does not elect to make such repairs which cannot be made in one hundred twenty (120) days, or such repairs cannot be made under such laws and regulations, this Lease may be terminated at the option of either party. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, the provisions of any statutes or laws permitting Tenant to terminate this Lease are waived by Tenant. In the event that the building in which the premises are situated is destroyed to the extent of thirty-three and one-third percent (33-1/3%) or more of the then replacement cost thereof, Landlord may elect to terminate this Lease, whether the premises are damaged or not. A total destruction of the premises or of the building in which the premises are located shall terminate this Lease.

14) CONDEMNATION:

If the whole or any part of a building of which the premises form a part shall be taken for public or quasi-public use by right of eminent domain, with or without litigation, or transferred by agreement in connection with such public or quasi-public use, this Lease, in the event such taking affects only a portion of the premises, as to the part so taken or condemned or transferred, shall terminate as of the date title shall vest in the condemnor and the rent payable hereunder shall be adjusted so that Tenant shall be required to pay for the remainder of the term only such portion of the rent as the area in the part remaining after the taking or the condemnation bears to the area of the entire premises as of the date title shall vest in the condemnor. In the event of such taking or condemnation by judgment, verdict or agreement, Landlord shall have the option to terminate this Lease of said date, or if all of the premises shall be so taken or condemned or such part thereof be so taken or condemned so that there does not remain a portion susceptible of occupation hereunder, this Lease shall thereupon terminate. All compensation awarded upon such condemnation or taking shall go to the Landlord, and Tenant shall have no claim thereto, and Tenant hereby irrevocably assigns and transfers to Landlord any right to compensation or damages to which the Landlord may become entitled during the term hereof by reasons of the condemnation of all or a part of the premises.

15) ASSIGNMENT AND SUBLETTING:

Tenant shall not voluntarily assign or encumber Tenant's interest in this Lease or in the premises or sublease all or any part of the premises, or allow any other person or entity to occupy or use all or any part of the premises, without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld.

16) DEFAULT:

The occurrence of any of the following shall constitute a default by Tenant: (a) failure to pay rent when due; (b) abandonment and vacation of the premises (failure to occupy and operate the premises for ten (10) consecutive working days shall be deemed an abandonment and vacation); (c) failure to perform any other provision of this lease if the failure to perform is not cured within fifteen (15) days after notice has been given to Tenant. If the default cannot be reasonably cured within fifteen (15) days, Tenant shall not be in default of this Lease if Tenant commences to cure the default within the fifteen (15) day period and diligently and in good faith continues to cure the default.


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 5 OF 10

Landlord shall have the remedies hereinafter set forth in this paragraph 16 if Tenant commits a default. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law.

Landlord can continue this Lease in full force and effect, and the Lease will continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect rent when due. During the period Tenant is in default, and only after vacating the premises, Landlord can enter the premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the premises, including, without limitation, broker's commissions, expenses of remodeling the premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates the rent is due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's rights to possession of the premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. Landlord's consent to a proposed assignment or subletting shall not be unreasonably withheld.

Landlord can terminate Tenant's right to possession of the premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to recover from Tenant: (a) the worth at the time of the award of the unpaid rent that had been earned at the time of termination of this lease; (b) the worth, at the time of the award of the amount by which the unpaid rent that would have been earned after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth, at the time of the award," as used in (a) and (b) of this paragraph is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth, at the time of the award," as referred to in (c) of this paragraph is to be computed by discounting the amount of the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%).

If Tenant is in default of this Lease, Landlord shall have the right to have a receiver appointed to collect rent and conduct Tenant's business. Neither the filing of a petition for the appointment of a receiver nor the appointment itself shall constitute an election by Landlord to terminate this Lease.

Landlord, at any time after Tenant commits a default, can cure the default at Tenant's cost. If Landlord, at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the rate of ten percent (10%) per annum from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be additional rent.

Rent not paid when due shall bear interest at the rate of ten percent (10%) per annum from the date due until paid. Said interest will accrue in addition to any late charges provided under this Lease.

17) SIGNS:

Tenant shall not install, or cause to be installed, any signs in or upon the premises or any part of the building of which the premises forms a part. Landlord shall provide standard sign on entry door to Premises and on appropriate building directories.


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 6 OF 10

18) LANDLORD'S ENTRY ON PREMISES:

Landlord and its authorized representatives shall have the right to enter the premises at all reasonable times for any of the following purposes:

(a) To determine whether the premises are in good condition and whether Tenant is complying with its obligations under this lease;

(b) To do any necessary maintenance and to make any restoration to the premises or the building and other improvements in which the premises are located that Landlord has the right or obligation to perform;

(c) To show the premises to prospective brokers, buyers, tenant, or persons interested in an exchange at any time during the term.

Landlord shall not be liable in any other manner for any inconvenience, disturbance, loss of business, nuisance or other damage arising out of Landlord's entry on the premises as provided in this paragraph except damage resulting from the acts or omission of Landlord or its authorized representatives.

Tenant shall not be entitled to an abatement or reduction of rent if Landlord exercises any rights reserved in this paragraph.

Landlord shall conduct its activities on the premises as allowed in this paragraph in a manner that will cause the least possible inconvenience, annoyance, or disturbance to Tenant.

19) SUBORDINATION AND ESTOPPEL:

In the event any mortgagee shall elect to have this Lease a prior lien to its mortgage, then and in such event, upon such mortgagee notifying the Tenant in writing to that effect, this Lease shall have priority over the lien of such mortgage to the same extent as if the same extent as if the same had been placed on record prior to such mortgage. Tenant covenants and agrees, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under any mortgage covering the demised premises, whether or not this Lease is terminated by such foreclosure or sale, that Tenant will, upon request by the purchaser, attorn to the purchaser upon any foreclosure or sale and recognize any such purchaser as the Landlord under this Lease, it being the intent hereof that if this lease should be terminated by such foreclosure or sale, it shall, on request by purchaser, be reinstated as a lease between the purchaser and Tenant. Tenant, upon request of any party in interest, shall execute such instrument or instruments as shall be requested to carry out the requirements of this paragraph, and if Tenant fails to execute and deliver any such instrument, Tenant irrevocably constitutes and appoints Landlord as Tenant's special attorney-in-fact to execute and deliver any such instrument.

Within ten (10) days after notice from Landlord, Tenant shall execute and deliver to Landlord, in recordable form, a certificate stating that this lease is unmodified and is in full force and effect, or in full force and effect as modified, and stating the modifications. The certificate also shall state the amount of minimum monthly rent, the dates to which the rent has been paid in advance, and the amount of any security deposit, and such other information as Landlord shall reasonably request. Failure to deliver the certificate within the ten (10) days shall be conclusive upon the party failing to deliver the certificate for the benefit of the party requesting the certificate and any successor the party requesting the certificate, that this Lease is in full force and effect and has not been modified except as may be represented by the party requesting the certificate. If a party fails to deliver the certificate within the ten (10) days, the party failing to deliver the certificate irrevocably constitutes and appoints the other party as its special attorney-in-fact to execute and deliver the certificate to any third party.


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 7 OF 10

20) NOTICE:

Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally or sent by prepaid, first-class mail. Any notice, demand, request, consent, approval or communication that either party desires or is required to give to the other party shall be addressed to Landlord at 298 S. Sunnyvale, Suite 105-A, Sunnyvale, CA 94086 and to Tenant at 298 S. Sunnyvale, Suite 209, Sunnyvale, CA 94086. Either party may change its address by notifying the other party of the change of address. Notice shall be deemed communicated within forty-eight (48) hours from the time of mailing if mailed as provided in this paragraph.

21) ATTORNEY'S FEES:

Tenant agrees that if Landlord is involuntarily made a party to any litigation concerning this Lease or the premises or any property of which the premises are a part by reason of any act or omission of Tenant and not because of any act or omission of Landlord, then Tenant shall hold harmless landlord from all liability by reason thereof, including reasonable attorney's fees incurred by Landlord in such litigation and all taxable court costs. If legal action shall be brought by either Landlord or Tenant for the unlawful detainer of the premises, for the recovery of any rent or any other sums due under the provisions of this Lease, or because of the breach of any term, covenant, or provision of this Lease, the party prevailing in said action (Landlord or Tenant, as the case may be) shall be entitled to recover from the party not prevailing costs of suit and a reasonable attorney's fee which shall be fixed by the Judge of the Court.

22) SURRENDER OF PREMISES: HOLDING OVER:

On expiration of ten (10) days after termination of the term, Tenant shall surrender to Landlord the premises and all Tenant's improvements and alterations in good condition (except for ordinary wear and tear occurring after the last necessary maintenance made by Tenant, destruction to the premises covered by paragraph 13, and alterations that Tenant is obligated to remove under the provisions of paragraph 9).

23) MISCELLANEOUS:

Time is of the essence of each provision of this Lease.

Whenever consent or approval of either party is required that party shall not unreasonably withhold such consent or approval.

Each party represents that it is has not had dealings with any real estate broker, finder, or other person, with respect to this Lease in any manner other than BT Commercial. Each party shall hold harmless the other party from all damages resulting from any claims that may be asserted against the other party by any broker, finder, or other person, with whom the other party has or purported has dealt.

This Lease shall be construed and interpreted in accordance with the laws of the State of California.

This Lease contains all the agreements of the parties and cannot be amended or modified except by a written agreement.

All provisions, whether covenants or conditions, on the part of Tenant shall be deemed to be both covenants and conditions.

The titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon and are not relevant to the construction or interpretation of any part of this Lease.


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 8 OF 10

As used in this Lease, the singular or plural number shall each be deemed to include the other whenever the context so indicates.

"Party" shall mean Landlord or Tenant; and if more than one person or entity is Landlord or Tenant, the obligations imposed on that party shall be joint and several.

The un-enforceability, invalidity, or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first above written.

COMMTOUCH, INC., A CALIFORNIA CORPORATION       DE ANZA BUILDING


By: /s/  SIGNATURE                              By: /s/  SIGNATURE
    -------------------------------------           ----------------------------

Date:  2/22/96                                  Date:  March 13, 1996
      -----------------------------------             --------------------------


THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS FOLLOWS.

PAGE 9 OF 10

[Suite #209 DIAGRAM]

EXHIBIT A


THIS ADDENDUM SHALL BE ATTACHED TO AND MADE A PART OF THAT CERTAIN LEASE AGREEMENT BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP AS "LANDLORD", AND COMMTOUCH, INC., A CALIFORNIA CORPORATION. "TENANT" FOR THE PREMISES COMMONLY KNOWN AS 298 S. SUNNYVALE AVENUE, SUITE 209, SUNNYVALE, CALIFORNIA AND DATED FEBRUARY 5, 1996 FOR REFERENCE PURPOSES ONLY.

PAGE 10 OF 10

1)   RENT SCHEDULE:

     Months 01-06        $1.30 per sq. ft. full service
     Months 07-12        $1.35 per sq. ft. full service
     Months 13-24        $1.40 per sq. ft. full service
     Months 25-36        $1.45 per sq. ft. full service

2) TENANT IMPROVEMENTS:

Landlord, at Landlord's sole expense, shall complete the following tenant improvements prior to the Occupancy Date:

1. Shampoo the carpet.
2. Eliminate a portion of the built-in counter as noted on the attached floorplan. The counter and walls need to be repaired and finished to look good.
3. Wash all vinyl wall covering; if it does not clean up, all walls shall be patched and painted with a mutually agreeable color.
4. Replace any broken or stained ceiling tiles.
5. Paint all HVAC registers and returns.

3) ADVANCED RENT:

Upon the execution of the lease, Tenant shall pay to Landlord the sum of Two Thousand Three Hundred Sixty-Eight and 60/100 Dollars ($2,368.60) for the first month of rent.

4) SECURITY DEPOSIT:

Upon the execution of the Lease, Tenant shall pay to Landlord the sum of Two Thousand Five Hundred and 00/100 Dollars ($2,500.00) as a security deposit.

5) MOLLY BOLTS:

Tenant shall not use molly bolts or any other items in the walls that will cause large holes.

6) PROPERTY TAX:

Any increase in taxes due to resale, refinancing or change of ownership during the lease term shall be borne by Landlord.

7) OPTION TO RENEW:

One (1) three (3) year option to renew the lease with three (3) months prior notice. Option Rent to be agreed on at the time the option is exercised.

8) OPTION TO CANCEL:

Tenant shall have the right to cancel this lease after the 24th month of the lease term by giving the Landlord 120 days written notice prior to the end of the 24th month. Should Tenant decide to cancel the last year of the lease term, Tenant shall pay a penalty of three months rent which equals $7,652.40, and the unamortized broker's commission which equals $1,585.14, for a total of $9,237.54. Said amount shall be due and payable to Landlord at the time Tenant notifies Landlord of its intent to cancel.

READ AND APPROVED:

TENANT:   Commtouch, Inc.,            LANDLORD: De Anza Building
          a California Corporation              a California Limited Partnership

By: [SIG]                             By: [SIG]
   -------------------------             ------------------------------

                                      March 13, 1996


FIRST AMENDMENT TO LEASE

This is an amendment to the lease dated February 5, 1996 for Suite 209 between De Anza Building as Landlord and Commtouch Inc., a California Corporation, as Tenant. Landlord and Tenant do hereby agree to the following:

1. TERM. Lease term shall be extended for one additional year, until April 30, 2000.

2. PREMISES. The Premises shall consist of 2,004 rentable square feet (includes 10% loan factor--see Exhibit "A").

3. RENT. Monthly rent shall be calculated at $2.25 per rentable square foot, fully serviced, which equals Four Thousand Five Hundred Nine Dollars and no cents ($4,509.00) per month.

All other terms and conditions of the original lease shall remain the same.

Read and Approved:

          /s/ SIGNATURE
-----------------------------------------------      -------------------
Tenant, Gideon Mantel, CEO, Commtouch Inc.           date


          /s/ SIGNATURE                                   2-15-99
-----------------------------------------------      -------------------
Landlord, Yun So Chang                               date


THIS IS ADDENDUM NO. 2 TO THE LEASE DATED FEBRUARY 5, 1966 BETWEEN DeANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP AND COMMTOUCH, INC. A CALIFORNIA CORPORATION.

SINCE ROBERT NOVAK IS NO LONGER WITH COMMTOUCH, GIDEON MANTEL, C.O.O. IS HEREINAFTER THE RESPONSIBLE PERSON FOR THE ABOVE MENTIONED LEASE.

IT IS FURTHER AGREED THAT TONI CASTRO BE MADE THE RESPONSIBLE PERSON IN THE ABSENCE OF MR. MANTEL. SHE CAN BE LET INTO THE SUITE AS REQUIRED (IF ACCIDENTALLY LOCKED OUT) AND IS THE CONTACT PERSON AT ALL TIMES FOR SUITE 209. RENT IS DUE ON THE FIRST OF THE MONTH AND LATE (CHARGES WILL APPLY) IF RECEIVED AFTER THE TENTH. ALL OTHER TERMS OF THE ABOVE MENTIONED LEASE REMAIN IN EFFECT.

/s/ HARRISON WILLIAMS                              12/10/96
--------------------------------------            ----------
Harrison Williams, General Partner                   Date
DeAnza Building, a Limited Partnership


/s/ GIDEON MANTEL                                   12-9-96
--------------------------------------            -----------
Gideon Mantel, C. O. O.                              Date

CommTouch, Inc.


EXHIBIT 21-1
SUBSIDIARIES OF THE REGISTRANT

COMPANY                      STATE OF INCORPORATION
-------                      ----------------------
CommTouch Software Inc.            California


EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions 'Experts," and to the use of our report dated March 15, 1999 (Except for Note 11, as to which the date is in Amendment No. 1 to the Registration Statement (Form F-1) and related Prospectus of CommTouch Software Ltd. for the registration of 3,000,000 shares of its ordinary shares.

Tel-Aviv, Israel

March 15, 1999 (except for Note 11

and to which the date is             )


                                                KOST FORER & GABBAY
                                      A member of Ernst & Young international

The foregoing Consent is in the form that will be signed upon the completion of the Recapitalization described in note 11 to the Consolidated Financial Statements.

Tel-Aviv, Israel

June 3, 1999

KOST FORER & GABBAY

A member of Ernst & Young international


EXHIBIT 23.3

CONSENT OF MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP

We consent to the references to the name of our firm under the caption "Legal Matters" in the Registration Statement (Form F-1) and related Prospectus of CommTouch Software Ltd. for the registration of 3,000,000 shares of its Ordinary Shares.

MCCUTCHEN, DOYLE, BROWN & ENERSEN LLP

Palo Alto, California

June 3, 1999