UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
    EXCHANGE ACT OF 1934
                                       OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 For the fiscal year ended December 31, 2002

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

         For the transition period from _________________ to ________________

                        Commission file number 000-26495

                             COMMTOUCH SOFTWARE LTD.
            (Exact name of Registrant as specified in its charter and
                 translation of Registrant's name into English)

                                     Israel
                 (Jurisdiction of incorporation or organization)

      1A Hazoran Street Poleg Industrial Park, P.O. Box 8511 Netanya 42504,
                            Israel 011-972-9-863-6888
                    (Address of principal executive offices)

 Securities registered or to be registered pursuant to Section 12(b) of the Act.

     Title of each class              Name of each exchange on which registered
     -------------------              -----------------------------------------
             N/A                                         None

 Securities registered or to be registered pursuant to Section 12(g) of the Act.

                  Ordinary Shares, par value NIS 0.05 per share
                                (Title of Class)

        Securities for which there is a reporting obligation pursuant to
                           Section 15(d) of the Act.

                                      None

    Indicate the number of outstanding shares of each of the issuer's classes of
capital  or common  stock as of the close of the  period  covered  by the annual
report (December 31, 2002).

    Ordinary Shares, par value NIS 0.05              22,219,696

    Indicate  by check mark  whether  the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

    Indicate by check mark which  financial  statement  item the  registrant has
elected to follow. Item 17 [ ] Item 18 [X]

<PAGE>

                                     PART I

Recent Development: Transition to Anti-Spam Business

During 2002,  concurrent with the divestiture of the Company's  outsourced email
businesses in transactions  with MailCentro  Inc. and  Telecomputing,  Inc. (see
discussion under "Item 5. Operating and Financial Review and Prospects"  below),
and the  sale of the  Company's  subsidiary  Wingra,  Inc.,  the  Company  began
marketing to service providers its "Commtouch Messaging Platform" ("CMP"), which
had been in development by the Company prior to that time. Following a concerted
effort to  penetrate  the  email  server  market  and a  determination  that the
continuing  unfavorable economic conditions would hamper potential sales of CMP,
and given the Company's inherent  knowledge of anti-spam  solutions based on its
many years as an ASP in the  outsourced  email market and the growing  worldwide
attention   that  has  been  directed  to  the  problem  of  spam,  the  Company
transitioned  its focus to the  anti-spam  market in mid-2002.  While no uniform
definition of spam exists,  the Company  generally defines "spam" as the sending
of unsolicited bulk email for commercial and non-commercial purposes.

During the latter half of 2002,  the Company  directed  all of its  research and
development  resources into completing the development of its anti-spam solution
for the  enterprise  market.  In early  2003,  the Company  completed  the first
version  of its  anti-spam  solution  known  as  ASAP!(TM)  (Anti-Spam  Adaptive
Protection),  which offers real-time enterprise protection against spam based on
a  patent-pending  technology.  ASAP!,  which  integrates with the  Microsoft(R)
Exchange Server, adapts its detection capabilities to recognize and counter spam
attacks as they are launched over the Internet to pre-emptively block spam. This
adaptability  feature is derived from ASAP!'s  architecture,  which  combines an
Enterprise Gateway  application (i.e.  software) with a remote Service Center to
deliver to  customers  the  benefits of  in-house  installation  and  outsourced
service in a single solution.

The Service Center  enables  Commtouch to analyze daily the  characteristics  of
millions  of email  messages,  so that a spam  attack  can be  identified  and a
detection  'signature' created and communicated to the Enterprise Gateway before
the attack can reach the corporate customer. The Enterprise Gateway provides the
customer's  IT  managers  with  the  ability  to  customize   ASAP!'s  detection
parameters to the needs of the organization and its employees.

The Company is marketing and selling ASAP! through a reseller (channel) program,
and as of June 9, 2003,  the  Company  has  contracted  with 25  resellers.  The
Company's  current  market  focus is on  enterprise  customers  located in North
America. The Company anticipates that it will begin commercially  shipping ASAP!
by mid to late June 2003.

In or about the period that the Company  transitioned to the anti-spam business,
it entered into two strategic  agreements with AxcessNet  Ltd.,  under which the
Company is receiving  consulting  and  fundraising  services from AxcessNet (see
discussion under "Item 10. Additional Information - Material Contracts" below).

As the  Company  shifted  its focus to the  anti-spam  market  during  2002,  it
continued  to  receive  royalty  payments  from  MailCentro  and  Telecomputing.
However,  it is  noted  that  these  royalty  payments  will  not  recur  to any
significant  extent during 2003 and  thereafter.  Furthermore,  revenues in 2002
from the few customers previously retained by the Company in connection with its
prior  email  business  are  currently  insignificant,  as most  of the  related
agreements have terminated.

Item 1. Identity of Directors, Senior Management and Advisers.

    Not applicable.

Item 2. Offer Statistics and Expected Timetable.

    Not Applicable

Item 3. Key Information.

Unless otherwise indicated, all references in this document to "Commtouch," "the
Company," "we," "us" or "our" are to Commtouch Software Ltd. or its wholly-owned
subsidiaries,  Commtouch  Inc.  and  Commtouch  (UK) Ltd  and,  as  relating  to
consolidated   financial   information   contained  herein  former  wholly-owned
subsidiaries Commtouch Latin America Inc. and Wingra, Inc., which were dissolved
and  sold  respectively  during  2002,  and  former  majority-owned

                                       2
<PAGE>
subsidiary, Commtouch K.K. (Japan) (during 2002 Commtouch divested itself of its
majority holdings and retained an equity interest in this company,  which is now
known as Imetrix).

The selected  consolidated  statements  of  operations  data for the years ended
December 31, 2000,  2001 and 2002 and the selected  consolidated  balance  sheet
data as of December 31, 2001 and 2002 have been  derived  from the  Consolidated
Financial  Statements  of  Commtouch  included  elsewhere  in this  report.  The
selected consolidated statements of operations data for the years ended December
31,  1998  and 1999  and the  selected  consolidated  balance  sheet  data as of
December  31,  1998,  1999 and 2000  have  been  derived  from the  Consolidated
Financial  Statements  of Commtouch not included  elsewhere in this report.  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
"Item 5.  Operating and Financial  Review and  Prospects"  and the  Consolidated
Financial Statements and the Notes thereto included elsewhere herein:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                             ---------------------------------------------------
                                                               1998      1999       2000*      2001*     2002
                                                             -------   --------   --------   --------   --------
                                                                  (USD in thousands, except per share data)
<S>                                                          <C>       <C>        <C>        <C>        <C>
Consolidated Statements of Operations Data:
Revenues:
   Email services .........................................  $   389   $  4,251   $ 17,771   $ 13,318   $  3,238
   Software licenses, maintenance and services ............     --         --        1,000        270        200
                                                             -------   --------   --------   --------   --------
     Total revenues .......................................      389      4,251     18,771     13,588      3,438

   Cost of revenues:
   Email services .........................................      569      3,643     11,800     13,962      1,675
   Software licenses, maintenance and services ............     --         --         --         --         --
                                                             -------   --------   --------   --------   --------
     Total cost of revenues ...............................      569      3,643     11,800     13,962      1,675
                                                             -------   --------   --------   --------   --------
   Gross profit (loss) ....................................     (180)       608      6,971       (374)     1,763
                                                             -------   --------   --------   --------   --------
 Operating expenses:
   Research and development, net ..........................    1,149      2,942     10,244      5,884      2,246
   Sales and marketing ....................................    2,001      7,722     26,534     12,894      1,176
   General and administrative .............................      604      4,328     13,455     10,337      2,588
   Amortization of prepaid marketing expenses .............     --        3,263      4,508       --         --
   Write-off of  property and equipment and other
       ....................................................     --         --         --       10,166        750
   Amortization of stock-based employee deferred
     compensation .........................................       91      3,436      3,050      2,204        551
                                                             -------   --------   --------   --------   --------
     Total operating expenses .............................    3,845     21,691     57,791     41,485      7,311
                                                             -------   --------   --------   --------   --------
 Operating loss ...........................................   (4,025)   (21,083)   (50,820)   (41,859)    (5,548)
 Interest and other income (expenses), net ................     (326)     1,232      2,886        583        (60)
 Equity in losses of affiliate ............................     --         --         --         --          (56)
 Write-off of impaired long-term investments ..............     --         --       (5,000)    (2,000)      --
 Minority interest ........................................     --         --           55        285         74
                                                             -------   --------   --------   --------   --------
Loss from continuing operations ...........................   (4,351)   (19,851)   (52,879)   (42,991)  $ (5,590)

 Gain on disposal of Wingra ...............................     --         --         --         --        1,014
 Discontinued operations - Wingra .........................     --         --       (1,346)   (18,016)      (335)
                                                             -------   --------   --------   --------   --------

 Income (Loss) from sale of discontinued operations .......     --         --       (1,346)   (18,016)       679
                                                             -------   --------   --------   --------   --------
Net Loss ..................................................  $(4,351)  $(19,851)  $(54,225)  $(61,007)  $ (4,911)
 Basic and diluted net loss per share
   Loss from continuing operations ........................  $ (3.00)  $  (2.65)  $  (3.42)  $  (2.51)  $  (0.27)
   Income (Loss) from sale of discontinued operations .....     --         --        (0.09)     (1.05)  $   0.03
                                                             -------   --------   --------   --------   --------
 Net loss .................................................  $ (3.00)  $  (2.65)  $  (3.51)  $  (3.56)  $  (0.24)
                                                             -------   --------   --------   --------   --------
 Weighted average number of shares used in
 Computing basic and diluted net loss per share ...........    1,450      7,487     15,462     17,152     20,854
                                                             -------   --------   --------   --------   --------
</TABLE>
                                       3
<PAGE>
                                                 December 31,
                                  ---------------------------------------------
                                    1998      1999      2000     2001      2002
                                  -------   --------  -------  -------   ------
                                                 (in thousands)
Consolidated Balance Sheet Data:
 Cash and cash equivalents .....  $   834   $ 65,996  $20,831  $ 2,248   $1,388
 Marketable securities .........     --       18,050    8,607     --       --
 Working capital (deficit) .....   (1,440)    88,053   23,768     (607)     549
 Total assets ..................    2,366    100,336   77,280    9,545    2,984
 Long-term liabilities .........      530        497    1,825      940      413
 Shareholders' equity (deficit)      (815)    95,312   61,728    4,059    1,437

* - Reclassified  to conform to the current years  classification  mainly due to
divestiture of Wingra.

                           FORWARD LOOKING STATEMENTS

This  report  contains   forward-looking   statements  that  involve  risks  and
uncertainties. These statements relate to our future plans, objectives, beliefs,
expectations  and intentions.  In some cases,  you can identify  forward-looking
statements  by our use of words such as  "expects,"  "anticipates,"  "believes,"
"intends," "plans," "seeks" and "estimates" and similar expressions.  Our actual
results,  levels of activity,  performance or achievements may differ materially
from those  expressed or implied by these  forward-looking  statements.  Factors
that could cause or contribute  to these  differences  include  those  discussed
below and elsewhere in this report.

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

Business Risks

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

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

Dependence upon resellers and product concentration

The Company  expects that it will continue to be dependent  upon resellers for a
significant portion of its revenues.  If anticipated orders from these resellers
fail to materialize,  the Company's  business,  operating  results and financial
condition will be materially adversely affected.

The  Company  expects  to  derive  the  vast  majority  of its  revenues  in the
foreseeable  future  from  sales  of its  anti-spam  solutions.  See  "Item 5 --
"Operating and Financial  Review and Prospects" and "Item 4 - Information on the
Company."

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

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

                                       4
<PAGE>
A number  of  factors,  many of which  are  enumerated  in this  "Risk  Factors"
section,  are likely to cause fluctuations in our operating results and/or cause
our share  price to decline.  Other  factors  which may cause such  fluctuations
include:

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

     o   The market acceptance of our new anti-spam solutions

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

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

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

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

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

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

     o   The threat of de-listing by the NASDAQ;

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

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

     o   The substantial decrease in information technology spending in general;

     o   Pricing of our solutions;

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

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

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

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

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

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

                                       5
<PAGE>
In the market for  anti-spam  solutions,  there are a large  number of providers
offering "content filtering" solutions (solutions focusing solely on the content
of potential spam email). Other providers that offer forms of software (gateway)
and/or service based solutions and which may be viewed as direct  competitors to
Commtouch  include  Brightmail(R)  and Postini(R).  There is a great  likelihood
that,  as the market for  anti-spam  solutions  further  develops  and given the
difficult  technological  hurdles in attempting to create an effective solution,
established  Internet security players will enter the market, who may be able to
leverage  their  market  position  and  resources  to  capture a portion  of the
anti-spam market.

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

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

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

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

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

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

We incurred net losses of  approximately  $54.2 million in 2000,  $61.0 in 2001,
$4.9  million in 2002 and a net loss of $1.14  million for the first  quarter of
2003. As of December 31, 2002 and March 31, 2003, we had an accumulated  deficit
of approximately $151.7 million and approximately $152.8 million,  respectively.
We have not achieved profitability in any period, and we might continue to incur
net losses in the future.  If we do not achieve  profitability,  our share price
may decline further.

Possible need for additional funds

The Company remains very thinly capitalized.  As such, we might become dependent
upon  raising  additional  funds to finance our  business.  Our cash  balance at
December  31,  2002 and  March  31,  2003 was  approximately  $1.4  million  and
approximately $1.1 million,  respectively.  If we are unable to raise additional
funds, the Company could fail. There can be no assurance that we will be able to
raise  necessary  funds or that we will be able to do so on terms  acceptable to
us.
                                       6
<PAGE>
If needed,  our inability to obtain adequate  capital would limit our ability to
continue our operations.  Any such additional  funding may result in significant
dilution to existing stockholders.

As discussed below under "Item 10. Additional Information.  ISRAELI TAXATION AND
INVESTMENT  PROGRAMS--Law  for the  Encouragement  of  Industrial  Research  and
Development,  1984," in the past we have received  funds for the  development of
our business from the OCS.  However,  under our Convertible  Loan Agreement,  we
have agreed to limit our total funding  received or receivable from the OCS to a
maximum in the  aggregate  of  $1,500,000  during  the term of the loan.  Grants
received  from  the OCS  through  2002  that  the  Company  potentially  will be
obligated  to repay  totaled  $800,000  approximately,  and the Company has been
informed that the OCS has approved an additional grant of approximately $480,000
in 2003.

Risk of Litigation

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

Indemnification of Directors and Officers

The Company has agreements with its directors,  subject to Israeli law (Item 5 -
"Operating and Financial Review and Prospects"), that provide for the Company to
indemnify these directors for (a) any monetary  obligation imposed upon them for
the benefit of a third party by a judgment,  including a settlement agreed to in
writing by the Company, or an arbitration  decision certified by the court, as a
result of an act or omission of such person in his capacity as a director of the
Company, and (b) reasonable litigation expenses,  including legal fees, incurred
by such a director for which  he/she is obligated to pay by a court order,  in a
proceeding  brought against him/her by or on behalf of the Company or by others,
or in connection  with a criminal  proceeding in which he/she was acquitted,  in
each case relating to acts or omissions of such person in his/her  capacity as a
director of the Company.

Risk due to economic conditions

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

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

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

Our low  head-count  of 32  employees  (as of May 2003)  continues to strain our
operational resources, and although the Company added additional sales personnel
in the early months of 2003, the lack of sufficient personnel may compromise our
ability to enhance revenues.

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

At December  31,  2002,  we had sales  offices in Israel and the United  States.
Depending  on the  success of our  marketing  efforts in North  America,  we may
pursue the  marketing of our  anti-spam  solutions in  international  markets by
utilizing

                                       7
<PAGE>
appropriate  distributorship  channels.  However,  we may not be able to compete
effectively in international markets due to various risks inherent in conducting
business internationally, such as:

     o   differing technology standards;

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

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

     o   difficulties in collecting  accounts  receivable and longer  collection
         periods;

     o   unexpected changes in regulatory requirements;

     o   political and economic instability;

     o   potentially adverse tax consequences; and

     o   potentially reduced protection for intellectual property rights.

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

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

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

Technology Risks

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

The spam and  anti-spam  industry is  characterized  by difficult  technological
challenges,  sophisticated "spammers" and constantly evolving spam practices and
targets that could render our  anti-spam  solutions and  proprietary  technology
ineffective. Our success depends, in part, on our ability to continually enhance
our existing  anti-spam  solutions and to develop new  solutions,  functions and
technology that address the potential  needs of prospective  customers and their
users.  The  development  of proprietary  technology and necessary  enhancements
entails  significant  technical  and  business  risks and  requires  substantial
expenditures  and  lead-time.  We may not be able to keep pace  with the  latest
technological  developments.  We  may  not  be  able  to  use  new  technologies
effectively or adapt to customer or end user  requirements or emerging  industry
standards.  Also, we must be able to act more quickly than our competition,  and
may not be able to do so. See "Item 4 - Information on the Company."

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

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

                                       8
<PAGE>
Although we have not  experienced any material  software  defects to date in our
anti-spam  solutions  offering,  it is  possible  that,  despite  testing by us,
defects  may  exist in the  software  we  license.  These  defects  could  cause
interruptions  in our anti-spam  solutions  for customers  that could damage our
reputation,  create  legal  risks,  cause  us  to  lose  revenue,  delay  market
acceptance  or divert our  development  resources,  any of which could cause our
business to suffer.

Investment Risks

We may need additional capital.

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

Based on the cash balance at March 31, 2003,  current  projections  of revenues,
related expenses,  the ability to further curtail certain discretionary expenses
and completion of the  convertible  loan  transaction  (as discussed above under
paragraph  a of this Item 3 and below  under Item 5,  "Operating  and  Financial
Review and Prospects - Liquidity and Capital  Resources"),  the Company believes
it has  sufficient  cash to  continue  operations  for at least the next  twelve
months.

We are  subject to a class  action  lawsuit  which may have a  material  adverse
effect on us.

Following  our  restatement  of revenues  for the first three  quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the  Northern  District  of  California  against  the Company and certain of our
officers and a director,  alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
These lawsuits were consolidated into one action in late 2001.  Thereafter,  the
Company filed a Motion to Dismiss,  which was granted. The plaintiffs then filed
a second amended and  consolidated  complaint,  and our second motion to dismiss
was only partially accepted, with the end result being that the plaintiffs filed
a third  amended  and  consolidated  complaint.  We  (including  the  individual
defendants) filed an answer to that complaint,  and the case then moved into the
discovery stage, with the case being set for trial in January 2004. In May 2003,
a settlement  agreement was signed between the plaintiffs and defendants and the
court  thereafter  issued a  preliminary  order  approving the  settlement.  The
settlement  calls for the  payment of $15 million to the  plaintiffs,  with this
amount to be fully funded by the Company's Directors and Officers policy.  While
the payment to plaintiffs under this settlement should not cause the Company any
financial hardship,  we are unable to predict whether the whole or a substantial
portion of the class members will choose to  participate  in the  settlement and
whether  ultimately the court will issue a final order approving the settlement.
The settlement  does not contain any admissions or findings of wrongdoing on the
part of the  defendants,  and we  continue  to  maintain  that the  Company  and
individual defendants acted properly at all times.

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

Our ordinary shares are quoted on the Nasdaq SmallCap Market.  To continue to be
listed, we are required to maintain shareholders' equity of at least $2,500,000,
or market  value of our  outstanding  shares  (excluding  shares held by company
insiders and principal  shareholders) of at least  $35,000,000,  or we must have
realized at least $500,000 in net income from continuing  operations in our last
fiscal year or in two of our last three fiscal years.

Currently,  we are not in  compliance  with any of these  tests and  Nasdaq  may
delist  our  ordinary  shares.  If this  occurs,  trading  in our  shares may be
conducted in the  over-the-counter  market in the so-called "pink sheets" or, if
available,  the "OTC Bulletin  Board  Service." As a result,  an investor  would
likely find it significantly more difficult to dispose of, or to obtain accurate
quotations as to the value of, our shares. The Company recently has been advised
by Nasdaq that it no longer meets the  requirements  for listing on the SmallCap
Market and is in the process of discussing  with Nasdaq  appropriate  efforts to
become compliant.

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

                                       9
<PAGE>
Nasdaq also may delist our shares if it deems it necessary to protect  investors
and the public interest.

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

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

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

Our directors and  affiliates of our directors,  our executive  officers and our
shareholders  who currently  individually  beneficially own over five percent of
our ordinary shares, beneficially own, in the aggregate,  approximately 31.3% of
our outstanding ordinary shares as of February 7, 2003 plus warrants and options
exercisable  within 60 days thereof.  If they vote together  (especially if they
were to convert all beneficial holdings into shares entitled to voting rights in
the Company),  these shareholders will be able to exercise significant influence
over all matters  requiring  shareholder  approval,  including  the  election of
directors and approval of significant corporate transactions. This concentration
of ownership  could also delay or prevent a change in control of Commtouch.  The
above percentage of beneficial  ownership includes warrants and options totaling
11.24% of the outstanding ordinary shares which are underwater as of February 7,
2003.

InfoSpace  beneficially  owns  approximately  8.7% of our  outstanding  ordinary
shares  (inclusive of a warrant  underwater as of February 7, 2003  constituting
4.9% of the  outstanding  ordinary  shares).  InfoSpace  merged  with  Go2Net in
October 2000. In connection  with this merger  InfoSpace  assumed Go2Net shares,
warrants and rights. In 1999, in connection with entering into an email services
agreement,  we issued to  InfoSpace  a warrant to  purchase  1,136,000  ordinary
shares at an exercise price of $12.80 per share.  Concurrent with Commtouch Inc.
entering into the email services agreement, we issued 896,057 ordinary shares to
InfoSpace  and  448,029  in  ordinary  shares  to Vulcan  Ventures  in a private
placement at $14.88 per share. We believe that Vulcan  Ventures  divested itself
of all of its  shareholdings  in the  Company.  The warrant is  non-forfeitable,
fully vested and immediately exercisable, and will expire in July 2004.

Pursuant to the Ordinary Shares and Warrants  Purchase  Agreement dated February
27, 2002:

     o   OZF Ltd.  acquired  beneficial  ownership of approximately  7.2% of our
         outstanding  ordinary  shares  (inclusive of warrants  underwater as of
         February 7, 2003 constituting 2.7% of the outstanding ordinary shares);

     o   Gideon Mantel, CEO and a director in the Company,  acquired  additional
         shares and warrants to purchase  shares in the Company.  Together  with
         his  prior  holdings  in the  Company,  Mr.  Mantel  beneficially  owns
         approximately  7.9% of our outstanding  ordinary  shares  (inclusive of
         warrants  underwater  as of February 7, 2003  constituting  1.8% of the
         outstanding ordinary shares); and

     o   Nahum Sharfman,  a director in the Company,  acquired additional shares
         and warrants to purchase shares in the Company. Together with his prior
         holdings in the Company,  Mr. Sharfman  beneficially owns approximately
         6.1% of our  outstanding  ordinary  shares  (inclusive  of warrants and
         options  underwater  as of  February 7, 2003  constituting  1.8% of the
         outstanding ordinary shares).

These  significant  shareholders  will be able to  significantly  influence  and
possibly  exercise  control  over  most  matters   requiring   approval  by  our
shareholders,  including the election of directors  and approval of  significant
corporate
                                       10
<PAGE>
transactions.  This  concentration  of  ownership  may also  have the  effect of
delaying or preventing a change in control.  InfoSpace  will also have the right
to name  one  director  to our  Board as long as it  continues  to hold at least
620,022  shares,  including  the shares  issuable upon exercise of the InfoSpace
warrant. It named Thomas Camp to the Board under this provision, who resigned on
August 22, 2001 and was not replaced by  Infospace.  In  addition,  conflicts of
interest may arise as a consequence of these  significant  shareholders  control
relationship with us, including:

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

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

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

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

The sale, or  availability  for sale, of substantial  quantities of our ordinary
shares may have the  effect of further  depressing  its  market  price.  A large
number  of  our  ordinary  shares  which  were  previously   subject  to  resale
restrictions,  are  currently  eligible  for resale.  In addition a  significant
number of shares  are  eligible  for  resale in the future  (i.e.  those  shares
covered by warrants  issued in the private  round of financing of February  2002
and those  shares  that may be issued if the  lenders  in the  convertible  loan
transaction  decide to  exercise  warrants  and/or  convert the  Company's  loan
obligations to equity,  as discussed  below under paragraph a of Item 3 and Item
5,  "Operating  and  Financial  Review and  Prospects  -  Liquidity  and Capital
Resources").

Also, the shares that could be issued under the Convertible Loan Agreement would
dilute existing shareholders

Risk of occurrence of event of default under Convertible Loan Agreement

The Company is required to abide by the terms and provisions of the  Convertible
Loan Agreement.  Upon failure to do so, for example, failure to pay principal or
interest, failure to obtain the registration with the SEC of the shares that may
be issued to lenders under the agreement,  failure to maintain consolidated cash
reserves of at least $500,000,  upon the lenders' demand, we would be in default
of the  agreement.  The lenders  were granted  security  interests in all of the
Company's assets.  If an event of default is not cured by the Company,  the loan
would accelerate and all amounts due under the loan would immediately become due
and payable.  If the Company is unable to repay the loan  amounts,  the lenders,
among  other  things,  would  have the  right  to  foreclose  on their  security
interests  in the  Company's  assets by seizing and  selling  all the  Company's
assets. See the discussion under Item 4 "Information on the Company".

Intellectual Property Risks

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

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

Other parties may assert  infringement claims against us. We may also be subject
to legal  proceedings and claims from time to time in the ordinary course of our
business,  including claims of alleged  infringement of the patents,  trademarks

                                       11
<PAGE>
and other  intellectual  property  rights of third  parties by ourselves and our
licensees. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.

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

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

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

While laws  aimed at  curtailing  the  spread of spam have been  adopted by some
states,  enforcement  has not been  widespread and the lack of a body of federal
anti-spam law has  highlighted  an increase in the amount of spam  traffic.  The
growth and  development  of the spam market may prompt calls for more  stringent
Internet user protection laws that may limit the ability of companies  promoting
or  delivering  spam  online.  Moreover,  the  applicability  to the Internet of
existing  laws in  various  jurisdictions  governing  issues  such  as  property
ownership,  sales and other taxes,  libel and personal  privacy is uncertain and
may take years to resolve.  The adoption of additional laws or  regulations,  or
the application of existing laws or regulations to the Internet,  may impair the
growth of the Internet or commercial  online services.  All or some of the above
laws could decrease the demand for our anti-spam solutions and increase our cost
of doing business, or otherwise harm our business and operating results.

Risks Relating to Operations in Israel

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

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

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

Since the establishment of the State of Israel in 1948, a state of hostility has
existed,  varying in degree and  intensity,  between  Israel  and  certain  Arab
countries.   Since  September  2000,  a  continuous   armed  conflict  with  the
Palestinian  Authority has been taking place.  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, Israel continues
to face  hostile  actions and threats from  various  elements in the region.  We
cannot predict whether or in what manner these problems will be resolved.

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

                                       12
<PAGE>
Certain of our officers and employees are currently  obligated to perform annual
reserve  duty in the Israel  Defense  Forces and are subject to being called for
active military duty at any time.  Although  Commtouch has operated  effectively
under these  requirements  since its inception,  we cannot predict the effect of
these obligations on Commtouch in the future.  Our operations could be disrupted
by the absence,  for a significant period, of one or more of our officers or key
employees due to military service.

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

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

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

Prior to 1998, we received  grants from the  Government  of Israel,  through the
Office of the Chief Scientist (OCS), for the financing of a significant  portion
of our research and  development  expenditures  in Israel.  In 2001 and 2002, we
applied  for  additional  grants and we may apply for  additional  grants in the
future. In 1999 and 2000, we did not receive any grants from the OCS. In 2001 we
received  $0.6  million  and in 2002 we  received  $0.2  million.  While we have
applied  for an  additional  grant in 2003,  the OCS budget has been  subject to
reductions which may affect the availability of funds for this prospective grant
and other  grants in the future.  Therefore,  we cannot be certain  that we will
continue to receive  grants at the same rate, or at all. In addition,  the terms
of any  future  OCS  grants  may be less  favorable  than  our past  grants.  In
connection with research and  development  grants received from the OCS, we must
pay  royalties  to the OCS on the  revenue  derived  from the sale of  products,
technologies and services developed with grants from the OCS.

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

The Company received grants from the Government of Israel,  through the OCS, for
the  financing  of  a  significant  portion  of  its  research  and  development
expenditures in Israel relating to some of Commtouch's  previous  products.  The
related funded projects ultimately failed and the relevant royalty payments were
made by the Company to the OCS on behalf of the  revenues  generated  from these
projects.  The Company will not be obligated  to pay future  royalties  for such
projects  undertaken  in 2001 or  earlier  years,  since no  future  revenue  is
expected from these projects. Accordingly, the Company decided to write down the
$0.4  million  accrual  it  recorded  in past  years and  determined  that as of
December 31, 2001 there were no contingent  liabilities for royalties from these
projects.  In March  2002,  the Company  submitted  an  application  for project
failure with regard to these  projects,  and the OCS  subsequently  approved the
application.  Also,  we received  royalty-bearing  grants in 2002  totaling $0.2
million.  The OCS is  entitled  to revisit  the status of past  projects  it has
confirmed  as "failed" to ensure  that the  Company is not  currently  utilizing
technology developed under such projects.

                                       13
<PAGE>
Also,  under our Convertible  Loan Agreement,  we have agreed to limit our total
funding  received or  receivable  from the OCS to a maximum in the  aggregate of
$1,500,000  during the term of the loan.  Grants  received  from the OCS through
2002 that the Company  potentially  will be obligated to repay totaled  $800,000
approximately,  and the Company has been  informed  that the OCS has approved an
additional grant of approximately $480,000 in 2003.

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

Pursuant to the Law for the Encouragement of Capital Investments, the Government
of Israel through the Investment Center has granted "approved enterprise" status
to a portion  of our  capital  investment  programs.  The  portion of our income
derived  from our  approved  enterprise  program  will be exempt  from tax for a
limited  period  of two  years  commencing  in the  first  year in which we have
taxable income, and will be subject to a reduced tax for an additional period of
five to eight years  dependent on the  percentage of foreign  shareholders.  The
benefits   available  to  an  approved   enterprise  are  conditioned  upon  the
fulfillment  of conditions  regarding a required  amount of investments in fixed
assets and a portion of these investments being made with net proceeds of equity
capital  raised  by us as  stipulated  in  applicable  law  and in the  specific
certificates of approval.  If we fail to comply with these conditions,  in whole
or in part, we may be required to pay  additional  taxes for the period in which
we  benefited  from the tax  exemption  or reduced tax rates and would likely be
denied  these  benefits  in the future.  In  addition,  the law and  regulations
prescribing  the benefits  provide for an  expiration  date for the grant of new
benefits.  The expiration date has been extended  several times in the past. The
expiration  date  currently is end of December  2003 and no new benefits will be
granted after that date unless the expiration date is extended. We cannot assure
you that new benefits  will be available  after  December  2003 or that benefits
will be  continued in the future at their  current  levels or at all. Out of our
three approved enterprise programs, two were cancelled as of December 31, 2002.

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

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

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

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

Tax reform in Israel may reduce our tax benefits,  which might adversely  affect
our profitability.

Item 4. Information on the Company.

Overview

We are a provider of anti-spam  solutions to enterprise  customers  (See PART I,
"Recent  Development:  Transition to Anti-Spam Business" for additional detailed
information).  The Company offers its anti-spam  solutions to small,  medium and
large  enterprises  through a variety of distribution  channels,  namely various
reseller  channels.  The  solutions  are also  available  for  integration  with
security,  content filtering,  anti-virus and other filtering  solutions through
alliances and strategic partnerships.

                                       14
<PAGE>
In its previous  capacity as a dedicated  email service  provider to millions of
users,  the  Company  found it  necessary  to design an  effective  strategy  to
eliminate  millions of unsolicited  commercial  email messages daily. It is this
strategy  that has led the Company to develop and deliver its current  anti-spam
solutions,  which  are  positioned  to  tackle  sophisticated  spam  attacks.  A
combination of proprietary and patent-pending technologies makes it possible for
Commtouch to detect,  alert and block most spam attacks as they are  distributed
over the Internet.

Commtouch Offerings

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

In particular, ASAP! operates to help eliminate spam as follows:

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

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

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

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

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

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

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

We also offer an ASAP! Software  Development Kit ("SDK").  The ASAP! SDK enables
third-party vendors to integrate ASAP! advantages into their existing offerings,
providing them with full spam  identification and spam  classification  services
from the ASAP!  Service Center.  These vendors  benefit from ASAP!  expertise in
blocking spam and other unwanted  email traffic  without the need to develop and
dedicate a service  department  in-house.  The SDK  communicates  fully with the
remote Service Center,  receiving  results to queries about suspicious  messages
and acting  according to set policies on the customer side. Each such vendor has
the  flexibility  to determine  how best to integrate the SDK results into their
solution.  For example,  if the Service Center  classifies a specific message as
spam, the
                                       15
<PAGE>
vendor's  application may respond by either quarantining the message,  rejecting
it completely or sending a bounce-back message to its sender or any other option
provided by the vendor's specific application.

The SDK consists of a set of APIs,  which  receive  characteristics  of incoming
messages as input from the  vendor's  application,  returning  the status of the
message  as  output  from the  Service  Center.  The  vendor  has the  option of
installing an API, which returns a deterministic  result classifying messages as
either spam or non-spam,  or using an API that classifies  messages based on the
level of  suspicion  that the  message is spam.  Each vendor can  implement  its
solution  differently,  making the unique  advantages  of SDK  flexible to match
particular needs.

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

     o   Anti-virus applications

     o   Content filtering solutions

     o   Firewall systems

     o   Security servers

     o   Other network appliances

Competitive Landscape

The markets in which  Commtouch  competes are intensely  competitive and rapidly
changing.  We believe  there is no single  competitor  that offers the  complete
package  of  anti-spam  protection  that  Commtouch  provides.  We are  aware of
competitors  that  provide  anti-spam  products  either  alone  or as  part of a
complete messaging system or email security system.

Commtouch's  principal  competition  are  companies  that offer  various  e-mail
content filtering products.  Companies that sell products that compete with some
of  the  features  within  our  products  include   Brightmail(R),   Postini(R),
Tumbleweed,  CipherTrust,  SurfControl,  Clearswift  Technologies,  CipherTrust,
Inc., and Trend Micro Incorporated.

The  principal  competitive  factors  in our  industry  include  price,  product
functionality,  product  integration,  platform  coverage  and ability to scale,
worldwide  sales  infrastructure  and  global  technical  support.  Some  of our
competitors  have  greater  financial,  technical,  sales,  marketing  and other
resources than we do, as well as greater name recognition and a larger installed
customer  base.  Additionally,  some of  these  competitors  have  research  and
development capabilities that may allow them to develop new or improved products
that may compete with product lines we market and distribute.

We expect that the market for anti-spam  solutions will become more consolidated
with larger companies being better  positioned to compete in such an environment
in the long term.  As this market  continues  to develop,  a number of companies
with greater  resources  than ours could attempt to increase  their  presence in
this market by acquiring or forming strategic  alliances with our competitors or
business  partners.  Our  success  will  depend on our ability to adapt to these
competing  forces,  to develop  more  advanced  products  more  rapidly and less
expensively than our competitors,  and to educate potential  customers as to the
benefits of licensing our products  rather than  developing  their own products.
Competitors  could introduce  products with superior  features,  scalability and
functionality  at lower prices than our products and could also bundle  existing
or new products with other more established  products that discourage users from
purchasing  our  products.  Increased  competition  is likely to result in price
reductions,  reduced gross margins and loss of market share,  any of which could
harm our business.

See also  disclosure  under  "Item 3. Key  Information-  RISK  FACTORS--Business
Risks--We have many  established  competitors who are offering  solutions to the
spam problem."

Convertible Loan Transaction

To enhance the  Company's  overall  financial  position,  on January  29,  2003,
Commtouch  entered  into  a  Convertible  Loan  Agreement   ("Convertible   Loan
Agreement"),  including certain ancillary  agreements and documents  attached as
exhibits  thereto,  with  certain  lenders  identified  in  Exhibit  "A" to such
Convertible Loan Agreement. The Convertible Loan Agreement allowed for a maximum
possible loan amount of $1,250,000. As of March 26, 2003, the lenders had agreed
to advance Commtouch a loan of $905,000. On March 28, 2003, by way of Addendum 1
to the  Convertible  Loan  Agreement,  the Company  and the lenders  amended the
Convertible Loan Agreement to provide an option to certain of

                                       16
<PAGE>
the lenders, their affiliates and investors from the Company's previous round of
financing  the  right  to  loan  the  Company  an  amount  of  up  to  $345,000,
representing  the  difference   between  the  maximum  loan  amount   originally
contemplated  and the amount of the loan as at March 26,  2003.  This option was
exercised on May 11, 2003.

The Company has received the total loan amount of  $1,250,000  from the lenders.
The loan is to be repaid after three years,  unless converted into equity by the
lenders or a defined default or other event  triggering  early repayment is met,
and it  bears  interest  at a rate of ten  percent  per  annum  to be paid  with
priciple.  Furthermore,  the loan principal and interest may be converted by the
lenders  into  equity in the  Company at any time  during  the loan  term,  at a
conversion  price of $0.25 per Ordinary  Share  ("Conversion  Price").  Warrants
exercisable  for purchase of up to 5,000,000 of the  Company's  ordinary  shares
have been issued to the lenders (based on loan amounts  advanced  divided by the
Conversion Price).  Each one-third of the warrants are exercisable at prices per
Ordinary  Share of $0.25,  $0.33 and $0.50  respectively,  and the  warrants are
exercisable  at any time within five years of issuance.  Warrants  shall also be
issued on an annual basis for any accumulated interest on the loan.

As security for repayment of the loaned  amounts,  the lenders have been granted
security  interests in all of the assets of the Company.  Also,  the lenders are
entitled to nominate  one director for election to the Board of Directors of the
Company or appoint one observer to the Board.

Also,  the Company has agreed  that,  among  other  things,  until all loans are
repaid, it will;

     o   not pay any  dividends  or make  any  distribution  on its  outstanding
         Ordinary  Shares,  or redeem any Shares for  consideration  without the
         prior written consent of 50% of all the lenders;

     o   not alter its capital structure or permit any corporate  reorganization
         and/or  disposal of assets  outside the  ordinary  course of  business,
         except  as   authorized   by  vote  of  its  board  of  directors   and
         shareholders;

     o   secure approval of 50% of the lenders before issuing  preferred  shares
         or other preferential liquidation rights;

     o   not create any security  interests on indebtedness that will rank prior
         to advances  under the  Convertible  Loan  Agreement  and the  security
         interest  granted under the instruments  provided for in the Agreement,
         without approval of 50% of the lenders;

     o   along with its  subsidiaries,  continue to engage  substantially in the
         same  businesses  and not to enter into  certain  business  combination
         transactions;

     o   limit its total funding  received or receivable from the Israeli Office
         of Chief Scientist  ("OCS") to a maximum in the aggregate of $1,500,000
         during the term of the loan.

Lenders  comprising not less than 50% of all the lenders may require the Company
to  register  with the SEC the resale of all  Ordinary  Shares  issuable  to the
lenders  under the  Agreement.  The lenders may also sell their  shares in other
registration  statements  that the Company  files for its own benefit or that of
third parties who wish to sell shares. This right expires three (3) months after
the third anniversary of the last applicable  Warrant issuance date. The maximum
number of shares that may be registered is 13,310,000.  The Company will pay the
expenses  of  these  registrations,   except  for  underwriting   discounts  and
commissions and the fees and expenses of any lender's  counsel.  The Company has
also agreed to indemnify the lenders  against certain  liabilities  arising from
the public offer and sale of their shares pursuant to the registration.

The Company will be in default under the Convertible  Loan Agreement and subject
to prior conversion in accordance unless agreed otherwise by the Lender Majority
(""Lender  Majority" shall mean those Lenders who have lent  collectively to the
Company  over  50% of  the  Loan  Amount"),  all  amounts  due  thereunder  will
accelerate  and  immediately  become due and  payable if certain  events  occur,
including the following:

     o   the Company's  failure to repay amounts due under the Convertible  Loan
         Agreement;

     o   the Company's failure to repay amounts due on any debt ranking prior to
         or on a parity with the Convertible Loan Agreement or the occurrence of
         any event of default in any loan  arrangement  ranking prior to or on a
         parity with the Convertible Loan Agreement;

                                       17
<PAGE>
     o   if  certain  statements  made by the  Company  in  connection  with the
         Convertible Loan Agreement were materially untrue

     o   if the  Company's  cash  reserves  on a  consolidated  basis fall below
         $500,000;

     o   the Company  admits in writing to a lender under the  Convertible  Loan
         Agreement its inability to pay its debts;

     o   the  filing  any  proceedings  regarding  the  Company  in  bankruptcy,
         insolvency,   winding   up,   dissolution,   liquidation,   moratorium,
         receivership or reorganization  for the benefit of creditors,  which in
         the case of  proceedings  brought  against the  Company,  have not been
         withdrawn or dismissed within ninety (90) days;

     o   the commencement by a third party creditor of a proceeding to foreclose
         a security  interest  or lien in any  property or assets of the Company
         upon default in the payment or  performance of any debt of the Company,
         in excess of $250,000 which is secured thereby; and

     o   the  entry  against  the  Company  of a final  judgments  in  excess of
         $250,000 that are not  discharged,  provided for, stayed or appealed in
         thirty days an attachment  is levied  against the assets of the Company
         involving  an amount in excess of $250,000 and the levy is not vacated,
         bonded or otherwise terminated within thirty days.

In some cases, the Convertible  Loan Agreement  provides the Company will a cure
period for an event of default,  and if the Company is unable to cure the breach
it will be in default.

A more complete description of this convertible loan transaction may be found in
the Company's Form 6-K filed with the SEC for the month of April 2003,  which is
incorporated  herein by  reference  under  Exhibit  2.9 to this Form 20-F.  This
description  is  qualified  in its  entirety  by  reference  to the  text of the
Convertible  Loan Agreement  which is  incorporated  by reference into this Form
20-F as Exhibit 2.9.1.

Intellectual Property

We regard our patent pending anti-spam  techonolgy,  copyrights,  service marks,
trademarks,  trade secrets and similar intellectual  property as critical to our
success,  and  rely  on  patent,  trademark  and  copyright  law,  trade  secret
protection and  confidentiality  and/or license  agreements  with our employees,
customers,  partners and others to protect our proprietary  rights.  We are only
actively  maintaining  our  registered  trademark  for  "COMMTOUCH",   which  is
currently registered in the U.S., Israel, European Union, China, Mexico, Norway,
Taiwan,   Russian  Federation,   South  Korea  and  Australia.   While  previous
registrations of PRONTO (Canada and South Korea);  COMMTOUCH SOFTWARE (Australia
and New Zealand);  PRONTO MAIL (New  Zealand) may still be in force,  we are not
currently  actively  maintaining  these  trademarks.  The  Company may decide to
actively   maintain  some  or  all  of  these  trademarks  in  the  future,   as
circumstances  may  justify.  We  also  have  the  following  pending  trademark
applications:  COMMTOUCH  (India,  Canada  and  Brazil).  We are  also  claiming
trademark rights in "ASAP!", as applicable to our anti-spam  solutions,  as from
the beginning of 2003.

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

We also continue to hold a perpetual  mail server  license which was utilized in
our hosted  service  offering  and is still  being  utilized  by us to service a
current customer, and may license other technology as the need arises. We cannot
be certain that, apart from the mail server license,  other third-party  content
licenses  will be available to us on  commercially

                                       18
<PAGE>
reasonable  terms  or  that  we will  be  able  to  successfully  integrate  the
technology  into our  products.  These  third-party  licenses  may  expose us to
increased  risks,  including  risks  associated  with  the  assimilation  of new
technology,  the  diversion  of  resources  from  the  development  of  our  own
proprietary  technology,  and  our  inability  to  generate  revenues  from  new
technology  sufficient to offset associated  acquisition and maintenance  costs.
The inability to obtain any of these  licenses could result in delays in product
development  until  equivalent  technology  can  be  identified,   licensed  and
integrated.  Any such delays could cause our  business/financial  condition  and
operating results to suffer.

Government Regulation

 While laws  aimed at  curtailing  the spread of spam have been  adopted by some
states,  enforcement  has not been  widespread and the lack of a body of federal
anti-spam law has  highlighted  an increase in the amount of spam  traffic.  The
growth and  development  of the spam market may prompt calls for more  stringent
Internet user protection laws that may limit the ability of companies  promoting
or  delivering  spam  online.  Moreover,  the  applicability  to the Internet of
existing  laws in  various  jurisdictions  governing  issues  such  as  property
ownership,  sales and other taxes,  libel and personal  privacy is uncertain and
may take years to resolve.  The adoption of additional laws or  regulations,  or
the application of existing laws or regulations to the Internet,  may impair the
growth of the Internet or commercial  online services.  All or some of the above
laws could decrease the demand for our anti-spam solutions and increase our cost
of doing business, or otherwise harm our business and operating results.

Employees

As of  December  31,  2002,  2001  and  2000,  we had 22,  92 and 486  full-time
employees,  respectively. None of our U.S. employees are covered by a collective
bargaining agreement.  As of June 9, 2003, we had 32 employees.  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  Israeli  federation  of
employers'   organizations)  apply  to  Commtouch's  Israeli  employees.   These
provisions  principally  concern the maximum length of the workday and workweek,
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 Israeli employees are subject to cost of living
adjustments,  based on changes in the Israeli  Consumer Price Index. 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.  We  currently  fund  our  ongoing  severance
obligations by making monthly payments for insurance policies and by an accrual.
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.  We also  provide
certain Israeli  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 an amount equal to 7.5% of the employee's base salary,
up to a certain maximum base salary.

Description of Property

Our  principal  executive  offices  are  located  at 1A  Hazoran  Street,  Poleg
Industrial Park, P.O.Box 8511, Netanya 42504, Israel, where our telephone number
is  011-972-9-863-6888,  and 1300  Crittenden  Lane,  Suite 102,  Mountain View,
California  94043,  where our  telephone  number is (650)  864-2000.  All of our
facilities are leased.  We were  incorporated in Israel under the laws of Israel
on February 5, 1991. Our Articles of Association  are on file in Israel with the
office of the Israeli Registrar of Companies and available for public inspection
from the Registrar.

Item 5. Operating and Financial Review and Prospects.

                                       19
<PAGE>
The following  discussion  should be read in conjunction  with the  Consolidated
Financial  Statements and the Notes thereto  included  elsewhere in this report.
This  discussion   contains   forward-looking   statements  based  upon  current
expectations  that involve risks and  uncertainties.  Any  statements  contained
herein  that  are  not  statements  of  historical  fact  may  be  deemed  to be
forward-looking  statements.  For example,  the words "expects,"  "anticipates,"
"believes,"  "intends," "plans," "seeks" and "estimates" and similar expressions
are intended to identify forward-looking statements.  Commtouch's actual results
and the timing of certain events may differ  significantly  from those projected
in the  forward-looking  statements.  Factors that might cause future results to
differ  materially  from  those  projected  in  the  forward-looking  statements
include,   but  are  not  limited  to,  those  set  forth  under  "Item  3.  Key
Information."  and in the  Company's  other  filings  with  the  Securities  and
Exchange Commission.

Overview

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

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

The results of operations including revenue, operating expenses and other income
and  expense of Wingra  for 2000,  2001 and 2002 have been  reclassified  in the
accompanying statements of operations as discontinued operations.

Critical Accounting Policies and Estimates

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

Revenue recognition

Revenue is recognized when the earnings process is complete,  as evidenced by an
agreement  between the customer and the company,  when  delivery has occurred or
services  have been  rendered,  when the fee is fixed or  determinable  and when
collection is probable. The company's revenue recognition policy is discussed in
Note 2 of Notes to Consolidated Financial Statements. The recognition of revenue
in conformity with accounting principles generally accepted in the United States
requires the company to make estimates and assumptions  that affect the reported
amounts of revenue.  Estimates related to the recognition of revenue include the
accumulated  provision for revenues  subject to refund and other.  As additional
information becomes available, or actual amounts are determinable,  the recorded
estimates are revised.  Consequently,  current operating results can be affected
by revisions to prior accounting estimates.

Allowance for Doubtful Accounts and promissory notes

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

Impairment of long-lived assets

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

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

Contingencies

Commtouch  periodically  records the  estimated  impacts of various  conditions,
situations  or  circumstances  involving  uncertain  outcomes.  These events are
called "contingencies", and Commtouch's accounting for such events is prescribed
by  Statement  of  Financial   Accounting   Standards  No.  5,  "Accounting  for
Contingencies"  ("SFAS No. 5")
                                       20
<PAGE>
SFAS No. 5 defines a contingency as "an existing condition, situation, or set of
circumstances involving uncertainty as to possible gain or loss to an enterprise
that will ultimately be resolved when one or more future events occur or fail to
occur."

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

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

Revenue Sources

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

Direct  E-marketing.  During 2002,  we did not  recognize any revenues from this
type of activity,  as our business model had changed (see above discussion under
"Overview").  Prior  to  2002,  because  of our  installed  user  base  and  our
agreements  with our  customers,  we could assist  e-commerce  companies  (those
seeking marketing channels) in distributing their services to our customers' end
users who opted to receive  offers by email.  We shared with our  customers  the
revenues from this direct e-marketing, which were earned either on a per-message
basis, a referral  basis, or as a commission on products sold. In 2001 and 2000,
no direct e-marketing customer provided more then 10% of revenues.

Strategic Transaction with Go2Net (InfoSpace)

InfoSpace  merged with Go2Net in October 2000.  In  connection  with this merger
InfoSpace assumed Go2Net shares, warrants and rights.

In 1999,  concurrent with the sale of our shares in the initial public offering,
we entered  into a service  agreement  with  InfoSpace,  a network  of  branded,
technology- and community-driven websites focused on personal finance, commerce,
and  games.  InfoSpace  also  develops  Web-related  software.  Pursuant  to the
agreement we were offering  InfoSpace's end users a private label email service,
including  our  email,   calendaring  and  other  services.  The  services  were
customized  to the look  and feel of  InfoSpace's  websites.  The  terms of this
agreement were  substantially  the same as our commercial  agreements with other
customers except that we had agreed to share a materially greater portion of our
advertising  revenues  with  InfoSpace  than we were sharing under other similar
agreements.  In  addition,  in  connection  with the  agreement,  we  issued  to
InfoSpace  a  warrant  to  purchase  1,136,000  ordinary  shares  at a per share
exercise price of $12.80, subject to adjustment as set forth in the warrant. The
warrant is fully vested and non-forfeitable. The warrant will expire on July 16,
2004, the fifth  anniversary of the initial public  offering.  The fair value of
the warrant,  estimated at $5.8  million,  was  amortized to operating  expenses
ratably  over  the  minimum  term of the  agreement  (one  year)  and was  fully
amortized at the end of 2000.  Simultaneously with the sale of the shares in the
initial  public  offering,  we issued a total of  1,344,086  ordinary  shares to
InfoSpace  and  Vulcan  Ventures  Incorporated  at $14.88 per share in a private
placement.  In the future, we may have to issue in-the-money warrants to acquire
our ordinary shares to marketing  channels or strategic  partners who provide us
with business leads. The issuance of in-the-money warrants to marketing channels
or  strategic  partners  may  further  dilute  our  shareholders,  increase  our
operating  loss in the future  and cause our stock  price to fall.  The  service
agreement of 1999 was replaced by a new  agreement,  effective  February 1, 2002
having a one year  duration,  but  InfoSpace  had the  right  to  terminate  the
agreement at any time upon thirty (30) days written  notice.  InfoSpace also had
the right to terminate the agreement if there were  technical  problems with the
products or services provided.  The performance  specifications set forth in the
agreement include the maintenance of certain levels of email system availability
and response time.  Infospace was to pay a quarterly fee of $7,500 for use of up
to 10,000 mailboxes. This agreement was assigned to MailCentro,  Inc., the party
which assumed the servicing of

                                       21
<PAGE>
most of our consumer  business,  effective  March 1, 2002.  As of March 1, 2003,
Commtouch Inc. was no longer  entitled to receive a portion of the revenues from
this agreement.

Results of Operations

The following  table sets forth  financial data for the years ended December 31,
2000, 2001 and 2002 (in thousands):

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                          -------------------------------------
                                                                            2000*         2001*         2002
                                                                          ---------     ---------     ---------
<S>                                                                       <C>           <C>           <C>
Revenues:
 Email services.....................................................      $  17,771     $  13,318     $   3,438
 Software license revenues..........................................          1,000           270            --
                                                                          ---------     ---------     ---------
 Total revenues.....................................................         18,771        13,588         3,438
                                                                          ---------     ---------     ---------
Cost of revenues:
 Email services.....................................................         11,800        13,962         1,675
 Software license revenues..........................................             --            --            --
                                                                          ---------     ---------     ---------
 Total cost of revenues.............................................         11,800        13,962         1,675
                                                                          ---------     ---------     ---------
 Gross profit (loss)................................................          6,971          (374)        1,763
                                                                          ---------     ----------    ---------
Operating expenses:
 Research and development, net......................................         10,244         5,884         2,246
 Sales and marketing................................................         26,534        12,894         1,176
 General and administrative.........................................         13,455        10,337         2,588
 Amortization of prepaid marketing expenses.........................          4,508            --            --
 Amortization of stock-based employee deferred compensation.........          3,050         2,204           551
 Write-off of property and equipment and other......................             --        10,166           750
                                                                          ---------     ---------     ---------
 Total operating expenses...........................................         57,791        41,485         7,311
                                                                          ---------     ---------     ---------
Operating loss......................................................        (50,820)      (41,859)       (5,548)
 Interest and other income, net.....................................          2,886           583           (60)
 Equity in losses of affiliate......................................             --            --           (56)
 Write-off impaired long-term investments...........................         (5,000)       (2,000)           --
 Minority interest..................................................             55           285            74
                                                                          ---------     ---------     ---------
Loss from continuing operations.....................................        (52,879)      (42,991)      (5,590)
Gain on disposal of Wingra..........................................             --            --         1,014
Discontinued Operations - Wingra....................................         (1,346)      (18,016)         (335)
                                                                        -----------   ------------  ------------
Income (Loss) from sale of discontinued operations..................         (1,346)      (18,016)          679
                                                                        -----------   ------------  -----------
Net loss............................................................      $ (54,225)    $ (61,007)    $  (4,911)
                                                                          =========     =========     =========
</TABLE>

* - Reclassified  to conform to the current years  classification  mainly due to
divestiture of Wingra.

Comparison of Years Ended December 31, 2002 and 2001

Revenues.  Email  service  revenues  decreased 74% from $13.3 million in 2001 to
$3.4 million in 2002.  We recognized  revenue of $0.3 million,  from the sale of
licenses in 2001 and none in 2002.  In 2002 we had two  customers  whose revenue
exceeded 10%,  representing 57% of the 2002 revenues.  No customer accounted for
more than 10% of revenues in 2001.

Cost of Revenues.  Cost of revenues  decreased 88% from $14.0 million in 2001 to
$1.7 million in 2002.We have decreased our hosting  infrastructure  costs due to
the agreement with MailCentro and sale of the Hosted Exchange business.

Research and Development,  Net. Research and development  expenses decreased 62%
from  $5.9  million  in  2001to  $2.2  million  in 2002 due to the  decrease  in
personnel and other related costs. In 2002 and 2001, we received royalty-bearing
grants  totaling  $0.2  and  $0.6  million,   respectively,   from  the  Israeli
government,  which were  recorded as a reduction  of  research  and  development
costs.  The  Israeli  government  requires  beneficiaries  of such grants to pay
royalties to the Israeli  government based on the revenues derived from the sale
of products,  technologies and services  developed with such grants.  We believe
that we have no obligation  for  royalties in 2001,  related to the 2001 grants,
since we had not started  generating revenue for the product developed with

                                       22
<PAGE>
such grants, but we may have obligations for royalties in 2002 and future years.
Moreover,  we believe that we have no  obligation  for royalties in 2001 for the
previous  years' funded projects as these projects failed and we do not generate
revenue or expect to generate  revenue from these  projects.  Nevertheless,  the
ultimate liability is subject to review by the OCS.

During 2001,  we reduced  research  and  development  personnel  by  eliminating
certain  projects,  while  only  maintaining  a core  project  aligned  with our
strategic direction.

Sales and  Marketing.  Sales and  marketing  expenses  decreased  91% from $12.9
million in 2001 to $1.2 million in 2002,  due to the agreement  with  MailCentro
and sale of the Hosted  Exchange  business,  as well as the  change in  business
strategy.

General and  Administrative.  General and administrative  expenses decreased 75%
from $10.3 million in 2001 to $2.6 million in 2002, due primarily to curtailment
of costs.

Amortization  of Stock-Based  Employee  Deferred  Compensation.  Our stock-based
employee deferred compensation expenses decreased 75% from $2.2 million for 2001
to $0.6 million for 2002. The deferred compensation is being amortized using the
sum-of-digits   method  over  the  vesting   schedule,   generally  four  years.
Amortization  of these amounts will  conclude  during the third quarter of 2003.
Deferred  compensation  expenses  also included $0.2 million and $0.3 million in
2002 and 2001,  respectively,  relating to the repricing of stock options during
2001.  The total  amortization  charge of $1.0 million  related to the repricing
will be  amortized  using the  straight-line  method  over a three year  vesting
schedule.

Write-off of Impaired Intangibles and Other Assets. Impairment and other charges
consist of costs  and/or  charges that are not  directly  associated  with other
expense classification or ongoing operations.  The Company periodically assesses
the  recoverability  of the carrying amount of intangible  assets,  property and
equipment  and  provides  for  any  possible  impairment  loss  based  upon  the
difference  between the carrying amount and fair value of such assets.  In 2002,
the  company  had  written  off  $0.8  million  regarding  unused  property  and
equipment.  In 2001,  impairment  and other charges of $23.4 million  included a
$13.3  million  impairment  of  goodwill  and other  intangibles  related to our
acquisition of Wingra,  Inc., $4.4 million impairment of leasehold  improvements
at unused leased facilities,  $3.6 million impairment of computer hardware which
is idle and not being  used,  an accrual of $1.0  million  for costs  related to
early  termination of these unused  facilities and a $1.1 million write-off of a
customer  relationship module (a software tool for managing customer relations),
which portion will no longer be utilized. The impairment charges of the goodwill
and other intangible assets were classified to discontinued operation due to the
divestiture of Wingra.

Interest and Other Income,  Net. Our interest and other income,  net,  decreased
from a net  income of $.6  million  for 2001 to a net loss of $0.1  million  for
2002, due primarily to decreased  interest income earned from cash  equivalents,
as the funds depleted in 2002.

Write-Off of Impaired Long-term Investments.  The Company invested $7 million in
the first nine months of 2000 in certain Internet centric companies in which the
company believed it had a significant ongoing strategic interest.  However,  due
to the economic slowdown and the significant decline in capital available to and
valuations of these privately  funded Internet  centric  companies,  the Company
believes that these  investments  are fully impaired.  Accordingly,  the Company
recorded a charge of $2.0 million in 2001 to reflect impairment of these assets.

Minority  Interest.  At December 31, 2001 and 2002,  the Company owned 70.6% and
32%, respectively, of the equity and voting rights of Commtouch, K.K. (Japan).

Income  Taxes.  As of December 31, 2002, we had  approximately  $28.0 million of
Israeli net operating loss  carry-forwards and $73.6 million of U.S. federal net
operating loss  carry-forwards  available to offset future taxable  income.  The
Israeli net operating loss  carry-forwards have no expiration date. The U.S. net
operating loss  carry-forwards  will expire in various amounts in the years 2008
to  2022.  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.

Comparison of Years Ended December 31, 2001 and 2000  -

                                       23
<PAGE>
Revenues.  Email  service  revenues  decreased 25% from $17.8 million in 2000 to
$13.3 million in 2001.  We recognized  revenue of $0.3 million and $1.0 million,
from the sale of licenses in 2001 and 2000,  respectively.  In 2001 and 2000, no
customer accounted for more than 10% of revenues.

Cost of Revenues.  Cost of revenues  increased 18% from $11.8 million in 2000 to
$14.0 million in 2001, due to the increase in depreciation costs as we ramped up
during 2000. Cost of revenues  consisted  primarily of costs related to Internet
data center  services from  third-party  providers,  depreciation  of equipment,
Internet  access,  personnel  and  related  costs.  In 2000 we sized our hosting
infrastructure for substantial growth.

Research and Development,  Net. Research and development  expenses decreased 43%
from  $10.2  million  in 2000 to $5.9  million  in 2001 due to the  decrease  in
personnel and other related costs. In 2001, we received  royalty-bearing  grants
totaling  $0.6 million  from the Israeli  government,  which were  recorded as a
reduction of research and development  costs.  The Israeli  government  requires
beneficiaries of such grants to pay royalties to the Israeli government based on
the  revenues  derived  from the sale of  products,  technologies  and  services
developed with such grants.  We believe that we have no obligation for royalties
in 2001, related to the 2001 grants, since we had not started generating revenue
for the product  developed  with such grants,  but we may have  obligations  for
royalties  in 2002  and  future  years.  Moreover,  we  believe  that we have no
obligation  for  royalties in 2001 for the previous  years'  funded  projects as
these  projects  failed and we do not  generate  revenue  or expect to  generate
revenue from these projects.  Nevertheless, the ultimate liability is subject to
review by the OCS.

During 2001,  we reduced  research  and  development  personnel  by  eliminating
certain  projects,  while  only  maintaining  a core  project  aligned  with our
strategic direction.

Sales and  Marketing.  Sales and  marketing  expenses  decreased  51% from $26.5
million in 2000 to $12.9 million in 2001, due to decreased personnel and related
costs, public relations, other marketing expenses and direct sales costs in line
with reduced  expected  revenue  levels and the  Company's  channel  selling and
marketing focus in 2001.  Previously,  Company  personnel were focused on direct
sales efforts.

General and  Administrative.  General and administrative  expenses decreased 24%
from  $13.5  million  in 2000  to  $10.3  million  in  2001,  due  primarily  to
curtailment of costs.

Amortization  of  Prepaid  Marketing  Expenses.   Our  amortization  of  prepaid
marketing  expenses  related to the InfoSpace and Microsoft  warrants  decreased
from $4.5 million in 2000 to zero in 2001,  since it was fully  amortized at the
end of 2000. The prepaid marketing expense was amortized using the straight-line
method over the one-year minimum term of each of the commercial agreements.

Amortization  of Stock-Based  Employee  Deferred  Compensation.  Our stock-based
employee deferred compensation expenses decreased 28% from $3.1 million for 2000
to $2.2 million for 2001. The deferred compensation is being amortized using the
sum-of-digits   method  over  the  vesting   schedule,   generally  four  years.
Amortization  of these amounts will  conclude  during the third quarter of 2003.
Deferred  compensation  expenses  also  included  $0.3  million  related  to the
repricing of stock options  during 2001. The total  amortization  charge of $1.0
million  related to the  repricing  will be  amortized  using the  straight-line
method over a three year vesting schedule.

Write-off of Impaired Intangibles and Other Assets. Impairment and other charges
consist of costs  and/or  charges that are not  directly  associated  with other
expense classification or ongoing operations.  The Company periodically assesses
the  recoverability  of the carrying amount of intangible  assets,  property and
equipment  and  provides  for  any  possible  impairment  loss  based  upon  the
difference  between the carrying  amount and fair value of such  assets.  During
2001,  impairment  and other charges of $23.4  million  included a $13.3 million
impairment  of goodwill  and other  intangibles  related to our  acquisition  of
Wingra, Inc., $4.4 million impairment of leasehold improvements at unused leased
facilities,  $3.6 million  impairment of computer hardware which is idle and not
being used, an accrual of $1.0 million for costs related to early termination of
these unused facilities and a $1.1 million write-off of a customer  relationship
module (a software tool for managing customer relations),  which portion will no
longer be utilized.

Interest and Other Income,  Net. Our interest and other income,  net,  decreased
from a net income of $2.9  million for 2000 to a net income of $0.6  million for
2001, due primarily to decreased  interest  income earned from cash  equivalents
and marketable securities, as the funds depleted in 2001.

                                       24
<PAGE>
Write-Off of Impaired Long-term Investments.  The Company invested $7 million in
the first nine months of 2000 in certain Internet centric companies in which the
company believed it had a significant ongoing strategic interest.  However,  due
to the economic slowdown and the significant decline in capital available to and
in valuations of these privately funded Internet centric companies,  the Company
believes that these  investments  are fully impaired.  Accordingly,  the Company
recorded  a  charge  of  $5  million  and  $2.0  million,   in  2000  and  2001,
respectively, to reflect impairment of these assets.

Minority Interest.  Minority interest  represents a stockholders'  proportionate
share of the equity of Commtouch,  K.K.  (Japan) or 5.83%.  At December 31, 2000
and 2001,  the Company owned 94.17% and 70.6%,  respectively,  of the equity and
voting rights of Commtouch, K.K. (Japan).

Income  Taxes.  As of December 31, 2001, we had  approximately  $22.6 million of
Israeli net operating loss  carry-forwards and $67.6 million of U.S. federal net
operating loss  carry-forwards  available to offset future taxable  income.  The
U.S. net operating  loss  carry-forwards  will expire in various  amounts in the
years 2008 to 2022.  The  Israeli  net  operating  loss  carry-forwards  have no
expiration date.  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.

Quarterly Results of Operations (Unaudited)

The  following  table sets  forth  certain  unaudited  quarterly  statements  of
operations data for the eight quarters ended December 31, 2002. This information
has been derived from the Company'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 report.  The operating results
for any quarter are not necessarily  indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                      --------------------------------------------------------------------------------
                                      Mar. 31,   Jun.  30,  Sept. 30,  Dec. 31,  Mar. 31,  Jun. 30, Sept. 30, Dec. 31,
                                        2001*      2001*     2001*      2001*     2002      2002      2002       2002
                                      --------   --------   --------   -------   -------   -------   -------   -------
                                                                        (in thousands)
                                                                         (unaudited)
<S>                                   <C>        <C>        <C>        <C>       <C>       <C>       <C>       <C>
Email service revenues .............  $  3,658   $  3,838   $  3,495   $ 2,597   $ 1,271   $ 1,005   $   525   $   637
Cost of email service revenues .....     4,656      3,573      3,553     2,180       933       406       153       183
                                      --------   --------   --------   -------   -------   -------   -------   -------
Gross profit (loss) ................      (998)       265        (58)      417       338       599       372       454
                                      --------   --------   --------   -------   -------   -------   -------   -------
Operating expenses:
 Research and development, net .....     2,587      2,166      1,078        53       573       530       621       522
 Sales and marketing ...............     6,346      2,683      2,447     1,418       521       244       221       190
 General and administrative ........     5,504      2,639      1,958       236       766       421       379     1,022
 Amortization of stock-based
 employee compensation .............       481        481        694       548       138       138       138       137
Write-off of  property and equipment
and other ..........................      --         --        6,485     3,681      --        --        --         750
                                      --------   --------   --------   -------   -------   -------   -------   -------
 Total operating expenses ..........    14,918      7,969     12,662     5,936     1,998     1,333     1,359     2,621
                                      --------   --------   --------   -------   -------   -------   -------   -------
Operating loss .....................   (15,916)    (7,704)   (12,720)   (5,519)   (1,660)     (734)     (987)   (2,167)
Interest and other income
 (expenses), net ...................       344        492         89      (342)       44       (20)      (48)      (36)
Write-off of impaired long-term
  investments ......................      --         --       (2,000)     --        --        --        --        --
Eequity interesting losses of
affiliate...........................      --         --         --        --        --          18       (47)      (27)
Minority interest ..................        22         21        137       105        63        11      --        --
                                      --------   --------   --------   -------   -------   -------   -------   -------
Loss from continuing operations ....   (15,550)    (7,191)   (14,494)   (5,756)   (1,553)     (725)   (1,082)   (2,230)
                                      --------   --------   --------   -------   -------   -------   -------   -------
Gain on disposal of Wingra .........      --         --         --        --       1,014      --        --        --
Discontinued operations - Wingra ...    (1,581)    (1,335)   (13,352)   (1,748)     (335)     --        --        --
                                      --------   --------   --------   -------   -------   -------   -------   -------
Income (Loss) from sale of
discontinued operations ............      (672)      (444)      (385)     (441)      679      --        --        --
                                      --------   --------   --------   -------   -------   -------   -------   -------
Net loss ...........................  $(17,131)  $ (8,526)  $(27,846)  $(7,504)  $  (874)  $  (725)  $(1,082)  $(2,230)
                                      ========   ========   ========   =======   =======   =======   =======   =======
</TABLE>
                                       25
<PAGE>
* - Reclassified to conform to the current quarters classification mainly due to
divestiture of Wingra.

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:

     o   continued  growth of the  Internet,  email usage and the spread of spam
         email;

     o   demand for anti-spam solutions;

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

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

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

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

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

     o   technical difficulties or system outages;

     o   foreign exchange rate fluctuations;

     o   the  announcement or  introduction of new or enhanced  solutions by our
         competitors;

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

     o   the pricing policies of our competitors;

     o   failure to increase our sales; and

     o   governmental regulation relating to the Internet, and spam practices 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  issuance  of  equity
securities  and, to a lesser extent from private loans,  bank loans and research
and development grants from the Israeli government.

As of December 31, 2002 and March 31, 2003  respectively,  we had  approximately
$1.4million and  approximately  $1.1 million of cash to fund operations in 2003.
In 2002 we utilized  $2.8  million of cash to fund  operating  losses.  Net cash

                                       26
<PAGE>
provided by financing  activities and investing  activities  were  approximately
$1.3  million  and $ 0.6  million,  respectively,  mainly due to  proceeds  from
issuance  of  shares  and  proceeds   from  sale  of  property  and   equipment,
respectively.  To limit our cash expenses in 2003 we have further  reduced staff
from 35 at March 1, 2002 to 32 on June 9, 2003.  These actions were possible due
to the  transition of our business from  outsourced  email services to anti-spam
solutions.  Furthermore,  we have reduced our office lease  commitments  both in
Israel and the United  States,  resulting  in both a lowering  of actual  rental
expenditures and future obligations.

Convertible Loan

See  discussion  under  "Item  3.  Key  Information  -  Recent   Developments  -
Convertible Loan Agreement.

As of December  31,  2002 and March 31,  2003,  we had  working  capital of $0.5
million and $0.1 million, respectively.

Based on the cash balance at December 31, 2002, current projections of revenues,
related expenses,  and the completion of the convertible loan  transaction,  the
Company believes it has sufficient cash to continue  operations for at least the
next twelve months through December 31, 2003.

Class Action Litigation

Following  our  restatement  of revenues  for the first three  quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the  Northern  District  of  California  against  the Company and certain of our
officers and a director,  alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
These lawsuits were consolidated into one action in late 2001.  Thereafter,  the
Company filed a Motion to Dismiss,  which was granted. The plaintiffs then filed
a second amended and  consolidated  complaint,  and our second motion to dismiss
was only  partially  accepted,  with the end result  being that the  plaintiff's
filed a third amended and consolidated  complaint.  We (including the individual
defendants) filed an answer to that complaint,  and the case then moved into the
discovery stage, with the case being set for trial in January 2004. In May 2003,
a settlement  agreement was signed between the plaintiffs and defendants and the
court  thereafter  issued a  preliminary  order  approving the  settlement.  The
settlement  calls for the  payment of $15 million to the  plaintiffs,  with this
amount to be fully funded by the Company's Directors and Officers policy.  While
the payment to plaintiffs under this settlement should not cause the Company any
financial hardship,  we are unable to predict whether the whole or a substantial
portion of the class members will choose to  participate  in the  settlement and
whether  ultimately the court will issue a final order approving the settlement.
The settlement  does not contain any admissions or findings of wrongdoing on the
part of the  defendants,  and we  continue  to  maintain  that the  Company  and
individual defendants acted properly at all times.

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.  A part of our
income,  however,  is derived from the Company's capital investment program with
Approved  Enterprise  status  under  the Law for the  Encouragement  of  Capital
Investments in three 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 five to 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 in every year through  2001,  we have not yet
used the tax benefits for which we are eligible.

See item 10 for tax reform
                                       27
<PAGE>
Impact of Inflation and Currency Fluctuations

Most of our sales are in U.S. dollars.  However,  a portion of our costs relates
to our operations in Israel. A substantial  portion of our operating expenses in
Israel,  primarily our research and development expenses, is denominated in NIS.
Costs not  denominated  in U.S.  dollars are  translated to U.S.  dollars,  when
recorded, at prevailing rates of exchange.  This is done for the purposes of our
financial  statements and reporting.  Costs not denominated in U.S. dollars will
increase  if the rate of  inflation  in Israel  exceeds the  devaluation  of the
Israeli  currency  as  compared  to the U.S.  dollar  or if the  timing  of such
devaluation lags considerably behind inflation. Consequently, we are and will be
affected by changes in the prevailing NIS/U.S. dollar exchange rate.

The annual rate of inflation in Israel was 6.5% in 2002,  1.4% in 2001 and 0% in
2000.  The NIS was devalued  against the U.S.  dollar by  approximately  7.3% in
2002,  9.3% in 2001 and -2.7% in 2000. The  representative  dollar exchange rate
for converting the NIS to U.S. dollars,  as reported by the Bank of Israel,  was
NIS 4.737 for one U.S. dollar on December 31, 2002. Note that the representative
dollar exchange rate was NIS _4.474 at May 14, 2003.

Because  exchange rates between the NIS and the dollar  fluctuate  continuously,
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 re-measurements are reported in the consolidated
financial statements for relevant periods in the statement of operations.

Item 6. Directors, Senior Management and Employees

The following  table sets forth certain  information  regarding our directors at
February 7, 2003:

                                             Beneficial
                                             Ownership
             Name                  Age        >1%(3)         Position
             ----                  ---      ------------     --------
Amir Lev....................        43          3.3%      Director
Carolyn Chin................        55          1.2%      Chairman of the
                                                          Board of Directors
Gideon Mantel(1)............        43          7.9%      Director
Nahum Sharfman(1)...........        55          6.1%      Director
Richard Sorkin..............        41           --       Director
Udi Netzer (2)..............        47           --       Director
Ofer Segev(1)(2)............        43           --       Director

----------------
(1)      Member of the Compensation Committee
(2)      Member of the Audit Committee and Outside Director
(3)      For  purposes of this table,  a person or group of persons is deemed to
         have beneficial ownership of shares of the Company's common stock which
         such  person  or group has the  right to  acquire  on or within 60 days
         after February 7, 2003.  Unless otherwise  indicated,  to the Company's
         knowledge the person named has sole voting and investment power and the
         right to receive the economic benefits,  or share such power and rights
         with such  person's  spouse,  with  respect to all shares  held by that
         person.  Warrants  and options that were  underwater  as of February 7,
         2003 were included in the calculation of beneficial ownership.

Other Management Employees:

The  following  table  sets  forth  the names and  positions  of our  management
employees at February 7, 2003:

<TABLE>
<CAPTION>
Name                    Age                  Ownership >1%               Position
----                    ---                                              --------
<S>                     <C>                 <C>                          <C>
Gideon Mantel           43                  See table above              CEO
Amir Lev                43                  See table above              President and Chief Technical Officer
Devyani Patel......     42                        ___                    Vice President, Finance
Avner Amram........     41                        ___                    Executive Vice President, Commtouch Inc.
Gary Davis.........     41                        ___                    General Counsel and Corporate Secretary
Udi Trugman........     32                        ___                    Vice President, Research and Development, Commtouch
                                                  ___                    Software Ltd.
Ronni Zehavi.......     37                        ___                    Vice President, Operations, Commtouch Software Ltd.
Haggai Carmon......     44                        ___                    Vice President, Marketing, Commtouch Software Ltd.
</TABLE>

                                       28
<PAGE>
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 was also the
General  Manager of Commtouch  from January 1997 through April 2000,  and in May
2000 became President. Mr. Lev received a B.A. in Computer Science and Economics
from Hebrew University, Jerusalem.

Carolyn  Chin has served as the  Chairman  of the Board of  Directors  since May
2001. Ms. Chin has served as a Director of Commtouch since August 2000. Ms. Chin
has  30  years  of  experience  in  information  technology,  marketing,  media,
telecommunications,  retailing, health care, education and small business market
segments.  She has held a number of senior  executive  positions  including  at:
Reuters,  Market XT, IBM, Citibank,  AT&T, Macy's and in the US Government.  She
has served on over 30 boards and committees. Ms. Chin has also received numerous
honors  including  selection  as a White House  Fellow and the  Committee of 100
(prominent  Chinese-Americans).  She  graduated  with an MBA  from  the  Harvard
Business School and a BS in Management  Engineering from Rensselaer  Polytechnic
Institute.

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.

Nahum Sharfman rejoined the Board in March 2000. Mr. Sharfman is a co-founder of
Commtouch  and served as its Chief  Executive  Officer and Chairman of the Board
from its inception in February 1991. In November 1997 Mr.  Sharfman  resigned as
Chief  Executive  Officer  to become a founder  of  Dealtime.com.  Mr.  Sharfman
remained  Chairman of the Board of Commtouch and a Director  until January 1999.
Prior to founding  Commtouch,  Mr.  Sharfman  spent eleven  years with  National
Semiconductor  Corporation  in various  development  and management  roles.  Mr.
Sharfman  received a Ph.D. in High Energy Nuclear  Physics from Carnegie  Mellon
University  and M.S.  and B.S.  degrees in  Physics  from the  Technion-  Israel
Institute of Technology, Haifa.

Richard Sorkin has served as a Director of Commtouch since July 1999. 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  March  1996 he held  various
executive  positions  with  Creative  Technology,  Ltd.,  a leading  provider of
multi-media  hardware.  Mr. Sorkin received a B.A. with honors in Economics from
Yale University and an M.B.A. from Stanford University.

Udi Netzer has served as a Director of Commtouch since February 2002. Mr. Netzer
is also  currently  the active  Chairman of  Eyeblaster,  Inc.,  a rich media ad
management   system  that  allows   publishers,   agencies  and  advertisers  to
independently create and manage out-of-banner  advertising campaigns. Mr. Netzer
has  over 15  years'  experience  in  various  sales,  marketing  and  executive
positions  with  companies  such as 3Com,  Netmanage,  and VCON. As a partner in
Evergreen, Mr. Netzer was one of the first venture capitalists in Israel.

Ofer Segev has served as a Director of Commtouch  since February 2002. Mr. Segev
has been CEO of Teleknowledge since January 2002 and its CFO from May 2001. From
May 2000 to April 2001 served as CFO for Tundo.  Prior to his position at Tundo,
Segev  spent 15  years  with  Ernst & Young.  Segev  has a BA in  economics  and
accounting  from Bar Ilan  University in Israel,  and has studied at the Kellogg
Graduate School of Management at Northwestern University.

Avner Amram joined  Commtouch  in 1996 and  currently  serves as Executive  Vice
President. Mr. Amram has over 15 years of experience in the areas of technology,
operational  management and  leadership,  and is also a founder of CVDO.  Before
2002,  Mr. Amram served as COO of Commtouch  and was  responsible  for worldwide
operations.  Mr. Amram also held a number of  positions  at  Commtouch  prior to
being  appointed COO. From 1995 to 1996, Mr. Amram served

                                       29
<PAGE>
as project  manager for Medatech,  a leading  provider of customer  relationship
management  (CRM) solutions,  developing and managing  complex  installations at
large  organizations.  Prior to Medatech,  Mr. Amram acted as General Manager of
Fuga Nursery in Israel,  where he was responsible  for  operations,  production,
marketing and  distribution.  Mr. Amram holds a Bachelors of Science  (BSC),  in
Computer Engineering and graduated Cum Laude from the Technion, Israel Institute
of Technology.

Devyani  Patel joined  Commtouch in 1996 as a consultant  and became a full-time
employee in early 1999. She served as Corporate  Controller for Commtouch  until
November 2001 when she was appointed as the Vice President of Finance. Ms. Patel
has nearly 20 years of accounting and finance experience,  including  technology
industry   experience.   Ms.  Patel  graduated  from  the  University  of  Kent,
Canterbury, England in Accounting and Law.

Gary Davis joined  Commtouch in September 1999 and serves as General Counsel and
Corporate  Secretary.  Mr. Davis has over 17 years of legal  experience  in both
private law firm and corporate practices. Mr. Davis is certified to practice law
in both the State of Israel and  California.  Prior to September 1999, Mr. Davis
was  in-house  counsel  to  Israel  Military  Industries  and  Elta  Electronics
Industries. He received a B.A. in Political Economy of Industrial Societies from
U.C. Berkeley and a J.D. in law from Golden Gate University.

Udi Trugman  joined  Commtouch in December 1996 and serves as Vice  President of
Research and  Development.  Prior to 2002,  Mr.  Trugman was Senior  Director of
Systems in the R&D group. Mr. Trugman has over 15 years of software  development
and  management  experience.   Prior  to  working  at  Commtouch,   Mr.  Trugman
specialized in development of commercial applications.

Ronni  Zehavi  joined  Commtouch  in June 1999 and serves as Vice  President  of
Operations.  Prior to joining  Commtouch,  Mr.  Zehavi was Human  Resources  and
Training  Manager for "Mondex - ecach",  a subsidiary  company of  International
Mastercard   from  1997  to  1999.   From  1994  to  1997,  Mr.  Zehavi  was  an
Organizational  Consultant in a counseling  firm.  Mr. Zehavi  received his M.A.
degree in Organizational  Sociology from Bar-Ilan University and his B.A. degree
in History and Educational Psychology from Tel-Aviv University.

Haggai Carmon joined  Commtouch in January 2002 and serves as Vice  President of
Marketing.  From  1998 to 2002,  Mr.  Carmon  was Vice  President  of  Corporate
Marketing and of Sales in  Asia-Pacific  for VCON  Telecommunications,  a public
vendor of corporate  videoconferencing  solutions,  and was also responsible for
international  pre-sales and technical support. Prior to that, Mr. Carmon was at
NetManage Ltd., a public software company of TCP/IP  applications for Windows, a
founder and CEO of Applico,  a Computer-aided  Design for  Architecture  service
firm and  managed  a  college  of Fine  Arts.  Mr.  Carmon  has over 15 years of
experience in technology and international management.

Election of Directors

Directors  (other than outside  directors,  as  explained  below) are elected by
shareholders at the annual general meeting of the  shareholders  and hold office
until the next annual  general  meeting  following the general  meeting at which
such  Director is elected  and until his  successor  is elected,  or until he is
removed.  An annual general meeting must be held at least once in every calendar
year,  but not more than  fifteen  months  after the  preceding  annual  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.
Until a vacancy  is  filled by the  shareholders,  the  Board of  Directors  may
appoint new directors  temporarily  to fill vacancies on the Board of Directors.
The  Articles  of  Association  of  Commtouch   authorize  the  shareholders  to
determine,  from time to time,  the  number of  directors.  The  number was most
recently fixed at 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,  the alternate may not in turn appoint
an  alternate  for  himself  (unless the  instrument  appointing  him  otherwise
expressly provides) and the alternate is not entitled to remuneration.  A person
who is not  qualified  to be  appointed  as a director,  or a person who already
serves as a  director  or an  alternate  director,  may not be  appointed  as an
alternate  director.  Unless the appointing director limits the time or scope of
the  appointment,  the  appointment  is  effective  for all  purposes  until the

                                       30
<PAGE>
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 and Outside Directors

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

     o   an employment relationship;

     o   a business or professional relationship maintained on a regular basis;

     o   control; and

     o   service as an office holder.

No person may serve as an outside  director  if the  person's  position or other
business  activities  create,  or may create,  a conflict  of interest  with the
person's responsibilities as an outside director or may otherwise interfere with
the person's  ability to serve as an outside  director.  If, at the time outside
directors are to be appointed, all current members of the Board of Directors are
of the same  gender,  then at least one  outside  director  must be of the other
gender.

Outside  directors  are to be  elected  by a  majority  vote at a  shareholders'
meeting, provided that either:

     o   such  majority  includes  at  least  one-third  of the  shares  held by
         non-controlling shareholders who are present and voting at the meeting;
         or

     o   the total number of shares held by non-controlling  shareholders voting
         against the election of the director at the meeting does not exceed one
         percent of the aggregate voting rights in the company.

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

In addition,  the Nasdaq National Market requires Commtouch to have at least two
independent  directors  on the  Board of  Directors  and to  establish  an audit
committee,  at least a majority of whose members are  independent of management.
We have appointed directors who qualify both as independent  directors under the
Nasdaq National Market requirements and as outside directors under the Companies
Law.

Audit Committee

The Companies Law requires public companies to appoint an audit  committee.  The
responsibilities  of the audit committee include  identifying  irregularities in
the   management  of  the  company's   business  and  approving   related  party
transactions  as required by law. An audit  committee  must  consist of at least
three  directors,  including all of the outside  directors.  The chairman of the
Board of Directors,  any director employed by or otherwise providing services to
the company,  and a  controlling  shareholder  or any relative of a  controlling
shareholder, may not be a member of the audit committee.

Internal Auditor
                                       31
<PAGE>
Under the  Companies  Law,  the Board of  Directors  must  appoint  an  internal
auditor,  nominated by the audit committee.  The role of the internal auditor is
to examine,  among other matters,  whether the company's actions comply with the
law and orderly  business  procedure.  Under the  Companies  Law,  the  internal
auditor may be an employee of the company but not an interested  party or office
holder, or a relative of an interested party or office holder, and he or she may
not be the company's independent  accountant or its representative.  The Company
appointed a qualified internal auditor during 2002.

Approval  of  Certain  Transactions;  Obligations  of  Directors,  Officers  and
Shareholders

The Israel  Companies  Law codifies the  fiduciary  duties that office  holders,
including directors and executive officers, owe to a company. An office holder's
fiduciary  duties  consist of a duty of care and a duty of loyalty.  The duty of
loyalty  includes  avoiding any conflict of interest between the office holder's
position  in the  company  and such  person's  personal  affairs,  avoiding  any
competition with the company,  avoiding exploiting any corporate  opportunity of
the company in order to receive  personal  advantage  for such person or others,
and  revealing  to the  company any  information  or  documents  relating to the
company's  affairs  which  the  office  holder  has  received  due to his or her
position as an office holder. Each person listed in the first table that appears
above at the beginning of this Item 6 is an office holder.

Under the Israel  Companies Law, all  arrangements  as to compensation of office
holders who are not directors  require approval of the Board of Directors unless
the  Articles of  Association  provide  otherwise.  Arrangements  regarding  the
compensation of directors also require audit committee and shareholder approval.
The Israel  Companies Law requires that an office holder  promptly  disclose any
personal  interest that he or she may have and all related material  information
known to him or her, in connection with any existing or proposed  transaction by
the company.  In addition,  if the transaction is an extraordinary  transaction,
the office  holder must also  disclose any personal  interest held by the office
holder's  spouse,  siblings,  parents,   grandparents,   descendants,   spouse's
descendants  and the spouses of any of the foregoing,  or by any  corporation in
which the office  holder is a five percent or greater  shareholder,  director or
general  manager  or in which he or she has the  right to  appoint  at least one
director or the general manager.  An  extraordinary  transaction is defined as a
transaction not in the ordinary course of business, a transaction that is not on
market terms,  or a transaction  that is likely to have a material impact on the
company's profitability, assets or liabilities.

In the case of a transaction that is not an extraordinary transaction, after the
office  holder  complies  with the  above  disclosure  requirement,  only  Board
approval is required  unless the Articles of Association of the company  provide
otherwise.  Such approval must determine that the  transaction is not adverse to
the company's interest. If the transaction is an extraordinary transaction, then
in addition to any  approval  required by the Articles of  Association,  it also
must be approved by the audit  committee and by the Board and,  under  specified
circumstances, by a meeting of the shareholders. An Israeli company whose shares
are publicly traded shall not be entitled to approve such a transaction  unless,
at the time the approval was granted,  two members of the audit  committee  were
outside  directors  and at least one of them was present at the meeting at which
the audit  committee  decided to grant the approval.  An office holder who has a
personal  interest in a matter that is  considered  at a meeting of the Board of
Directors or the audit committee generally may not be present at this meeting or
vote on this matter.

The  Israel  Companies  Law  applies  the  same  disclosure  requirements  to  a
controlling  shareholder of a public company,  which includes a shareholder that
holds 25% or more of the voting  rights if no other  shareholder  owns more than
50% of the  voting  rights in the  company.  Extraordinary  transactions  with a
controlling  shareholder  or in which a controlling  shareholder  has a personal
interest,  and the terms of compensation of a controlling  shareholder who is an
office  holder,  require  the  approval  of the  audit  committee,  the Board of
Directors and the  shareholders of the company.  The  shareholder  approval must
either  include at least  one-third of the  disinterested  shareholders  who are
present,  in person or by proxy,  at the  meeting or,  alternatively,  the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.

Under the Israel  Companies  Law, a shareholder  has a duty to act in good faith
towards the company and other  shareholders  and refrain from abusing his or her
power in the company,  including,  among other things,  in respect to his or her
voting at the general meeting of shareholders on the following matters:

     o   any amendment to the Articles of Association;

     o   an increase of the company's authorized share capital;

     o   a merger; or

                                       32
<PAGE>
     o   approval of  interested  party  transactions  that require  shareholder
         approval.

In addition, any controlling shareholder,  any shareholder who can determine the
outcome of a  shareholder  vote and any  shareholder  who,  under the  company's
Articles of  Association,  can appoint or prevent the  appointment  of an office
holder,  is under a duty to act with  fairness  towards the company.  The Israel
Companies Law does not describe the substance of this duty.

Compensation Committee Interlocks

The Compensation Committee,  which was established by the Board in January 1996,
is  responsible  for  determining  salaries,   incentives  and  other  forms  of
compensation  for  Commtouch's  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 other Directors.  Ofer
Segev,  as an outside  director,  and Nahum Sharfman are currently the two other
directors on the Compensation Committee.

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 or her as a result of the breach of his or her duty
of care to the company or to another person, or as a result of the breach of his
or her fiduciary duty to the company, to the extent that he or she 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 or she  committed in connection  with his
or her serving as an office holder.  Moreover, a company can indemnify an office
holder  for (a)  monetary  liability  imposed  upon him or her in favor of other
persons  pursuant to a court  judgment,  including a  compromise  judgment or an
arbitrator's  decision  approved  by a  court,  and  (b)  reasonable  litigation
expenses,  including attorneys' fees, actually incurred by him or her or imposed
upon him or her by a court, in an action, suit or proceeding brought against him
or her by or on behalf of the company or other persons,  or in connection with a
criminal  action which does not require  criminal  intent in which he or she was
convicted,  in each case in connection  with his or her  activities as an office
holder.  Our Articles of  Association  allow us to insure and  indemnify  office
holders to the fullest  extent  permitted  by law  provided  such  insurance  or
indemnification  is approved in accordance  with the Israel  Companies  Law. The
Company has acquired  directors' and officers'  liability insurance covering the
officers and directors of the Company and its  subsidiaries  for certain claims.
In addition,  the Company entered into an undertaking to indemnify the directors
of the  Company  in  connection  with the  shareholder-instigated  class  action
lawsuit,  subject to certain  limitations,  and this undertaking was ratified by
shareholders.  Further,  at the annual meeting of shareholders  held on November
18, 2002, the shareholders  approved a form of indemnification,  exculpation and
insurance agreement that is applicable to all directors serving the Company.

Compensation of Directors and Officers.

The directors of Commtouch can be remunerated by Commtouch for their services as
directors  to the extent such  remuneration  is approved  by  Commtouch's  audit
committee,  Board of  Directors  and  shareholders.  Directors  currently do not
receive cash compensation for their services as directors but are reimbursed for
their  expenses  for each Board of  Directors  meeting  attended.  However,  see
"Nonemployee Directors Stock Option Plan," below.

The  aggregate  direct  remuneration  paid by  Commtouch  to all  directors  and
executive officers (7 persons) in 2002 was approximately $0.5million. During the
same period Commtouch  accrued or set aside  approximately  $23,000 for the same
group to provide  pension,  retirement or similar  benefits.  As of December 31,
2002,  directors  and  executive  officers of Commtouch  (7 persons)  held stock
options to purchase an aggregate of 2,217,580 ordinary shares. In addition, at a
meeting of the Board of  Directors  on April 28, 2003 option  grant  allocations
totaling 975,000 options to certain executive  officers,  approved previously by
the  shareholders on November 18, 2002, were approved for grant,  subject to the
attainment  of  certain  milestones.  The  grant  date will be as of the date of
shareholder approval.

Options to Purchase Securities from Registrant or Subsidiaries.

As of December 31, 2002, 4,597,687 stock options to purchase ordinary shares had
been granted to  employees,  consultants,  executive  officers and  non-employee
directors under the Company's stock option plans, net of cancelled  options.  Of
that number  4,041,474 had not been  exercised and had exercise  prices  ranging
from $0.01 to $35 per share and a weighted  average per share  exercise price of
$0.18, and were held by 24 persons; these options have termination

                                       33
<PAGE>
dates  ranging from February  2006 to December  2012. At December 31, 2002,  the
persons named in Item 6 as a group (7 persons - executive officers and directors
only) held vested options to acquire  1,144,189  ordinary  shares.  Reference is
also made to the information contained in Item 7 below.

Employees

See Item 4: Employees

Item 7. Major Shareholders and Related Party Transactions.

The following table presents information with respect to beneficial ownership of
our ordinary shares as of December 31, 2002, including:

     o   each person or entity known to Commtouch to own beneficially  more than
         five percent of Commtouch's ordinary shares, and

     o   all executive officers and directors as a group.

Beneficial  ownership  is  determined  in  accordance  with  the  rules  of  the
Securities and Exchange  Commission and includes voting or investment  power, or
the right to receive the economic benefits of ownership, with respect to shares.
To  our  knowledge,  except  under  applicable  community  property  laws  or as
otherwise  indicated,  the persons  named in the table have sole voting and sole
investment  control and rights to receive economic  benefits with respect to all
shares  beneficially  owned.  The  applicable  percentage  of ownership for each
shareholder is based on 22,219,696ordinary shares outstanding as of December 31,
2002.  Ordinary  shares  issuable upon exercise of options and other rights held
and  exercisable  on or  within  sixty  days of  February  7,  2003  are  deemed
outstanding for the purpose of computing the percentage  ownership of the person
holding  those  options and other rights and for all directors and officers as a
group, but are not deemed outstanding for computing the percentage  ownership of
any other person.

                                                        Amount     Percent of
                                                        Owned        Class
                                                        -----        -----

Infospace                                              2,032,057    8.7%(1)
Gideon Mantel                                          1,815,803    7.94%(2)
OZF Ltd.                                               1,643,834    7.2%(3)
Nahum Sharfman                                         1,369,787    6.05%(4)
All directors and officers as a group (7 persons)      4,356,578    16.4%(5)

(1)  The above percentage  includes warrants and options which are underwater as
     of February 7, 2003: 4.86% of class

(2)  The above percentage  includes warrants and options which are underwater as
     of February 7, 2003: 1.84% of class

(3)  The above percentage  includes warrants and options which are underwater as
     of February 7, 2003: 2.70% of class

(4)  The above percentage  includes warrants and options which are underwater as
     of February 7, 2003: 1.76% of class

(5)  The above percentage  includes warrants and options which are underwater as
     of February 7, 2003: 5.16% of class

Interest of Management in Certain Transactions.

Private Placement of February 2002
                                       34
<PAGE>
In February 27, 2002,  Commtouch entered into a private placement agreement with
a few of its  founders  (Gideon  Mantel,  Nahum  Sharfman  and Amir Lev) and new
investors,  whereby  Commtouch issued  approximately 4.4 million ordinary shares
against the  investment of  approximately  $1.3 Million in a private  placement;
approximately  one-third of the shares were purchased by  Commtouch's  founders,
who are also  currently  Commtouch  directors  and/or  executive  officers.  The
purchasers in the private placement also received five-year warrants to purchase
up to an additional 2.66 million ordinary shares  (approximately).  The exercise
price for one-third of the warrants is $0.37 per share,  the exercise  price for
an  additional  one-third  of the  warrants is $1.00 per share and the  exercise
price for the final  one-third  of the  warrants  is be $2.00  per  share.  This
agreement  was approved by the  shareholders  on April 8, 2002.  The Company has
used the proceeds of this placement for general corporate  working capital.  The
funds were received on April 15, 2002.

Relationship with InfoSpace

InfoSpace  merged with Go2Net in October 2000.  In  connection  with this merger
InfoSpace assumed Go2Net shares, warrants and rights.

In 1999,  concurrent with the sale of our shares in the initial public offering,
we entered  into a service  agreement  with  InfoSpace,  a network  of  branded,
technology- and community-driven websites focused on personal finance, commerce,
and  games.  InfoSpace  also  develops  Web-related  software.  Pursuant  to the
agreement we were offering  InfoSpace's end users a private label email service,
including  our  email,   calendaring  and  other  services.  The  services  were
customized  to the look  and feel of  InfoSpace's  websites.  The  terms of this
agreement were  substantially  the same as our commercial  agreements with other
customers except that we had agreed to share a materially greater portion of our
advertising  revenues  with  InfoSpace  than we were sharing under other similar
agreements.  The service  agreement  of 1999 was  replaced  by a new  agreement,
effective  February 1, 2002 having a one year  duration,  but  InfoSpace had the
right to  terminate  the  agreement  at any time upon thirty  (30) days  written
notice.  InfoSpace  also had the right to terminate  the agreement if there were
technical  problems  with the  products or services  provided.  The  performance
specifications  set forth in the agreement  include the  maintenance  of certain
levels of email system  availability  and response time.  Infospace was to pay a
quarterly fee of $7,500 for use of up to 10,000  mailboxes.  This  agreement was
assigned to  MailCentro,  Inc., the party which assumed the servicing of most of
our consumer business,  effective March 1, 2002. As of March 1, 2003,  Commtouch
Inc.  was no longer  entitled  to  receive a portion of the  revenues  from this
agreement.

In connection  with  Commtouch  Inc.  entering into the original  email services
agreement,  we issued to  InfoSpace  a warrant to  purchase  1,136,000  ordinary
shares at an exercise price of $12.80 per share. The warrant is non-forfeitable,
fully vested and  immediately  exercisable,  and will expire five years from the
date of the original email service agreement (July 16, 2004).

Concurrent  with  Commtouch Inc.  entering into the email services  agreement in
1999, we issued 896,057 ordinary shares to InfoSpace and 448,029 ordinary shares
to Vulcan Ventures in a private  placement at $14.88 per share.  Pursuant to the
share purchase  agreement,  InfoSpace and Vulcan Ventures have the right to name
one  director to our board as long as they  continue to hold at least 25% of the
combined  number of shares  purchased by them in the private  placement  and the
shares issuable to InfoSpace upon exercise of the warrant.  Mr. Thomas Camp, who
was appointed to the board  pursuant to that  agreement,  resigned on August 22,
2001 and was not replaced by InfoSpace and Vulcan Ventures,  and we believe that
Vulcan Ventures divested itself of all of its  shareholdings in the Company.  In
connection with this transaction, we agreed to pay U.S. Bancorp Piper Jaffray an
advisory fee of $550,000 under the terms of an engagement letter agreement dated
as of July 5, 1999.

We agreed to register the shares and warrant  described above promptly after the
closing of the  initial  public  offering.  The  registration  statement  became
effective on January 7, 2000.

At  InfoSpace's  option,  the  warrant  is  exercisable  pursuant  to a cashless
exercise based on the average  closing price of the ordinary shares for the five
days  preceding  the  exercise.  The holder of the  warrant is required to avoid
becoming a 10% or greater shareholder of the Company as a result of any exercise
of the  warrant.  The holder of the warrant is given the  opportunity  to profit
from a rise in the market  price of the  ordinary  shares and the  warrant.  The
warrant  includes  provisions  which  adjust  the  exercise  and price  upon the
occurrence  of certain  events  which  might  otherwise  dilute the value of the
warrant.

Option Exercises and Purchases of Shares By Certain Officers

                                       35
<PAGE>
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% annually, with payments of interest only
due on March 17 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  collateralized  by a pledge of
the stock purchased. The outstanding principal amount of the note as of December
31, 2002 is $341,272.

Item 8. Financial Information.

See Item 18: Financial Statements

If the Company decides to distribute a cash dividend out of income that has been
tax  exempt  due to an  "Approved  Enterprise"  status  under  the  Law  for the
Encouragement of Capital Investments,  1959, the amount of cash dividend will be
subject to  corporate  tax at the rate then in effect  under  Israeli  law.  The
Company has never  declared or paid cash  dividends on its  ordinary  shares and
does not anticipate  paying any cash dividends in the  foreseeable  future.  The
Company  intends to retain  future  earnings to finance the  development  of its
business.

Item 9. The Offer and Listing.

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

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

                                            High         Low
                                            ----         ---
1999:
Third Quarter (beginning July 13, 1999)  $   22.62    $11.0625
Fourth Quarter ........................      49.12     14.3125

2000:
 First Quarter ........................  $   66.50    $35.5625
 Second Quarter .......................      38.56      14.625
 Third Quarter ........................      33.93       16.50
 Fourth Quarter .......................  $   19.25    $   7.44

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

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


Most Recent Six Months:
November 2002 .........................  $    0.22    $   0.09
December 2002 .........................       0.21        0.11
January 2003 ..........................       0.16        0.14
February 2003 .........................       0.15        0.13
March 2003 ............................       0.14        0.10
April 2003 ............................       0.41        0.12

                                       36
<PAGE>
Item 10. Additional Information.

Under current Israeli regulations,  any dividends or other distributions paid in
respect of ordinary  shares  purchased by  non-residents  of Israel with certain
non-Israeli  currencies  (including  dollars) will be freely repatriable in such
non-Israeli  currencies  at the  rate  of  exchange  prevailing  at the  time of
conversion, provided that Israeli income tax has been paid on, or withheld from,
such payments.

Neither the Articles of  Association of the Company 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
at a state of war with Israel.

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 Restated and Amended  Articles of  Association,
copies of which have been filed as exhibits to this and our prior Annual Reports
on Form 20-F,  as amended  (subject  to further  amendment  of our  Articles  of
Association from time to time).

As of December 31, 2002,  our authorized  share capital  consisted of 40,000,000
ordinary  shares,  NIS 0.05 par  value.  As of  December  31,  2002,  there were
22,219,696 ordinary shares issued and outstanding.

DESCRIPTION OF ORDINARY SHARES

All issued and outstanding  ordinary shares of Commtouch are duly authorized and
validly issued,  fully paid and  nonassessable.  The ordinary shares do not have
preemptive   rights.   Neither  our  Memorandum  of  Association,   Articles  of
Association  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 are entitled to their full  proportion of any cash or share
dividend declared.

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.  Declaration of a dividend requires Board
of Director approval.

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. 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-quarter 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 Board of Directors  may determine in a notice to  shareholders.  At
such reconvened meeting any two shareholders  entitled to vote present in person
or by proxy will
                                       37
<PAGE>
constitute a quorum.  Shareholder resolutions 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.


                                       38
<PAGE>

ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

Under the  Companies  Law, a merger is generally  required to be approved by the
shareholders  and board of  directors of each of the merging  companies.  If the
share capital of the company that will not be the  surviving  company is divided
into different  classes of shares,  the approval of each class is also required.
In  addition,  a merger  can be  completed  only after all  approvals  have been
submitted to the Israeli  Registrar of Companies  and at least seventy days have
passed from the time that a proposal  for  approval of the merger was filed with
the Registrar.

The  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 25%  shareholder  of the  company.  This rule does not
apply if there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of tender offer if as a result of the  acquisition  the  purchaser
would become a 45% shareholder of the company, unless someone else already holds
a majority of the voting power of the  company.  These rules do not apply if the
acquisition  is made  by way of a  merger.  Regulations  promulgated  under  the
Companies  Law provide  that these  tender  offer  requirements  do not apply to
companies whose shares are listed for trading outside of Israel if, according to
the law in the country in which the shares are traded,  including  the rules and
regulations of the stock exchange on which the shares are traded, either:

     o   there is a  limitation  on  acquisition  of any level of control of the
         company; or

     o   the acquisition of any level of control requires the purchaser to do so
         by means of a tender offer to the public.

Finally,   Israeli   tax  law  treats   specified   acquisitions,   including  a
stock-for-stock  swap  between an Israeli  company and a foreign  company,  less
favorably  than does U.S. tax law.  For  example,  Israeli tax law may subject a
shareholder   who  exchanges  his  ordinary  shares  for  shares  in  a  foreign
corporation to taxation before it would become taxable in the United States, and
even though the investment has not become liquid.

TRANSFER OF SHARES AND NOTICES

Fully  paid  ordinary  shares  that are  issued  and not  subject  to any  legal
restrictions  on transference  may be transferred  freely.  Each  shareholder of
record  is  entitled  to  receive  at least  twenty-one  days'  prior  notice of
shareholder  meetings.  For purposes of determining the shareholders entitled to
notice and to vote at such meeting, the Board of Directors may fix a record date
not exceeding 40 days prior to the date of any shareholder meeting.

MODIFICATION OF CLASS RIGHTS

If at any time the share  capital is divided into  different  classes of shares,
then,  unless the conditions of allotment of such class provide  otherwise,  the
rights, additional rights,  advantages,  restrictions and conditions attached or
not attached to any class, at any given time, may be modified,  enhanced,  added
or  abrogated  by  resolution  at a meeting of the holders of the shares of such
class.

DESCRIPTION OF INVESTOR OPTIONS AND WARRANTS

INFOSPACE WARRANT

The  discussion  regarding  the Infospace  warrant  under Item 5.  Operating and
Financial Review and  Prospects--Strategic  Transaction with Go2Net  (InfoSpace)
and Item 7. "Major  Shareholders  and Related Party  Transactions--  Interest of
Management in Certain Transactions--Relationship with InfoSpace" is incorporated
herein by reference.

WINGRA WARRANTS AND OPTIONS

In connection with our acquisition of Wingra, we assumed warrants and options to
purchase 137,233 shares issued to the Wingra investors  (subsequently reduced to
121,329 due to expiration of certain  options),  and options to purchase 168,382
ordinary shares issued to Wingra employees  (subsequently reduced to 162,257 due
to expiration of options of terminating  employees).  Upon  effectiveness of the
merger, these warrants and options became immediately exercisable.

                                       39
<PAGE>
The assumed  investor  warrants and options were originally  issued by Wingra in
connection with loans to Wingra by banks and  shareholders.  The exercise prices
of those warrants and options range from $6.29 to $9.35 and the expiration dates
range from July 2002 through March 2004.

The employee stock options were originally granted to Wingra employees under the
Wingra  Technologies,  LLC 1998 Unit Option Plan.  The exercise  prices of those
options range from $0.2010 to $3.5010 and the expiration dates range from August
2008  through  July 2010.  At the time of the merger,  we assumed the rights and
obligations under that Option Plan.

EQUITY OFFICE PROPERTIES WARRANT

The  discussion  regarding the Equity Office  Properties  warrant under Item 19,
Note 13 to the Notes to Consolidated Financial Statements - Shareholders' Equity
is incorporated herein by reference.

COMPAQ WARRANT

The discussion  regarding the Compaq warrant under Item 19, Note 13 to the Notes
to  Consolidated  Financial  Statements -  Shareholders'  Equity is incorporated
herein by reference.

INVESTMENT ROUND WARRANTS

The discussion  regarding the February 2002 investment round warrants under Item
19, Note 13 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.

CONVERTIBLE LOAN WARRANTS

The discussion  regarding the January 2003  convertible loan warrants under Item
19, Note 13 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.

AXCESSNET WARRANT

The  discussion  regarding the  AxcessNet  warrant under Item 19, Note 13 to the
Notes  to  Consolidated   Financial   Statements  -   Shareholders'   Equity  is
incorporated herein by reference.

AGRON WARRANT

The  discussion  regarding the Agron warrant under Item 19, Note 13 to the Notes
to  Consolidated  Financial  Statements -  Shareholders'  Equity is incorporated
herein by reference.

REGISTRATION RIGHTS

The holders of convertible  preferred shares which were converted into 7,109,800
ordinary shares (the "Registrable Securities") upon effectiveness of the initial
public  offering,  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 the  initial  public
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.
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<PAGE>
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,  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.

The registration  rights described in the preceding three paragraphs expire five
years after the closing date of our initial public offering (July 16, 2004).

In addition, the Company granted registration rights as follows:

     a.  to InfoSpace,  Vulcan  Ventures and Microsoft,  pursuant to which their
         holdings in the Company  (including  the warrant  issued to  InfoSpace)
         were registered on January 7, 2000;

     b.  under the terms of the Wingra acquisition  agreement,  we were required
         to register the 1,568,869  shares issuable to the Wingra  investors and
         employees,   including  shares  issuable  under  options  and  warrants
         described above. The registration statements were filed to fulfill this
         requirement and became  effective,  respectively,  on September 6, 2001
         and July 20, 2001;

     c.  to investors under the private placement of February 27, 2002,  whereby
         Commtouch issued  approximately 4.4 million ordinary shares against the
         investment of approximately $1.3 million.  The investors in the private
         placement  also  received  five-year  warrants  to  purchase  up  to an
         additional  2.66 million  ordinary shares  (approximately).  The shares
         issued under this private placement, including shares to be issued upon
         the exercise of the warrants, were registered on May 28, 2002;

     d.  to lenders under the convertible loan agreement of January 29, 2003, as
         amended,  whereby a maximum  possible loan amount of $1,250,000 will be
         provided to the Company. The Company has received the total loan amount
         of $1,250,000 from the lenders.  The loan principal and interest may be
         converted  by the lenders into equity in the Company at any time during
         the  loan  term,  at a  conversion  price of $.25  per  Ordinary  Share
         ("Conversion Price").  Also, warrants exercisable for purchase of up to
         5,000,000  of the  Company's  ordinary  shares  have been issued to the
         lenders  covering  the stated  loan  amount,  based on such loan amount
         divided by the  Conversion  Price.  Warrants shall also be issued on an
         annual  basis for any  accumulated  interest on the loan.  Registration
         rights  have  been  granted  to the  lenders  in  connection  with  the
         conversion  rights and warrants  described  above,  covering a total of
         13,310,000  shares.  Demand  registration  rights  (exercisable  by the
         "Lender  Majority",  as  defined in the  agreement)  shall be in effect
         until  three (3) months  following  the third  anniversary  of the last
         applicable warrant issuance date. No demand served on the Company shall
         be  effective  until  at least  the  Lender  Majority  has  effected  a
         conversion of the loan into equity; and

     e.  piggy-back  registration  rights were included in all warrants detailed
         above in this Item 10.

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
Israeli  Registrar of Companies its Articles of  Association  and any amendments
thereto 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 Wells Fargo Bank
Minnesota N.A.

MATERIAL CONTRACTS IN 2002.

Consulting and Fundraising Agreements

On September 1, 2002, Commtouch entered into two agreements with AxcessNet Ltd.,
one for the providing of consulting  services to Commtouch  ("agreement  1") and
the  other  for  the  facilitating  of  fundraising  and  strategic   commercial
transactions  ("agreement  2").  Under  agreement  1,  AxcessNet is to receive a
payment of  $200,000,  comprised  of cash of  $140,000  and  warrants  valued at
$60,000.  Under  agreement  2, as amended on  December  1,  2002,

                                       41
<PAGE>
AxcessNet  is  entitled to receive 5% of proceeds  received  by  Commtouch  from
fundraising activities (and in the case of a business combination, a minimum fee
of $100,000),  as well as from commercial transactions entered into by Commtouch
through the efforts of AxcessNet.  The compensation to be paid under agreement 2
is payable in either cash or warrants,  at  AxcessNet's  discretion,  but if the
warrants  are to exceed  250,000,  Commtouch  has the right to pay any excess in
cash. Furthermore, in the event that Commtouch is acquired by a third party, any
continuing  payment  obligations of Commtouch to AxcessNet  under agreement 2 at
the time of such  acquisition may be fully liquidated by a payment of the lesser
of twenty four months worth of payments or the number of months  remaining under
Commtouch's obligations to AxcessNet.  During their relationship under agreement
1 and agreement 2, Commtouch and AxcessNet have been working together closely in
furtherance of the Company's business,  and are in constant  communications with
one another.  AxcessNet is also a lender under the  convertible  loan  agreement
entered into in early 2003. See "Item 3. Key Information - Recent Developments -
Convertible Loan Transaction."

Private Placement of February 2002

See  "Item 7.  Major  Shareholders  and  Related  Party  Transactions  - Private
Placement of February 2002".

Lease Termination  Agreement between Young Woo & Assoc.,  LLC and Commtouch Inc.
and Commtouch Software Ltd. (as guarantor) dated September 6, 2002

Pursuant  to the  agreement  with Young Woo,  Commtouch  and Young Woo agreed to
terminate the New York facilities lease agreement.  Within the framework of this
agreement Commtouch made certain payments to Young Woo and transferred ownership
to  certain  furniture,  and Young Woo  released  Commtouch  from the  remainder
(approximately two years) of the lease term under the original agreement and the
related guarantee.

Surrender  Agreement  between Omni South Beach, L.P. and Commtouch Latin America
Inc. dated August 31, 2002

Pursuant to the agreement with Omni,  Commtouch and Omni agreed to terminate the
Miami  facilities  lease  agreement.  Within  the  framework  of this  agreement
Commtouch made certain payments to Omni,  terminated a sublease agreement with a
third  party  sublessee  of  Commtouch  and  transferred  ownership  to  certain
furniture to Omni, and Omni released Commtouch from the remainder (approximately
five years) of the lease term under the original agreement.

Amended and Restated 1999 Non-Employee Directors Stock Option Plan

The allotment of shares under the original  1999  Non-Employee  Directors  Stock
Option Plan was in the amount of 180,000  ordinary  shares,  with an  additional
allotment  in 2000  bringing the plan's total  allotment to 500,000  shares,  an
allotment in 2001 bringing the plan's total to 750,000  ordinary  shares and two
allotments  during 2002 totaling  700,000  ordinary  shares  bringing the plan's
total to 1,450,000.  During 1999,  each individual who first joined the Board of
Directors  as a  non-employee  director  on or after the  effective  date of the
initial public offering  received an option grant for 10,000 shares.  Subsequent
to July 2000,  individuals  who joined the board  received  an initial  grant of
30,000   options.   Directors  who  are  reelected  at  the  annual  meeting  of
shareholders  are  generally  entitled to  additional  grants of 10,000  shares,
though  those  directors  reelected  at the August 22,  2001  annual  meeting of
shareholders  were  entitled  to a grant of 33,750,  those  directors  in office
immediately after the extraordinary  general meeting of shareholders on February
25, 2002 were  granted a one-time  option grant of 150,000  ordinary  shares and
those directors in office  immediately  after the annual meeting of shareholders
on November  18, 2002 were granted a one-time  option  grant of 50,000  ordinary
shares.  Also,  in  addition  to the grant of  shares  for her  reelection  as a
director in August 2001,  Carolyn  Chin,  in  recognition  of her  activities as
Chairman of the Board, received an additional grant of 221,250 ordinary shares.

Each option granted under the Non-Employee Directors Plan originally was to have
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;
however,  this  changed  pursuant  to an  amendment  to  the  plan  approved  by
shareholders  at the August 10, 2000 annual meeting of  shareholders,  such that
options become exercisable at a rate of 1/16th of the shares every three months.
Each option has an exercise price equal to the fair market value of the ordinary
shares on the grant date of such option.  However,  certain options  outstanding
and  unexercised at the time of the effective date of the Tender Offer Statement
of July 20, 2001, as amended,  were

                                       42
<PAGE>
repriced in accordance with the terms of the Tender Offer Statement, as amended.
Each option has a maximum term of ten years,  but will terminate  earlier if the
optionee ceases to be a member of the Board of Directors.

See the  discussion  under Item 4  "Information  on the Company - Description of
Property" for an indication of where the Company's Amended and Restated Articles
of Association  may be inspected.  In addition,  the Articles are attached as an
exhibit to this Form 20-F.

                    ISRAELI TAXATION AND INVESTMENT PROGRAMS

The  following  discussion  summarizes  the  material  Israeli tax  consequences
relating 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.

Tax Reform

On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to
the reform,  resident  companies are subject to Israeli tax on income accrued or
derived in Israel or abroad.  In  addition,  the concept of  controlled  foreign
corporation  was  introduced  according  to which an Israeli  company may become
subject to Israeli taxes on certain  income of a  non-Israeli  subsidiary if the
subsidiaries  primary  source of income is  passive  income  (such as  interest,
dividends,  royalties,  rental  income or capital  gains).  The tax reform  also
substantially changed the system of taxation of capital gains.

General Corporate Tax Structure

The regular general corporate tax rate in Israel is 36%. 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."

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 tax  purposes  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.

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<PAGE>
In addition,  subject to certain  limitations,  depreciation on fixed assets and
loss carry  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.

Law for the Encouragement of Industry (Taxes), 1969

Commtouch is currently  viewed as qualifying 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:

     o   deductions  of 12.5% per annum of the purchase  price of a patent or of
         know-how  that is utilized in the  development  or  advancement  of its
         enterprise;

     o   an election under certain conditions to file a consolidated return with
         additional related industrial companies;

     o   accelerated depreciation rates on equipment and buildings; and

     o   deduction of expenses  incurred in connection with a public issuance of
         shares listed for trading over a three year period. The tax authorities
         may construe this benefit to be relevant only upon a public issuance of
         shares in Israel.

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 is and will continue to be considered 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 three separate investment programs,  one
of which was cancelled in early 2002.  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.

Dividends paid by companies owning approved enterprises,  the source of which is
income  derived  from an  approved  enterprise  during the  applicable  benefits
period,  are generally  taxed at a reduced rate of 15% if the dividends are paid

                                       44
<PAGE>
during  the  benefits  period or at any time up to 12 years  after the  benefits
period.  This tax must be withheld at source by the company paying the dividend.
In the case of a "foreign investor's company," the 12 year limitation on reduced
withholding tax on dividends does not apply.  Subject to various  conditions,  a
foreign investor's company is a company more than 25% of whose share capital, in
terms of shares, rights to profits, voting and appointment of directors,  and of
whose combined  share and loan capital,  is owned by  non-Israeli  residents.  A
dividend paid from income  derived from an  enterprise  owned by a company which
has elected the "alternative  benefits program" during the period in which it is
exempt  from tax is also  generally  subject  to the 15.0% tax rate;  this would
render the company liable for corporate tax on the amount distributed,  which is
defined  for this  purpose as  including  the amount of the  corporate  tax that
applies  as a result  of the  distribution,  at the rate  that  would  have been
applicable had the company not elected the alternative  benefits program,  which
is generally 25.0%.  Generally,  any dividends  distributed 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.  However,  a
company may elect to attribute any dividend distributed by it only to income not
subject to the alternative benefits program.

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 provided 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 of 15%  payable  with
respect to Approved  Enterprises),  unless 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 with respect to such income,

                                       45
<PAGE>
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 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 revenues  derived 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. The Company is subject to various provisions of
the Research Law and regulations and derivatives thereunder.

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 taxes
or other  benefits  previously  received  (including  interest  and CPI  linkage
difference)  and would likely be denied receipt of such grants or benefits,  and
participation of such programs, thereafter.

The Company has participated in programs sponsored by the OCS for the support of
research and development activities.  Through December 31, 2002, the Company had
recorded grants from OCS aggregating approximately $_1.4_ million for certain of
the Company's research and development projects. These grants were recorded as a
reduction of research and development  costs. As noted,  the Israeli  government
requires beneficiaries of such grants to pay royalties to the Israeli government
based  on the  revenues  derived  from the sale of  products,  technologies  and
services  developed with such grants.  We believe that we have no obligation for
royalties  in  2002,  related  to the  2002  grants,  since  we had

                                       46
<PAGE>
not started  generating  revenue for the product developed with such grants, but
we may have obligations for royalties in 2003 and future years.

With  regard  to  grants  before  2002,  the  Company  claims  that all of these
programs, which were funded at a total of $1.2 million, had failed and therefore
it will not be obligated to pay royalties.  In March 2002, the Company submitted
an application  for project  failure with regard to projects from 2001 and prior
years. This application was accepted by the OCS in August 2002. Accordingly, the
Company  has  determined  that as of December  31, 2002 there are no  contingent
liabilities for royalties under those projects.

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, 2000, the Company had received grants
from the Marketing Fund in the amount of approximately $279,000.

    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 report, 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  therefore 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
such U.S. Holder sells the ordinary share.

                                       47
<PAGE>
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
15%). 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.

See   discussion   under  this  Item  10  "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 under this Item 10 "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 28% 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

                                       48
<PAGE>
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
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
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 of its pre-2003
tax years.  Commtouch  expects that the majority of its assets will  continue to
generate  sufficient  levels of active income,  and the percentage (by value) of
its assets not  producing  or held for the  production  of passive  income  will
continue  to be  sufficient,  for it to avoid PFIC  treatment  for U.S.  federal
income tax purposes in post-2002  tax years.  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.  Tax  Considerations  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 or by attribution,  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 ordinary shares of Commtouch.  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 or by attribution, 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 15% 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).

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)

                                       49
<PAGE>
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.

                              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.  Despite a peace  agreement  between
Israel and Egypt signed in 1979,  a peace  agreement  between  Israel and Jordan
signed  in  1994  and,  since  1993,   several  agreements  between  Israel  and
Palestinian  representatives,  Israel  continues  to face  hostile  actions  and
threats from  various  elements in the region.  Further,  Israel has not entered
into any peace  agreement  with  Syria or  Lebanon,  and there  have been  major
difficulties  accompanied by violence in the negotiations with the Palestinians.
We cannot be certain as to how the current hostilities affecting the region will
develop or what effect they may have upon Commtouch.

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 Israeli  government has
periodically changed its policies in all these areas.

Until May 1998, Israel imposed extensive restrictions on transactions in foreign
currency.  These restrictions were largely lifted in May 1998, and since January
1, 2003, all exchange control restrictions have been removed, although there are
still  reporting  requirements  for  foreign  currency  transactions.   However,
legislation remains in effect pursuant to which currency controls can be imposed
by  administrative  action at any time.  Nonresidents of Israel who purchase our
ordinary  shares are able to repatriate in  non-Israeli  currency both dividends
(after  deduction  of  withholding  tax) and the  proceeds  from the sale of the
shares.
                                       50
<PAGE>
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.

Item 11. Qualitative and Quantitative Disclosure about Market Risk.

We develop our  technology  in Israel and seek to provide our software  products
worldwide.  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.  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.

Item 12. Description of Securities Other than Equity Securities.

Not applicable.

                                     PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

Not applicable.

Item 14.  Material  Modifications  to the Rights of Security  Holders and Use of
Proceeds.

Not applicable.

Item 15. Controls and Procedures


(a)  Under  the  supervision  and  with  the  participation  of our  management,
including our principal  executive officer and principal  financial officer,  we
conducted an  evaluation of the  effectiveness  of our  disclosure  controls and
procedures,  as such term is defined under Rule 13a-14(c)  promulgated under the
Exchange Act,  within 90 days of the filing date of this report.  Based on their
evaluation,  our principal  executive  officer and principal  financial  officer
concluded that the Company's disclosure controls and procedures are effective.


(b) There have been no significant  changes  (including  corrective actions with
regard to  significant  deficiencies  or material  weaknesses)  in our  internal
controls or in other  factors that could  significantly  affect  these  controls
subsequent  to the date of the  evaluation  referenced  in paragraph  (a) above,
including any  corrective  actions with regard to significant  deficiencies  and
material weaknesses.

                                       51
<PAGE>
Item 16. Reserved

                                    PART III

Item 17. Financial Statements.


The Company has responded to Item 18.

Item 18. Financial Statements

     (a) Financial Statements

                                                                        Page
                                                                        ----
Report of Independent Auditors.....................................      F-1
Consolidated Balance Sheets........................................      F-2
Consolidated Statements of Operations..............................      F-3
Statement of Changes in Shareholders' Equity.......................      F-4
Consolidated Statements of Cash Flows..............................      F-5
Notes to Consolidated Financial Statements.........................      F-8

     (b) Financial Statement Schedule:

The following  financial  statement schedule of Commtouch Software Ltd. for each
of the three years in the period ended December 31, 2002 is filed as part of the
Annual Report and should be read in conjunction with the consolidated  financial
statements of Commtouch Software, Ltd.

    Schedule II --Valuation and Qualifying Accounts

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


Item 19  Exhibits

    The list of exhibits  required by this Item is  incorporated by reference to
the Exhibit Index which precedes the exhibits to this report.


                                       52
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders of COMMTOUCH SOFTWARE LTD.

We have  audited  the  accompanying  consolidated  balance  sheets of  Commtouch
Software Ltd. ("the  Company") and its  subsidiaries as of December 31, 2001 and
2002,  and  the  related  consolidated  statements  of  operations,  changes  in
shareholders'  equity,  and cash flows for each of the three years in the period
ended  December  31, 2002.  Our audits also  included  the  financial  statement
schedule  listed in the Index at item  18(b).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule 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 misstatements. 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  statements  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  subsidiaries as of December 31, 2001 and 2002,
and the consolidated  results of their operations and cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles  generally accepted in the United States.  Also, in our opinion,  the
related financial statement  schedule,  when considered in relation to the basic
financial  statements  taken as a whole,  present fairly in all material respect
the information set forth therein.

Tel-Aviv, Israel
March 7, 2003

                                                KOST, FORER & GABBAY
                                         A Member of Ernst & Young Global


                                   F-1
<PAGE>

                             COMMTOUCH SOFTWARE LTD.

                           CONSOLIDATED BALANCE SHEETS
               (USD in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                          ----------------------
                                                                                             2001         2002
                                                                                          ---------    ---------
<S>                                                                                       <C>          <C>
Assets
Current Assets:
   Cash and cash equivalents......................................................        $   2,248    $   1,388
   Trade receivables, net.........................................................              864           64
   Prepaid expenses and other accounts receivable.................................              700          231
                                                                                          ---------    ---------
   Total current assets...........................................................            3,812        1,683
                                                                                          ---------    ---------

   Long-term lease deposits.......................................................              261            5
   Severance pay fund.............................................................              320          264
   Property and equipment, net....................................................            5,152        1,029
   Equity investment..............................................................               --            3
                                                                                          ---------    ---------
                                                                                          $   9,545    $   2,984
                                                                                          ---------    ---------
Liabilities and Shareholders' Equity
Current Liabilities:
   Bank credit line and current maturities of bank loans and capital leases               $     799    $     ---
   Accounts payable...............................................................            1,374          338
   Employees and payroll accruals.................................................              633          424
   Deferred revenues..............................................................              839           --
   Accrued expenses and other liabilities.........................................              774          372
                                                                                          ---------    ---------
   Total current liabilities......................................................            4,419        1,134
                                                                                          ---------    ---------

   Long-term bank loans and capital leases........................................              260           --
   Other liabilities..............................................................              255          135
   Accrued severance pay..........................................................              425          278
                                                                                          ---------    ---------
                                                                                                940          413
                                                                                          ---------    ---------
   Minority interest..............................................................              127          ---
                                                                                          ---------    ---------
Commitments and Contingencies

Shareholders' Equity
   Ordinary Shares, nominal value NIS 0.05 par value-
   Authorized: 40,000,000 shares as of
   December 31, 2001 and 2002; Issued and
   outstanding: 17,496,819 and  22,219,696 shares
   as of December 31, 2001 and 2002, respectively.................................              239          290
   Additional paid-in capital.....................................................          152,162      153,460
   Deferred stock compensation....................................................             (828)        (277)
   Notes receivable from shareholders.............................................             (754)        (365)
   Accumulated deficit............................................................         (146,760)    (151,671)
                                                                                          ---------    ---------
   Total shareholders' equity.....................................................            4,059        1,437
                                                                                          ---------    ---------
                                                                                          $   9,545    $   2,984
                                                                                          =========    =========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      F-2
<PAGE>
                             COMMTOUCH SOFTWARE LTD.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (USD in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                               Year ended
                                                                                              December 31,
                                                                                  ----------------------------------
                                                                                     2000*        2001*       2002
                                                                                  -----------  ----------  ---------
<S>                                                                               <C>           <C>         <C>
Revenues:
   Email services..........................................................       $  17,771     $ 13,318    $  3,238
   Software licenses.......................................................           1,000          270         200
                                                                                  ---------     --------    --------
   Total revenues..........................................................          18,771       13,588       3,438
                                                                                  ---------     --------    --------
Cost of revenues:
   Email services..........................................................          11,800       13,962       1,675
   Software licenses.......................................................              --           --          --
                                                                                  ---------     --------    --------
   Total cost of revenues..................................................          11,800       13,962       1,675
                                                                                  ---------     --------    --------
Gross profit (loss)........................................................           6,971         (374)      1,763
                                                                                  ---------     ---------   --------
Operating expenses:
   Research and development, net...........................................          10,244        5,884       2,246
   Sales and marketing.....................................................          26,534       12,894       1,176
   General and administrative..............................................          13,455       10,337       2,588
   Amortization of the prepaid marketing expenses..........................           4,508           --          --
   Amortization of stock-based employee deferred compensation (1)                     3,050        2,204         551
   Write-off of property and equipment and other...........................              --       10,166         750
                                                                                  ---------    ---------   ---------
   Total operating expenses................................................          57,791       41,485       7,311
                                                                                  ---------    ---------   ---------
Operating loss.............................................................         (50,820)     (41,859)     (5,548)
   Interest and other income (expense), net................................           2,886          583         (60)
   Equity in losses of affiliate ..........................................              --           --         (56)
   Write-off of impaired long-term investments.............................          (5,000)      (2,000)         --
   Minority interest.......................................................              55          285          74
                                                                                  ---------     --------    --------
Loss from continuing operations............................................         (52,879)     (42,991)     (5,590)
                                                                                  ----------    ---------   ---------
Discontinued operations
   Gain from disposal of Wingra............................................              --           --       1,014
   Discontinued operations - Wingra........................................          (1,346)     (18,016)      (335)
                                                                                  ---------     --------    --------
Income (Loss) from discontinued operations.................................          (1,346)     (18,016)       679
                                                                                  ---------     --------    --------
Net loss...................................................................       $ (54,225)    $(61,007)   $ (4,911)
                                                                                  =========     ========    ========
Basic and diluted net loss per share
   Loss from continuing operations.........................................       $   (3.42)    $  (2.51)   $  (0.27)
   Income (Loss) from discontinued operations..............................           (0.09)    $  (1.05)   $   0.03
                                                                                  ---------     --------    --------
Net loss...................................................................       $   (3.51)    $  (3.56)   $  (0.24)
                                                                                  =========     ========    ========
Weighted average number of shares used in computing
   basic and diluted net loss per share....................................          15,462       17,152      20,854
                                                                                  =========     ========    ========
</TABLE>
<TABLE>
<CAPTION>
                                                                                               Year ended
                                                                                              December 31,
                                                                                  ----------------------------------
                                                                                     2000         2001        2002
                                                                                  ----------   ---------   ---------
(1) Stock-based Employee Compensation Relates to the following:
<S>                                                                               <C>           <C>         <C>
   Cost of revenues........................................................       $     102     $     82    $     20
   Research and development, net...........................................             284          226          56
   Sales and marketing.....................................................             795          554         139
   General and administrative..............................................           1,869        1,342         336
                                                                                  ---------     --------    --------
   Total...................................................................       $   3,050     $  2,204    $    551
                                                                                  =========     ========    ========
</TABLE>
* - Reclassified  to conform to the current years  classification  mainly due to
divestiture  of Wingra.  The  accompanying  notes are an integral  part of these
consolidated financial statements.

                                      F-3
<PAGE>
                             COMMTOUCH SOFTWARE LTD.

                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
               (USD in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                       Ordinary shares     Additional
                                                                 ----------------------      paid-in
                                                                     Shares       Amount     capital
                                                                 ------------     ------    --------
<S>                                                                <C>              <C>      <C>
Balance as of January 1, 2000                                      15,199,344       213      133,403
   Issuance of shares upon exercise of                                440,384         6        1,701
     options........................................
   Amortization of deferred stock                                          --        --           --
     compensation...................................
   Repayment of notes receivable....................                       --        --           --
   Other comprehensive income-unrealized
     holding losses on marketable                                          --        --           --
     securities.....................................
   Issuance of shares to minority interest
     in                                                                    --        --        1,090
     Japan-Note 2i..................................
   Issuance of shares and vested options
     and warrants                                                   1,285,294        17       14,800
     in consideration of the acquisition
     of Wingra......................................
   Net loss.........................................                       --        --           --
   Total comprehensive loss.........................                       --        --           --
                                                                 ------------     -----     --------
Balance as of December 31, 2000.....................               16,925,022       236      150,994
   Issuance of shares, net..........................                  315,789         2          256
   Issuance of shares upon exercise of                                256,008         1          116
     options........................................
Stock  based  compensation
   related to  warrants                                                    --        --           53
     granted to a service provider..................
   Amortization of deferred stock                                          --        --           --
     compensation...................................
   Deferred stock based compensation................                       --        --          303
   Repayment of notes receivable....................                       --        --           --
   Forgiveness of notes receivable..................                       --        --           --
   Other comprehensive income-unrealized
     holding losses on marketable                                          --        --           --
     securities.....................................
   Issuance of shares to minority interest
     in Japan-Note 2i...............................                       --        --          440
   Net loss.........................................                       --        --           --
   Total comprehensive loss.........................                       --        --           --
                                                                 ------------     -----     --------
Balance as of December 31, 2001.....................               17,496,819       239      152,162
   Issuance of shares, net..........................                4,434,932        48        1,295
   Issuance of shares upon exercise of                                287,945         3            3
     options........................................
Amortization  of  deferred
   stock based compensation.........................                       --        --           --
   Repayment of notes receivable....................                       --        --           --
   Valuation allowance for notes receivable.........                       --        --           --
   Net loss.........................................                       --        --           --
                                                                 ------------     -----     --------
Balance as of December 31, 2002.....................               22,219,696     $ 290     $153,460
                                                                 ============     =====     ========
</TABLE>
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                                     Stock-based      Notes     Accumulated
                                                       employee     receivable      other
                                                       deferred       from      comprehensive Accumulated
                                                     compensation  shareholders     income      deficit         Total
                                                     ------------  ------------     ------      -------         -----
<S>                                                     <C>           <C>            <C>        <C>             <C>
Balance as of January 1, 2000 .......................   (5,779)       (1,060)        63         (31,528)        95,312
   Issuance of shares upon exercise of options ......     --            --          --             --            1,707
   Amortization of deferred stock based compensation     3,050          --          --             --            3,050
   Repayment of notes receivable ....................     --              19        --             --               19
   Other comprehensive income--unrealized
     holding losses on marketable securities ........     --            --          (42)           --              (42)
   Issuance of shares to minority interest in
     Japan-Note 2i ..................................     --            --          --             --            1,090
   Issuance of shares and vested options and warrants
     in consideration of the acquisition ............     --            --          --             --           14,817
     of Wingra
   Net loss .........................................     --            --          --          (54,225)       (54,225)
                                                                                                              --------
   Total comprehensive loss .........................     --            --          --             --          (54,267)
                                                       -------       -------       ----       ---------       --------
Balance as of December 31, 2000 .....................   (2,729)       (1,041)        21         (85,753)        61,728
   Issuance of shares, net ..........................     --            --          --             --              258
   Issuance of shares upon exercise of options ......     --            --          --             --              117
   Amortization of deferred stock based compensation     2,204          --          --             --            2,204
   Stock based compensation related to warrants
     granted to a service provider ..................     --            --          --             --               53
   Deferred stock compensation ......................     (303)         --          --             --             --
   Repayment of notes receivable ....................     --             144        --             --              144
   Forgiveness of notes receivable ..................     --             143        --             --              143
   Other comprehensive income--unrealized
     holding losses on marketable securities ........     --            --          (21)           --              (21)
   Issuance of shares to minority interest in
     Japan-Note 2i ..................................     --            --          --             --              440
   Net loss .........................................     --            --          --          (61,007)       (61,007)
   Total comprehensive loss .........................     --            --          --             --          (61,028)
                                                       -------       -------       ----       ---------       --------
Balance as of December 31, 2001 .....................     (828)         (754)       --         (146,760)         4,059
   Issuance of shares, net ..........................     --            --          --             --            1,343
   Issuance of shares upon exercise of options ......     --            --          --             --                6
   Amortization of deferred stock based compensation       551          --          --             --              551
   Repayment of notes receivable ....................     --               4        --             --                4
   Valuation allowance for notes receivable .........     --             385        --             --              385
   Net loss .........................................     --            --          --           (4,911)        (4,911)
                                                       -------       -------       ----       ---------       --------

Balance as of December 31, 2002 .....................  $  (277)      $  (365)      $--        $(151,671)      $  1,437
                                                       =======       =======       ====       =========       ========

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-5
<PAGE>
                             COMMTOUCH SOFTWARE LTD.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (USD in thousands)
<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                                         December 31,
                                                                                -----------------------------
                                                                                  2000*      2001*     2002
                                                                                --------   --------   -------
<S>                                                                             <C>        <C>        <C>
Cash flows from operating activities:
   Net loss ..................................................................  $(54,225)  $(61,007)  $(4,911)
      Less loss for the period from discontinued operations ..................     1,346     18,016       335
   Adjustments to reconcile net loss to net cash used in Operating activities:
       Depreciation and amortization .........................................     5,891      7,432     1,988
       Amortization of stock-based employee deferred compensation and warrants
         issued for services received and bank line of credit ................     3,050      2,204       551
       Amortization of prepaid marketing expenses ............................     4,508       --        --
       Write-off of impaired long-term investments ...........................     5,000      2,000      --
       Write-off of property, equipment and other ............................      --       10,166       750
       Loss from sale of property and equipment ..............................      --          751       247
       Gain from sale of discontinued operations .............................      --         --      (1,014)
       Loss from sale of shares in consolidated subsidiary ...................      --         --         153
       Share of equity interest ..............................................      --         --         (56)
       Valuation allowance of notes receivable ...............................      --         --         385
   Changes in assets and liabilities:
       Trade receivables, net ................................................    (1,541)     3,712       114
       Prepaid expenses and other accounts receivable ........................    (1,931)     2,932       379
       Accounts payable ......................................................     2,118     (3,052)     (981)
       Employee and payroll accruals, accrued expenses and other liabilities .     4,109     (5,164)     (496)
       Deferred revenues .....................................................       612       (739)     (445)
       Accrued severance pay, net ............................................       (64)       216       (91)
       Forgiveness of notes receivable .......................................      --          143      --
       Minority interest in losses of a consolidated subsidiary ..............       (55)      (285)      (74)
       Other .................................................................       (99)    (1,969)      366
                                                                                --------   --------   -------
Net cash used in operating activities ........................................   (31,281)   (24,644)   (2,800)
                                                                                --------   --------   -------
Cash flows from investing activities:
   Proceeds from sales of marketable securities ..............................    18,969      8,586      --
   Purchases of marketable securities ........................................    (9,568)      --        --
   Purchase of long-term investments .........................................    (7,000)      --        --
   Long-term lease deposits ..................................................      (163)       202       100
   Proceeds from acquisition of Wingra .......................................       305       --        --
   Sale of Wingra ............................................................      --         --        (193)
   Sale of consolidated subsidiary ...........................................      --         --           1
   Proceeds from sale of property and equipment ..............................       337        160       719
   Purchase of property and equipment ........................................   (19,092)    (3,265)     --
                                                                                --------   --------   -------
Net cash (used) provided in investing activities .............................   (16,212)     5,683       627
                                                                                --------   --------   -------
Cash flows from financing activities:
   Repayment of note receivable by shareholder ...............................        19        144         4
   Repayment of bank loans and notes payable .................................      --         (946)      (40)
   Principal payment of capital lease ........................................      (619)       (24)     --
   Proceeds from issuance of shares, net .....................................     1,707        428     1,349
   Proceeds from minority interest in consolidated subsidiary ................     1,090        440      --
   Contribution from minority interest of consolidated subsidiary ............       131        336      --
                                                                                --------   --------   -------
Net cash provided by financing activities ....................................     2,328        378     1,313
                                                                                --------   --------   -------
Decrease in cash and cash equivalents ........................................   (45,165)   (18,583)     (860)
Cash and cash equivalents at the beginning of the year .......................    65,996     20,831     2,248
                                                                                --------   --------   -------
Cash and cash equivalents at the end of the year .............................  $ 20,831   $  2,248   $ 1,388
                                                                                ========   ========   =======

* - Reclassified to conform to the current years classification mainly due to divestiture of Wingra.
</TABLE>
                                      F-6
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                             <C>         <C>       <C>
Supplemental disclosure of cash flows activity: Cash paid during the year:
   Interest................................................................     $     31    $   161   $     3
</TABLE>

Proceeds from  acquisition  of Wingra,  for year ended December 31, 2000 were as
follows:


Tangible assets acquired                                             $    475
Liabilities assumed                                                    (3,054)
                                                                     ---------
Net liabilities assumed:                                               (2,579)


Customer base                                                           1,340
Workforce-in-place                                                        550
Intellectual Property                                                   1,660
In-process research & development expenses                              1,280
Goodwill                                                               12,590
                                                                     ---------
Intangibles acquired:                                                  17,420

Cash acquired:                                                            305
                                                                     ---------
Purchase price                                                       $ 15,146

The proceeds from the sale of Wingra,  for year ended  December 31, 2002 were as
follows:

Tangible assets sold                                                 $    314
Liabilities transferred                                                (1,521)
                                                                     ---------
Net liabilities transferred:                                           (1,207)

Cash transferred:                                                         193
                                                                     ---------
Gain from sale of Wingra                                             $ (1,014)

The  proceeds  from the of shares in  consolidated  subsidiary  (Commtouch  K.K.
(Japan),  now  known as  Imetrix),  for year  ended  December  31,  2002 were as
follows:

Tangible assets                                                      $    421
Liabilities                                                              (267)
                                                                     ---------
Net assets transferred:                                                   154

Cash received:                                                              1
                                                                     ---------
Loss from sale of consolidated subsidiary                            $    153


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-7
<PAGE>
                                                         Commtouch Software Ltd.

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

NOTE 1: GENERAL

a. Commtouch Software Ltd.  ("Commtouch",  "the Company") was incorporated under
the laws of Israel in 1991.  Commtouch has five  subsidiaries:  Commtouch  Inc.,
Commtouch  (UK) Ltd,  Commtouch  Latin  America Inc.  (dissolved  during  2002),
Wingra, Inc. ("Wingra") (sold during 2002) and Commtouch K.K. (Japan) (now known
as Imetrix)  (majority  owned during a portion of 2002,  and in which  Commtouch
currently holds a 32% interest).  The Company and its  subsidiaries  develop and
provide email anti-spam  solutions to enterprises.  Until December 31, 2002, the
Company  and  its  subsidiaries  provided  email  and  messaging  solutions,  to
customers  ranging from service  providers  to large and small  businesses,  who
offered the Company's Web-based email through their website to their end users.

In 2002, the Company sold its migration  service business and most of its hosted
email services and, while it initially  changed its focus to providing email and
messaging  solutions to service  providers (see Note 1b below),  it subsequently
ceased  promoting  its email and  messaging  solutions  and began  concentrating
solely on developing its anti-spam solutions.

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

During 2002,  approximately  57% of the revenues were derived from two customers
(39% from  customer A and 18% from  customer B). During 2001 and 2000, no single
customer accounted for more than 10% of the revenues.

b. Discontinued operations

In November 2000, the Company acquired Wingra  Technologies Inc.  ("Wingra"),  a
provider of messaging  integration and migration solutions for large enterprises
(see also Note 3).

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

The proceeds from the sale of Wingra,  for year ended  December 31, 2002 were as
follows:

Tangible assets:                                              $    314
Liabilities transferred                                         (1,521)
                                                              --------
Net liabilities transferred:                                    (1,207)

Cash transferred:                                                  193
                                                              --------
Gain from sale of Wingra                                      $  1,014

The results of operations including revenue, operating expenses and other income
and  expense of Wingra  for 2000,  2001 and 2002 have been  reclassified  in the
accompanying statements of operations as discontinued operations.

Obligations  to employees for severance and other  benefits  resulting  from the
discontinuation  have been  reflected in the financial  statements on an accrual
basis.

Summary  operating  results from the discontinued  operation for the years ended
December 31, 2000, 2001 and 2002 are as follows:

                                      F-8
<PAGE>
                                                         Commtouch Software Ltd.

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


                                         Year Ended December 31,
                            ---------------------------------------------------
                                  2000             2001              2002
                            ----------------- ----------------  ---------------

Revenues                     $         344     $       1,730     $         157
Cost of revenues                        64               643                76
                            ----------------- ----------------  ---------------

Gross profit                           280             1,087                81
Operating expenses                     261             3,029               416
Amortization and impairment
  of goodwill and other
  intangible assets                     85            16,074                --
In-process research
  and development                    1,280               --                 --
                            ----------------- ----------------  ---------------
Operating loss               $      (1,346)    $     (18,016)    $        (335)
                            ================= ================  ===============

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of Estimates:

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

b. Financial Statements in U. S. Dollars:

A majority of the revenues of the Company and its subsidiaries is made in United
States dollars ("dollars"). In addition, a substantial portion of their costs is
incurred or determined in dollars.  The Company's  management  believes that the
dollar is the primary currency of the economic  environment in which the Company
and each of its  subsidiaries  operate.  Thus the dollar is their functional and
reporting  currency.  Accordingly,  monetary  accounts  maintained in currencies
other than the dollar are  remeasured  into U.S.  dollars,  in  accordance  with
Statement of Financial Accounting Standard No. 52 "Foreign Currency Translation"
("SFAS No. 52"). All  transaction  gains and losses of the  remeasured  monetary
balance sheet items are  reflected in the  statements of operations as financial
income or expenses, as appropriate.

c. Principles of Consolidation:

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned subsidiaries and majority-owned  subsidiary.  All inter-company
balances and transactions have been eliminated in consolidation.

d. Cash and Cash Equivalents:

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

e. 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 two to
seven years.  Leasehold  improvements are amortized by the straight-line  method
over the lease term.

The Company and its subsidiary's  long-lived  assets are reviewed for impairment
in accordance with Statement of Financial Accounting Standard No.144 "Accounting
for the Impairment or Disposal of Long-Lived  Assets" ("SFAS  No.144")  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison  of the carrying  amount of an asset to the future  undiscounted
cash flows expected to be generated by the assets. If such assets are considered
to be impaired,  the  impairment  to be  recognized is measured by the amount by
which the  carrying  amount of the assets  exceeds the fair value of the assets.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair
                                      F-9
<PAGE>
                                                         Commtouch Software Ltd.

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


value less costs to sell.  For the year ended  December 31, 2002 the Company had
impairment losses totaling $ 750, which were recorded as operating expenses.

During  2001,  due to the  economic  slowdown,  the  reduction  of the  employee
headcount  and the  transfer  into new  facilities,  the  Company  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 in accordance  with  Statement of Financial
Accounting  Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets to be Disposed Of".  According to the evaluation the
Company  decided  to record  impairment  losses  totaling  $10,166,  which  were
recorded as operating expenses.

f. Long-Term Investments:

Long-term  investments  are  recorded at lower of cost or  estimated  fair value
according to  Accounting  Principle  Board  Opinion No. 18 "The Equity Method of
Accounting for  Investments in Common  Stocks",  since the Company does not have
the ability to exercise  significant  influence  over  operating  and  financial
policies of the  investee.  Long-term  investments  are reviewed for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
such  investments may not be recoverable.  Determination  of  recoverability  is
based on an estimate of undiscounted future cash flows resulting from the use of
the investment.  Measurements  of an impairment  loss for long-term  investments
that management expects to hold are based on the fair value of the investment.

The Company  invested  $7,000 in the first nine months of 2000 in three Internet
centric  companies in which the Company  believed it had a  significant  ongoing
strategic interest.

Due to the economic slowdown and the significant decline in capital available to
and in  valuations  of its  investment  in  privately  funded  Internet  centric
companies,  the Company believes all of these  investments are impaired.  During
2000 and 2001, based on a comprehensive review of the Company's investments, the
Company  recorded  a  non-cash  charge of $5,000 and  $2,000,  respectively,  to
write-down the recorded investment values.

g. Goodwill and Other Purchased Intangible Assets:

Goodwill  represents  excess of the  costs  over the net  assets  of  businesses
acquired. Goodwill arose from acquisition prior July 1, 2001 was amortized until
December  31, 2001 on a  straight-line  basis over 5 years.  Under  Statement of
Financial  Accounting  Standard No. 142,  "Goodwill and Other Intangible Assets"
("SFAS No.142") goodwill acquired in a business combination for which date is on
or after July 1, 2001, shall not be amortized.

Intangible  assets  included   workforce-in-place,   intellectual  property  and
customer base subject to amortization arose from acquisition prior July 1, 2001,
are being amortized on a straight-line  basis over their useful lives, which are
three, four and three years,  respectively in accordance with APB Opinion No. 17
"Intangible Assets" ("APB 17").

The  carrying  value of  goodwill  and other  purchased  intangible  assets were
periodically  reviewed by management,  based on the expected future undiscounted
operating  cash  flows  over  the  remaining  goodwill  amortization  period  in
accordance with APB No. 17.

At December 31,  2001,  due to the economic  slowdown,  the Company  performed a
comprehensive  review of the Company's  goodwill and other purchased  intangible
assets.  As a result,  the Company  recorded a non-cash  charge of  $13,280,  to
write-down the recorded values to zero.

h. Minority Interest:

Minority interest  represents a shareholders'  proportionate share of the equity
of Commtouch,  K.K.  (Japan).  At December 31, 2001 and 2002,  the Company owned
70.6% and 32%, respectively,  of the equity and voting rights of Commtouch, K.K.
(Japan) (now known as Imetrix).

                                      F-10
<PAGE>
                                                         Commtouch Software Ltd.

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


During  2001,  the  Company's   strategic   partner  in  Japan,   CSK,  invested
approximately  $800 in Commtouch,  K.K.  (Japan).  According to Staff Accounting
Bulletin No. 84 "Accounting for Sales of Stock by a Subsidiary", the Company had
not  recognized  gains from this issuance of shares since it is considered to be
an early stage company and thus classified it to Shareholders' Equity section of
the balance sheet under Additional  paid-in  capital.  In April 2002, as part of
the Company's focus change, the Japanese subsidiary's employees purchased 38% of
Commtouch,  K.K.  (Japan) shares from the Company for  approximately $1 (the par
value of the shares).  Consequently the Company's holdings decreased from 70% to
approximately  32%.  The sale of the shares  resulted in a loss of $153 that was
recorded as part of the equity in losses of an affiliate.

i. Research and Development Costs:

Research and  development  costs are charged to the  statement of  operations as
incurred. Statement of Financial Accounting Standards 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 did not incur any
material  costs  between the  completion  of the working  model and the point at
which the product is ready for general release. Therefore,  through December 31,
2000, 2001 and 2002, the Company has charged all software  development  costs to
research and development expense in the period incurred.

j. Revenue Recognition:

During  2002,  the Company  derives its  revenues  from  providing  hosted email
services,  royalties for the sale of its hosted Email services and from software
license agreements.

Revenues from Email services are recognized in accordance with Staff  Accounting
Bulletin No. 101 "Revenue  Recognition in Financial  Statements" ("SAB No. 101")
when  delivery has occurred,  persuasive  evidence of an agreement  exists,  the
vendor's fee is fixed and determinable and collectibility is probable.  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.  Amounts  received in
advance of service  delivery are recorded as deferred  revenues.  Other  service
revenues are primarily  comprised of revenues from consulting and training fees.
Consulting  services  are  billed  at an agreed  upon  rate  plus  out-of-pocket
expenses and training  services on a per session basis.  The Company  recognizes
service revenues from consulting and training when provided to the customer.

The Company  accounts for software  license revenue in accordance with Statement
of Position 97-2, "Software Revenue  Recognition",  as amended ("SOP 97-2"). SOP
97-2  generally  requires  revenue  earned on  software  arrangements  involving
multiple  elements to be allocated to each  element  based on the relative  fair
value of the elements.  The Company has also adopted SOP 98-9,  "Modification of
SOP 97-2,  Software Revenue  Recognition  with Respect to Certain  Transactions"
("SOP 98-9"), for all multiple elements  transactions entered into after January
1, 2000.  SOP 98-9  requires  that  revenue be  recognized  under the  "Residual
Method" when "Vendor Specific Objective  Evidence" ("VSOE") of fair value exists
for all undelivered elements and no VSOE exists for the delivered elements.
Revenue from software  licenses fees to end users are recognized when persuasive
evidence of an  arrangement  exists,  delivery of the software has occurred,  no
significant  obligation  with regard to the  implementation  remain,  the fee is
fixed and determinable and collectibility is probable.

Royalties  for  the  sale of the  hosted  email  services  are  recognized  when
persuasive  evidence  of  an  arrangement  exists,  services  are  provided,  no
significant  obligation  with regard to the  implementation  remain,  the fee is
fixed and determinable and collectibility is probable.

k. Concentrations of Credit Risk:
                                      F-11
<PAGE>
                                                         Commtouch Software Ltd.

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


SFAS No. 105,  "Disclosure  of  Information  About  Financial  Instruments  with
off-Balance-Sheet  Risk and Financial  Instruments with  Concentration of Credit
Risk" requires disclosure of any significant  off-balance-sheet  and credit risk
concentrations.   The  Company  and  its   subsidiaries   have  no   significant
off-balance-sheet   concentration  of  credit  risk  such  as  foreign  exchange
contracts, option contracts or other foreign hedging arrangements.

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist  principally  of  trade  receivables  and  cash  and  cash
equivalents.  The  majority  of the  Company's  cash  and cash  equivalents  are
invested in dollar and dollars  linked  investments  and are  deposited in major
banks in United States and Israel.  Such investments in the United States may be
in  excess  of  insured  limits  and are not  insured  in  other  jurisdictions.
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  trade  receivables  of the  Company  are  derived  from  transactions  with
companies located primarily in North America,  Europe,  Israel and the Far East.
An allowance for doubtful  accounts is determined  with respect to those amounts
that  the  Company  and its  subsidiaries  have  determined  to be  doubtful  of
collection.  The allowance for doubtful  accounts is composed of specific  debts
that are doubtful of  collection  amounting to $582 and $41 at December 31, 2001
and 2002, respectively. Bad debt expense (recovery) for the years-ended December
31, 2000, 2001 and 2002 were $2,000, $260 and $(40), respectively.

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

In  December  2002,  the FASB  issued  SFAS 148,  "Accounting  for  Stock  Based
Compensation Transition and Disclosure" - an amendment of FASB Statement No. 123
("SFAS 148").  SFAS 148 permits two additional  transition  methods for entities
that adopt the fair value based method of accounting  for  stock-based  employee
compensation.  The  statement  also requires new  disclosures  about the ramp-up
effect of stock-based  employee  compensation on reported results. The Statement
also requires that those effects be disclosed more prominently by specifying the
form,  content,  and location of those disclosures.  The transition guidance and
annual  disclosure  provisions of SFAS 148 are effective for fiscal years ending
after  December  15,  2002,  with  earlier  application   permitted  in  certain
circumstances.  The interim  disclosure  provisions  are effective for financial
reports  containing  financial  statements for interim  periods  beginning after
December 15, 2002. As at the balance sheet date, the Company  continues to apply
APB 25 (See also Note 13f).

Pro forma information under SFAS 123 is as follows:
<TABLE>
<CAPTION>
                                                          2000         2001         2002
                                                       ---------    ---------    ---------
<S>                                                    <C>          <C>          <C>
Net loss as reported.............................      $ (54,225)   $ (61,007)   $  (4,911)
                                                       =========    =========    =========
Pro forma net loss...............................      $ (68,309)   $ (65,734)   $  (8,627)
                                                       =========    =========    =========
Pro forma basic and diluted net loss per share...      $   (4.42)   $   (3.83)   $   (0.41)
                                                       =========    =========    =========
</TABLE>

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

m. 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,  on the basis of the costs  incurred and included as a
deduction of research and development  costs.  Research and  development  grants
amounted to zero, $600 and $200 in 2000, 2001 and 2002, respectively.

                                      F-12
<PAGE>
                                                         Commtouch Software Ltd.

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


n. Basic and Diluted Net Loss Per Share:

Basic and diluted net loss per share are presented in accordance  with Statement
of Financial  Accounting Standard No. 128, "Earnings per Share", for all periods
presented.

Basic net loss per share has been computed using the weighted-average  number of
ordinary  shares  outstanding  during  the year.  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  dilative  potential
ordinary shares considered outstanding during the year.

All  outstanding  stock  options  and  warrants  have  been  excluded  from  the
calculation  of the  diluted  loss per share  because  all such  securities  are
anti-dilative for all periods  presented.  The total number of shares related to
outstanding  options and warrants  excluded from the calculations of diluted net
loss per share were 4,096,455,  4,990,673 and 8,525,460 for 2000, 2001 and 2002,
respectively.

o. Severance Pay:

The Company's  liability  for severance pay in Israel 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.  The Company's  liability for all of its Israeli  employees is
fully provided by monthly deposits with severance pay fund's insurance  policies
and by an accrual.  The value of those  funds and  policies  are  recorded as an
asset in the Company's balance sheet.

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 is based on the cash  surrender  value of these  policies,  and
includes immaterial profits.

Severance expenses for 2000, 2001 and 2002 were  approximately  $483, $754 and $
58, respectively.

p. Fair Value of Financial Instruments:

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial  instruments.  The carrying amounts of cash
and cash equivalents,  trade receivables, other accounts receivable and accounts
payable, approximate their fair values due to the short-term maturities of these
instruments.

q. Reclassification:

Certain  amounts  from  prior  years  have been  reclassified  to conform to the
current year's  presentation.  The  reclassification had no effect on previously
reported net loss, shareholder's equity or cash flows.

r. Recently Issued Accounting Pronouncements:

In June 2002,  The FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities"  ("SFAS No. 146").  This statement  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS No. 146 requires
that a liability  for a cost  associated  with an exit or  disposal  activity be
recognized  when the  liability is incurred.  EITF 94-3 allowed for an exit cost
liability  to be  recognized  at the date of an entity's  commitment  to an exit
plan.  SFAS No. 146 also requires that  liabilities  recorded in connection with
exit plans be initially  measured at fair value.  SFAS No. 146 will be effective
for exit or disposal activities that are initiated after December 27, 2002.

                                      F-13
<PAGE>
                                                         Commtouch Software Ltd.

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


In  November  2002,  the  EITF  issued  No.  00-21,   "Accounting   for  Revenue
Arrangements  with  Multiple  Deliverables."  EITF No. 00-21  addresses  certain
aspects of the  accounting  by a vendor  for  arrangements  under  which it will
perform multiple revenue-generating activities. EITF No. 00-21 establishes three
principles:  revenue  should be  recognized  separately  for  separate  units of
accounting,  revenue for a separate unit of accounting should be recognized only
when the  arrangement  consideration  is reliably  measurable  and the  earnings
process is substantially  complete,  and consideration should be allocated among
the separate units of accounting in an arrangement  based on their relative fair
values. EITF No. 00-21 is effective for all revenue arrangements entered into in
fiscal periods beginning after June 15, 2003, with early adoption permitted.

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable  Interest  Entities"  ("FIN 46"). The objective of FIN 46 is to improve
financial  reporting by companies  involved with variable interest  entities.  A
variable  interest  entity is a corporation,  partnership,  trust,  or any other
legal structure used for business  purposes that either (a) does not have equity
investors  with voting  rights or (b) has equity  investors  that do not provide
sufficient financial resources for the entity to support its activities.  FIN 46
requires  a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns  or both.  FIN 46 also  requires  disclosures  about  variable  interest
entities that the company is not required to  consolidate  but in which it has a
significant  variable interest.  The consolidation  requirements of FIN 46 apply
immediately to variable  interest  entities  created after January 31, 2003. The
consolidation  requirements  apply to older entities in the first fiscal year or
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established.

The Company does not expect the adoption of the above  mentioned  pronouncements
to have a material  impact,  if any,  on the  Company's  consolidated  financial
statements.

Note 3: WINGRA:

a. Acquisition of Wingra Technologies Inc. ("Wingra")

On  November  24,  2000,  the  Company  entered  into a  definitive  acquisition
agreement to acquire Wingra.  Wingra is a provider of messaging  integration and
migration solutions for large enterprises.

Pursuant  to the  Wingra  Agreement,  the  shareholders  of Wingra  received  an
aggregate  of  1,285,294  of  Commtouch   ordinary  shares.  In  addition,   all
outstanding Wingra options and warrants converted into fully-vested  options and
warrants to purchase  305,615 of  Commtouch  ordinary  shares.  The Company also
assumed certain operating assets and liabilities of Wingra.  The 137,500 assumed
warrants  were granted by Wingra in  connection  with loans granted to Wingra by
banks and shareholders. The exercise price of those warrants range from $0.00625
to $0.00939 and the expiration  dates range from March 2001 through August 2002.
The  acquisition  was accounted for under the purchase  method,  for  accounting
purposes,   in  accordance  with  Accounting   Principles   Board  16  "Business
Combinations".  The  purchase  price was  allocated  to the assets  acquired and
liabilities  assumed based on their  respective fair values.  The purchase price
was determined to be $15,146  (based on the closing price of Commtouch  ordinary
shares on the date of the final agreement).  The consolidation of the assets and
liabilities  affected the  Company's  balance  sheet at December  31,  2000,  as
described in the following tables:

Total purchase price:
Ordinary shares                                         $11,970
Options and warrants                                      2,847
Acquisition expenses                                        329
                                                        -------
Purchase price                                          $15,146
                                                        -------

The purchase price was allocated to the acquired assets and assumed  liabilities
in the accompanying consolidated financial statements as follows:

                                      F-14
<PAGE>
                                                         Commtouch Software Ltd.

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


                                              Estimated
                                               Useful
                                                Life
                                             (In Years)
                                             ----------
Customer base                                       3         $  1,340
Workforce-in-place                                  3              550
Intellectual property                               4            1,660
In-process research & development            expensed            1,280
Goodwill                                            5           12,590
Less assumed net tangible liabilities             n/a           (2,274)
                                                              --------
                                                              $ 15,146
                                                              ========

The Company  recorded a one-time  charge of $1,280 in the fourth quarter of 2000
for purchased  in-process  technology related to a development  project that had
not reached  technological  feasibility,  had no alternative future use, and for
which successful development was uncertain.

The fair value of the  in-process  technology  was  determined  using the income
approach.  Under the income  approach,  the expected future cash flows from each
project under  development  are  estimated  and  discounted to their net present
value  at an  appropriate  risk-adjusted  rate of  return.  Significant  factors
considered  in the  calculation  of the rate of return are the  weighted-average
cost of  capital  and  return on assets,  as well as the risks  inherent  in the
development process, including the likelihood of achieving technological success
and market  acceptance.  Each  project  was  analyzed  to  determine  the unique
technological innovations,  the existence and reliance upon core technology, the
existence of any alternative  future use or current  technological  feasibility,
and the complexity, cost and time to complete the remaining development.  Future
cash flows for each project were estimated  based upon  forecasted  revenues and
costs,  taking into  account  product life cycles,  and market  penetration  and
growth rates.

Pursuant to a review of the Company's  goodwill and other  purchased  intangible
assets,  the  Company  recorded  during 2001 a non-cash  charge of  $13,280,  to
write-down  the  recorded  values to zero.  Amortization  expenses  amounted  to
approximately $85, $2,794 and zero for 2000, 2001 and 2002, respectively.

See Notes 2h and 2i for impairment charges during 2001.

b. Sale of Wingra - see Note 1b.

The results of operations of Wingra have been  reclassified in the statements of
operations as discontinued operations, See Note 1a.


NOTE 4: PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLES

                                                                December 31,
                                                               -------------
                                                               2001     2002
                                                               ----     ----


Prepaid Expenses.......................................        $ 374    $ 138
Other accounts receivable..............................          326       93
                                                               -----    -----
Prepaid expenses and other accounts receivables........        $ 700    $ 231
                                                               =====    =====

                                      F-15
<PAGE>
                                                         Commtouch Software Ltd.

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


NOTE 5: PROPERTY AND EQUIPMENT, NET
                                                               December 31,
                                                             ----------------
                                                             2001        2002
                                                             ----        ----
Cost:
Computers and peripheral equipment....................      $ 7,314     $ 5,222
Office furniture and equipment........................        1,168         477
Motor vehicles........................................           88          88
Leasehold improvements................................        1,217         694
                                                            -------     -------
                                                              9,787       6,481
Less accumulated depreciation.........................       (4,635)     (5,452)
                                                            -------     -------
Property and equipment, net...........................      $ 5,152     $ 1,029
                                                            =======     =======

Depreciation  expenses amounted to approximately  $5,846,  $7,462 and $1,988 for
2000, 2001 and 2002, respectively.

See Note 2 e for impairment charges during 2001 and 2002.

NOTE 6: LONG TERM BANK LOANS AND CAPITAL LEASES

                                                     Weighted
                                                      Average
                                                      Interest      December 31,
                                                        Rate            2001
                                                        ----            ----
Promissory notes with shareholders-Wingra.........     9.74%         $    585
Promissory notes with financial institutions-Wingra   11.00%              126
Capital lease obligations-Wingra..................                         45
Royalties in connection with Wingra's product                             218
                                                                     --------
                                                                          974
Less - current maturities.........................                       (714)
                                                                     --------
Total Long-term debt..............................                   $    260
                                                                     ========

The long term bank loans and capital leases were transferred in the beginning of
2002 as part of Wingra sale (see Note 1b).

NOTE 7: COMMITMENTS AND CONTINGENCIES

a. Operating Leases:

The Company  leases its facility in Israel under an  operating  lease  agreement
expiring  through 2003.  2003 minimum lease payments  under this  non-cancelable
lease are $300.

The  Company  leases its  facility  in the US under  operating  lease  agreement
expiring  through 2003.  2003 minimum lease payments  under this  non-cancelable
lease are $8.

Rent  expenses for 2000,  2001 and 2002 were  approximately  $2,300,  $2,800 and
$400,  respectively.  The above rent expense is net of sub-lease  rental  income
from various of the Company's  unused premises  totaling  approximately  $700 in
2002, $100 in 2001 and none in 2000.

b. Royalties:

From 1993 until 2000 the  Company  received  funding  from the OCS. In 2001, the
Company  reversed the $400 accrual it recorded in past years and determined that
as of December 31, 2001 there are no  contingent  liabilities  for royalties for
these  projects.  In March 2002,  the Company  received an approval  for project
failure  from the OCS,  stating  that  there are no contingent  liabilities  for
royalties for these projects.

In 2002 and 2001, the Company  received royalty bearing grants totaling $200 and
$600,  respectively,  from the  Israeli  government,  which were  recorded  as a
reduction of research and development expenses.  The Company is committed to pay
royalties  of 3% to 5% to the  Government  of Israel on  proceeds  from sales of
products  resulting  from the  research  and  development  projects in which the
Government  participated  in financing  such projects  through the Office of the
Chief  Scientist  ("the  OCS"),  up to the  amount  equal to 100% of the  grants
received by the  Company,  linked to the dollar

                                      F-16
<PAGE>
                                                         Commtouch Software Ltd.

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


and bears  interest  at an annual  rate of LIBOR.  As of  December  31, 2002 the
Company had a contingent liability to pay royalties of approximately $800.

c. Employee Options Withholding Tax

In April 2001, the Israeli Tax Authority  ("ITA") demanded  withholding tax from
the Company on behalf of former  employees who  exercised  options and a reserve
was  recorded.  As of December 31, 2001,  the Company did not believe it had any
liability and thus the reserve was cancelled.  During 2002, the Company received
a final  assessment  from the ITA,  according to which the Company does not have
any withholding tax liability.

d. Bank Line of Credit:

Due to the acquisition of Wingra,  Inc., the Company assumed a revolving  credit
arrangement   with  a   financial   institution.   The  credit   agreement   was
collateralized  by certain  assets of the Company.  The provisions of the credit
agreement  enable the Company to borrow up to $100 on a revolving line of credit
at annual interest rate of 14.25%.  The amount  outstanding at December 31, 2001
was approximately $100.
Due to the sale of Wingra in the beginning of 2002 there is no outstanding  bank
line of credit as of December 31, 2002.

e. Class Action Litigation

Following  the  restatement  of revenues  for the first three  quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the  Northern  District  of  California  against  the Company and certain of its
officers and a director,  alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
These lawsuits were consolidated into one action in late 2001.  Thereafter,  the
Company filed a Motion to Dismiss,  which was granted. The plaintiffs then filed
a second amended and consolidated complaint,  and the Company's second motion to
dismiss  was  only  partially  accepted,  with  the end  result  being  that the
plaintiff's  filed a third  amended  and  consolidated  complaint.  The  Company
(including the individual defendants) filed an answer to that complaint, and the
case then moved into the discovery  stage,  with the case being set for trial in
January 2004 (See also Note 12 for subsequent events).

NOTE 8: RESTRUCTURING CHARGES

During  2001,  the  Company   announced  that  it  was  implementing   strategic
initiatives  intended to further reduce costs.  In connection with the strategic
initiatives,  and in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived  Assets  and  for  Long-Lived  Assets  To Be  Disposed  Of",  SAB 100
"Restructuring and Impairment Charges" and EITF 94-3, "Liability Recognition for
Certain  Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
(Including Certain Costs in a Restructuring)"  (EITF 94-3), the Company recorded
restructuring  and other  non-recurring  charges of approximately  $11,166.  The
restructure included curtailing expenses and reducing the number of employees.

As a part of the cost  containment  efforts,  the  Company  reached  settlements
agreements with a few of its vendors. Some of the settlement agreements included
issuance of shares or warrants  while other  included  only cash  payments.  The
amount  written off totaled  approximately  $800,  which was  deducted  from the
relevant  categories  of  operating  expenses,  and the  Company  also  recorded
approximately $100 compensation expenses regarding the warrants issued (see Note
12b) and  agreed to pay a letter of credit for  approximately  $1,000 it granted
its landlord.

As  a  result  of  strategic  initiatives,   approximately  118  positions  were
eliminated in the Company during 2001.

                                      F-17
<PAGE>
                                                         Commtouch Software Ltd.

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


The following table summarizes the restructuring  accruals status as of December
31, 2001:

<TABLE>
<CAPTION>
                                                               Utilized                  Balance at
                                    Restructuring     ----------------------------      December 31,
                                       charge            Cash          Non-cash             2001
                                   ----------------   ------------   -------------   -------------------
<S>                                     <C>              <C>              <C>              <C>
Employee termination benefits           $ 1,000          $   575          $  --            $425
and related costs
Impairment of property and
equipment                                 9,191             --              9,191           --
Written down due to settlement
agreement                                   975             --                975           --
                                        -------          -------          -------          ----

                                        $11,166          $   575          $10,166          $425
                                        =======          =======          =======          ====
</TABLE>

During 2002, the Company continued  implementing  strategic initiatives intended
to further reduce costs.  In connection with the strategic  initiatives,  and in
accordance with SFAS 142 and EITF 94-3, the Company recorded  restructuring  and
other non-recurring  charges of approximately  $1,125. The restructure  included
curtailing  expenses  and  reducing  the  number  of  employees.  As a result of
strategic initiatives, approximately 37 positions were eliminated in the Company
during 2002

The following table summarizes the restructuring  accruals status as of December
31, 2002:
<TABLE>
<CAPTION>
                                                               Utilized                  Balance at
                                    Restructuring     ----------------------------      December 31,
                                       charge            Cash          Non-cash             2002
                                   ----------------   ------------   -------------   -------------------
<S>                                     <C>                <C>           <C>               <C>
Lease deposits and termination fees     $  128             $128          $--               $--
Impairment of property and
equipment                                  750              --             750              --
Loss on sale of assets                     247              --             247              --
                                        ------             ----          -----             ----

                                        $1,125             $128          $ 997             $--
                                        ======             ====          =====             ====
</TABLE>

NOTE 9: INCOME TAXES

Israeli Income Tax:

The  Company's  production  facilities  in Israel  have been  granted  "Approved
Enterprise" status for three separate investment programs in 1992, 1996 and 2000
by the Israeli  Investment  Center  under the Law for  Encouragement  of Capital
Investments, 1959 ("the Law"). The Company's first program was approved in 1995.
The Company's second and third programs (which were later cancelled)  received a
letter of approval in April 1996 and in December 2000, respectively.

During 2001, the "Approved  Enterprise"  status for the 1996 investment  program
was  cancelled.  During  2002,  the  "Approved  Enterprise"  status for the 2000
investment program was cancelled.

Undistributed  Israeli  income  derived from each of its  "Approved  Enterprise"
programs  entitle  the  Company  to a  tax-exemption  for a period  of two years
commencing  with 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 five to eight
years (depending on the level of foreign  investment in the Company).  These tax
benefits cannot continue beyond the earlier of twelve years from commencement of
operations,  or  fourteen  years  from  receipt  of  approval.  Thereafter,  the
Company's  income will be subject to the regular income tax rate of 36%.  Income
that was not derived from "Approved  Enterprise"  during the benefits  period is
taxed at the regular  rate of 36%.  As  currently  only a part of the  Company's
capital investments are approved (a "Mixed Enterprise"), its effective corporate
tax rate (once it earns taxable  income) will be the  determined by the weighted
combination of the various applicable rates.

As of December  31,  2002,  the tax benefits  period for the  outstanding  valid
program has not yet commenced.

                                      F-18
<PAGE>
                                                         Commtouch Software Ltd.

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


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.

Distribution  of cash  dividends  from  income  that was tax  exempt  due to the
"Approved  Enterprise" status is subject to corporate tax at the rate that would
have been  applicable  to the income of the Company had the Company not been tax
exempt.  In  addition,  these  dividends  will  generally  be  subject  to a 15%
withholding tax.

The Company's Board of Directors has determined that such tax-exempt income will
not be distributed as dividends.

Distribution  of cash  dividends from income that was not derived from "Approved
Enterprise" generally is subject to 25% withholding tax.

The  entitlement  to the  above  benefits  is  conditional  upon  the  Company's
fulfilling the  conditions  stipulated by the above law,  regulations  published
thereunder  and the  instruments  of approval  for the specific  investments  in
"Approved Enterprises". In the event of failure to comply with these conditions,
the  benefits  may be  canceled  and the  Company  may be required to refund the
amount of the benefits, in whole or in part, including interest.

The Company is currently  viewed as qualifying as an "industrial  company" under
the  Law for the  Encouragement  of  Industry  (Taxation),  1969  and as such is
entitled to certain tax benefits,  mainly  accelerated rates of depreciation and
the right to deduct public issuance expenses.

Results for tax purposes are measured in terms of earnings in NIS after  certain
adjustments  for  increases  in the  Israeli  Consumer  Price  Index  "CPI".  As
explained in Note 2b, the financial statements are measured in U.S. dollars. The
difference  between the annual  change in the Israeli CPI and in the  NIS/dollar
exchange rate causes a further  difference between taxable income and the income
before taxes shown in the financial  statements.  In accordance  with  paragraph
9(f) of SFAS No. 109, the Company has not provided  deferred income taxes on the
difference  between  the  functional  currency  and the tax bases of assets  and
liabilities.

On January 1, 2003, a comprehensive  tax reform took effect in Israel.  Pursuant
to the reform,  resident  companies are subject to Israeli tax on income accrued
or derived in Israel or abroad. In addition,  the concept of "controlled foreign
corporation"  was  introduced,  according to which an Israeli company may become
subject to Israeli taxes on certain  income of a  non-Israeli  subsidiary if the
subsidiary's  primary  source of income is  passive  income  (such as  interest,
dividends,  royalties,  rental  income or capital  gains).  The tax reform  also
substantially changed the system of taxation of capital gains.

As of  December  31,  2002,  Israeli  net  operating  loss  and  capital  losses
carry-forwards  amounted  to  $44,000.  Such net  operating  loss may be carried
forward  indefinitely  and offset  against future  taxable  income.  The Company
expects that during the period these tax losses are utilized its income would be
substantially tax exempted.  Accordingly, there will be no tax benefit from such
losses and no  deferred  income  taxes  have been  included  in these  financial
statements.

U.S. Income Tax:

Commtouch Inc. is taxed based upon tax laws in the U.S.

As of December 31, 2002,  Commtouch  Inc. had a U.S.  federal net operating loss
carry-forward  of  approximately  $73,600.  The net  operating  loss  expires in
various  amounts  between  the years  2008 and  2023.  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 Income Taxes:
                                      F-19
<PAGE>
                                                         Commtouch Software Ltd.

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


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,
                                                             ---------------
                                                             2001       2002
                                                             ----       ----
Deferred tax assets are as follows:
U.S. operating loss carry-forwards.....................    $ 25,020   $ 27,699
Reserves and allowances not currently deductible.......       2,565        496
                                                           --------   --------
Net deferred tax asset before valuation allowance......      27,585     28,195
Valuation allowance....................................     (27,585)   (28,195)
                                                           --------   --------
Net deferred tax asset.................................    $     --   $     --
                                                           ========   ========

As of December 31, 2002,  the Company has  provided a 100%  valuation  allowance
with  respect to deferred  tax assets  resulting  from tax loss  carry-forwards.
Management  currently  believes that since the Company and Commtouch Inc. have a
history of losses it is more likely than not that the deferred tax regarding the
loss carry-forwards and other temporary  differences will not be realized in the
foreseeable future.

Pretax loss:

Pretax losses are as follows:

                                2000      2001      2002
                              --------  --------  --------
Israel..................      $ 23,209  $ 26,951  $  4,320
U.S.....................        27,821    33,419     1,940
Other...................         3,195       637    (1,349)
                              --------  --------  --------
                              $ 54,225  $ 61,007  $  4,911
                              ========  ========  ========


NOTE 10: SHAREHOLDERS' EQUITY

The  ordinary  shares of the Company are traded on the NASDAQ  National  Market,
since July 1999.

Warrants to Private Placement Investors.

On February 27, 2002,  Commtouch  entered  into a private  placement  agreement,
whereby  Commtouch issued  approximately 4.4 million ordinary shares against the
investment of approximately  $1,343 in a private placement to private investors.
The  purchasers in the private  placement  also received  five-year  warrants to
purchase up to an additional 2.66 million  ordinary  shares.  The exercise price
for  one-third  of the warrants is $0.37 per share,  the  exercise  price for an
additional  one-third of the warrants is $1.00 per share and the exercise  price
for the final  one-third  of the  warrants  is $2.00 per share.  These  warrants
expire on April 15, 2007.

As of December 31, 2002,  Commtouch  outstanding warrants issued to consultants,
were as follows:

<TABLE>
<CAPTION>
                                      Warrants for     Exercise
      Issuance                        Common           price              Warrants
      Date                            shares           per share          exercisable   Exercisable through
      ------------------------------  --------------   -----------------  ------------  ---------------------
<S>        <C>                        <C>              <C>                <C>                <C>
      July 1999                       1,136,000        $        12.80     1,136,000     July 2004
      December 2001                   175,000          $        0.26      175,000       December 2006
      January 2002                    200,000          $        0.29      200,000       January 2007
      September 2002                  206,897          $        0.01      206,897       August 2007
      October 2002                    26,754           $        0.01      26,754        October 2007
                                      --------------                      ------------
      Total                           1,744,651                           1,744,651
                                      ==============                      ============
</TABLE>
                                      F-20
<PAGE>
                                                         Commtouch Software Ltd.

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

Warrants Issued to Strategic Partners and Customers.

Concurrent  with the closing of the IPO,  the Company  entered  into a customary
commercial email service agreement with InfoSpace (Formerly,  Go2Net), a related
party.  Under this  agreement,  the Company  provides  email services to the end
users  of  InfoSpace's  various  email  properties.   In  connection  with  this
agreement,  the  Company  issued a warrant  expiring  in July  2004 to  purchase
1,136,000  ordinary  shares at an  exercise  price of $12.80  per  share.  As of
December 31, 2002, this warrant had not been  exercised.  At the grant date, the
fair  value of this  warrant  was  estimated  as  $5,800  and was  amortized  to
operating  expenses over the minimum term of the contract (twelve months through
July 2000).

Warrants to service providers in connection with Settlement Agreements.

As  part  of  the  settlement  of  significant   outstanding  and  future  lease
obligations  to Commtouch  Inc's  Mountain View facility  lessor,  Equity Office
Properties  ("EOP"),  as  well  as  Commtouch  Inc's  equipment  vendor,  Compaq
Financial Services, the Company issued warrants to these services providers. The
EOP fully vested  warrant was issued in December 2001 and allows for purchase of
up to 175,000  ordinary shares at a price of $0.26,  and the Compaq fully vested
warrant  was issued in January  2002 and  allows for  purchase  of up to 200,000
ordinary shares at a price of $0.29 per share. These warrants expire in December
2006 and January 2007, respectively.

The fair value for the EOP and Compaq  warrants  were  estimated  at the date of
grant  using  a   Black-Scholes   Option   Pricing   Model  with  the  following
weighted-average assumptions:  risk-free interest rates of 4.0%, dividend yields
of 0%, volatility factors of the expected market price of the Company's ordinary
shares of 1.482 and an expected life of the warrant of 5 years after the warrant
is vested. Accordingly,  the Company recorded approximately $113 as compensation
expense and included the amount in operating expenses.

Warrants to AxcessNet Resources LLC.

As  consideration  for  consulting  services,  on  September 1, 2002 the Company
issued a fully vested  warrant to AxcessNet  Resources LLC for purchase of up to
206,897 of the  Company's  ordinary  shares at a price of $0.01 per  share.  The
warrant expires on August 31, 2007.

The fair  value  for the  warrant  was  estimated  at the date of grant  using a
Black-Scholes   Option   Pricing  Model  with  the  following   weighted-average
assumptions: risk-free interest rates of 3.7%, dividend yields of 0%, volatility
factors of the expected  market price of the Company's  ordinary shares of 1.482
and an expected  life of the  warrant of 5 years.  The fair value of the warrant
was immaterial.

Warrants to service provider.

As consideration for consulting services,  on October 1, 2002 the Company issued
a fully vested warrant to a service  provider to purchase of up to 26,754 of the
Company's  ordinary shares at a price of $0.01 per share. The warrant expires on
October 1, 2007.

The fair  value  for the  warrant  was  estimated  at the date of grant  using a
Black-Scholes   Option   Pricing  Model  with  the  following   weighted-average
assumptions: risk-free interest rates of 3.7%, dividend yields of 0%, volatility
factors of the expected  market price of the Company's  ordinary shares of 1.482
and an expected  life of the  warrant of 5 years.  The fair value of the warrant
was immaterial.

c. Issuance of Ordinary Shares Against Promissory Notes:

From February 1, 2000 through August 10, 2000 the Company  granted certain loans
to certain officers and directors to enable them to finance an early exercise of
their options into restricted shares. In December 2000, the Company was notified
by its legal  counsel,  that  under the new  Israeli  Companies  Law,  effective
February 1, 2000,  the Company was

                                      F-21
<PAGE>
                                                         Commtouch Software Ltd.

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

currently  prohibited  from  financing  a third  party  purchase  of its shares.
Accordingly,  the loans to officers and  directors  were in violation of Israeli
corporate  law and  considered  null and void.  Upon  notification,  the Company
decided to void the loans and the underlying exercise of options.

During 1999,  several  employees and officers early  exercised  670,180  options
granted to them by Commtouch. In consideration for the ordinary shares purchased
pursuant to the early exercise of the options, they provided Commtouch with full
recourse  promissory  notes in the original  principal  amount of  approximately
$1,060.  The promissory notes bear interest at 4.83%,  with interest payment due
at  the  end of  each  calendar  year,  with  the  principal  due on the  fourth
anniversary of the date of the promissory notes.

During 2001, the Company had forgiven a promissory  notes of $143 for one of its
employees  and demanded the then current value of the shares ($7 relating to the
7,500 shares) and the full interest on the original note.  Both interest and the
adjusted note were repaid in March 2001. The Company  accounted for this note in
accordance  with  EITF  00-23  "Issues  Related  to  the  Accounting  for  Stock
Compensation  under  APB 25 and  FASB  Interpretation  No.  44" and  EITF  95-16
"Accounting  for Stock  Compensation  Arrangements  with  Employer Loan Features
under APB Opinion No. 25".  During  2001,  a note for $137 was repaid by another
employee for 94,560 shares.

As of December  31,  2002,  three notes  remain  outstanding.  One pertains to a
current executive officer.  As the Company and such officer have agreed that the
Company will withhold all of the  officer's  salary  (since  September  2002) as
security and/or payment on behalf of the relevant note, and the officer has made
a commitment to repay the note by the end of 2003, the Company believes that the
loan will be fully repaid during 2003.  The Company  continues to negotiate with
one former employee in connection with the employee's  note, and believes that a
resolution will be reached that is agreeable to both parties. Regarding the last
outstanding  note, while the Company has attempted to resolve the matter with an
ex-employee, it has been unsuccessful to date. As the Company has been unable to
collect the principal  and interest  amounts under the notes from the two former
employees,  a doubt  exists if such notes will be  satisfied.  Accordingly,  the
Company  recorded a valuation  allowance on the full amounts of the notes in the
sum of $439, and recorded an expense in the statement of operations.

d. Employee Stock Purchase Plan:

Commtouch  reserved a total of  1,229,156  shares for  issuance  under the plan.
Eligible  employees were able to purchase ordinary shares at 85% of the lower of
the  market  value of the  Company's  Ordinary  shares  on the  first day of the
applicable  offering period or the last day of the applicable  purchase  period.
The total shares  issued  under the plan were  80,545,  136,782 and zero for the
years 2000, 2001 and 2002, respectively. This Plan terminated in late 2001.

e. Repricing

On April 30, 2001, the Company's Board of Directors  approved the "repricing" of
options previously granted to employees  according to the criteria stated below.
Accordingly,  the Company filed a Tender  Offer,  which expired on September 14,
2001,  and  Commtouch  has accepted for exchange  options to purchase  1,273,513
Ordinary Shares.  Previously granted options were cancelled and new options were
issued with an exercise price equal to the par value of the shares.  In order to
enjoy the repricing  mechanism,  previously  granted stock options must have met
the following conditions:

     o   The exercise price of the original options exceeds $10

     o   The option is issued but not exercised

The  repriced  stock  options vest over three years with 1/3 vesting on February
15, 2002 and the  remaining  2/3 vesting  every six months for the following two
years. In connection with this repricing, the Company charged approximately $300
as compensation expense in 2002 and 2001.

During  October  2001,  the Company  decided that 1/3 of the options  granted on
September 14, 2001 to employees  dismissed  during  October 2001 will not expire
upon  termination  of employment.  The Company  decided that this portion

                                      F-22
<PAGE>
                                                         Commtouch Software Ltd.

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

of the options will vest  according to the original  grant terms on February 15,
2002 and will be exercisable until August 15, 2002.

The modification of the grant term was accounted for under APB 25 and FIN 44 and
resulted in no effect.

f. Stock Options:

In 1996, the Company adopted the 1996 CI Stock Option Plan for granting  options
to its U.S.  employees  and  consultants  to  purchase  ordinary  shares  of the
Company.  Until 1999, the Company issued options to purchase  ordinary shares to
its Israeli  employees  pursuant to individual  agreements.  In 1999 the Company
approved the 1999 Section 3(i) Share Option Plan for its Israeli  employees  and
consultants, which was amended in 2001 to include Section 102 applicability (the
sections relate to code sections under the Israel tax law).

The Company has reserved  6,406,100  ordinary shares for issuance under employee
stock option  plans and  agreements.  As of December  31, 2002,  an aggregate of
3,672,555  ordinary  shares of the Company are still available for future grant.
Options granted under such plans 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 generally vest
ratably  over a  4-year  period.  Certain  repriced  stock  options  offered  to
employees in a Tender Offer Statement of July 20, 2001, as amended,  vest over a
three  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.  Any  options  that are  canceled  or not
exercised within the options period become available for future grant.

As a result of the Wingra acquisition, the Company assumed stock options granted
to employees under Wingra's stock option plan. At the date of acquisition  these
stock options were immediately converted into approximately 168,000 fully vested
stock options convertible into Commtouch ordinary shares.

A summary of the Company's share option activity under the plans is as follows:
<TABLE>
<CAPTION>
                                                                                                 Weighted Average
                                                       Number of Shares                           Exercise Price
                                          ------------------------------------------       --------------------------------
                                             2000            2001            2002            2000        2001         2002
                                          ----------      -----------    -----------       -------     -------      -------
<S>                                        <C>              <C>            <C>             <C>         <C>          <C>
Outstanding at beginning of period         1,383,110        2,650,455      2,915,689       $  9.62     $ 19.91      $  0.46
 Granted.......................            2,046,520        3,009,388*     2,058,521         24.10         0.2         0.16
 Exercised.....................             (359,839)        (119,268)      (261,490)         2.66        0.39         0.02
 Canceled......................             (419,336)      (2,624,886)    (1,979,175)        21.77       19.68         0.60
                                          ----------      -----------    -----------       -------     -------      -------
Outstanding at end of period...            2,650,455        2,915,689      2,733,545       $ 19.91     $  0.46      $  0.17
                                          ==========      ===========    ===========       =======     =======      =======
Exercisable at end of period...              526,986          281,830        716,407       $  8.61     $  2.70      $  0.21
                                          ==========      ===========    ===========       =======     =======      =======
</TABLE>

* - Includes 1,273,513 options repriced to par value during 2001.

The options outstanding as of December 31, 2002, have been separated into ranges
of exercise price, as follows:
<TABLE>
<CAPTION>
                                                Weighted
                           Options               Average            Weighted           Options       Weighted Average
                      Outstanding as of         Remaining            Average       Exercisable as of      Price of
                         December 31,       Contractual Life         Exercise        December 31,        Exercisable
  Exercise Price             2002                (years)              Price             2002              Options
  --------------             ----                -------              -----             ----              -------
<S>                         <C>                    <C>               <C>                  <C>             <C>
  $0.01-$0.11               1,888,335              8.83              $  0.04              584,550         $  0.04
  $0.28-$1.45                 844,210              7.41              $  0.37              131,232         $  0.83
  $35                           1,000              7.48              $ 35                     625         $ 35.00
                            ---------              ----              -------              -------         -------
  $ 0.01-$35                2,733,545              8.29              $  0.17              716,407         $  0.21
                            =========              ====              =======              =======         =======
</TABLE>

Weighted  average fair values and weighted  average  exercise  prices of options
whose  exercise  price is less or equals  market  price of the shares at date of
grant are as follows:
                                      F-23
<PAGE>
                                                         Commtouch Software Ltd.

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

<TABLE>
<CAPTION>
                                                                       For exercise prices on the date of grant that:
                                                     -----------------------------------------------------------------------------
                                                                Equals market price                  Are less than market price
                                                              Year ended December 31,                  Year ended December 31,
                                                     ---------------------------------------- --------------------------------
                                                         2000         2001          2002          2000          2001          2002
                                                     ------------ ------------  ------------  ------------  ------------  --------
<S>                                                     <C>           <C>           <C>            <C>          <C>           <C>
Weighted average exercise prices................        $ 24.10       $ 0.27        $ 0.16         $--          $ 0.01        $ 0.01
Weighted average fair values on date of grant...        $ 20.20       $ 0.10        $ 0.16         $--          $ 0.44        $ 0.16
</TABLE>

Under SFAS 123, pro forma  information  regarding net income (loss) and earnings
(loss) per share is  required  and has been  determined  as if the  Company  had
accounted  for its employee  stock  options  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 valuation model with the following weighted-average
assumptions for 2000, 2001 and 2002:  risk-free interest rates of 5.5% for 2000,
4.0% for 2001, and 3.7% for 2002,  dividend yields of 0%, volatility  factors of
the expected  market price of the Company's  ordinary  shares of 1.348 for 2000,
1.482 for  2001,  and 1.416  for 2002 and an  expected  life of the  option of 6
months after the option is vested for 2000, 2001 and 2002.

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 of 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.

The Company recorded deferred  compensation  representing the difference between
the exercise price and the deemed fair value of the Company's ordinary shares at
the date of grant. Such amount is being amortized using the sum-of-digits or the
straight-line  method over the vesting  period of the  options,  generally  four
years.

      Deferred stock based compensation is as follows:
      Balance as of January 1, 2002..............................     $    828
      Less amortization of deferred stock based compensation.....         (551)
                                                                      --------
      Balance as of December 31, 2002............................     $    277
                                                                      ========

g. Amended and Restated Non-Employee Directors Stock Option Plan:

The Company  adopted the 1999  Non-Employee  Directors  Stock Option  Plan.  The
original  allotment of shares in this plan was in the amount of 180,000 ordinary
shares. The Company, with shareholder approval,  has amended this allotment over
the past few years as follows:

     a.  In 2000, an increase was approved  bringing the plan's total  allotment
         to 500,000 shares;

     b.  In 2001, an increase was approved  bringing the plan's total  allotment
         to 750,000 ordinary shares; and

     c.  In  2002,  two  increases  were  approved  bringing  the  plan's  total
         allotment to 1,450,000.

Further, during 1999, each individual who first joined the Board of Directors as
a  non-employee  director on or after the effective  date of the initial  public
offering  received an option grant for 10,000 shares.  This amount was increased
at a shareholders  meeting in 2000, such that going forward,  individuals  first
joining the Board receive an initial grant of 30,000 options.

Directors who are reelected at the annual meeting of shareholders  are generally
entitled to additional  grants of 10,000 shares.  However,  this amount has been
increased over the past few years pursuant to shareholder approvals, such that:

     a.  Directors   reelected  at  the  August  22,  2001  annual   meeting  of
         shareholders were entitled to a grant of 33,750;

                                      F-24
<PAGE>
                                                         Commtouch Software Ltd.

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


     b.  Directors in office immediately after the extraordinary general meeting
         of  shareholders  on February 25, 2002 were  granted a one-time  option
         grant of 150,000 ordinary shares; and

     c.  Directors   in  office   immediately   after  the  annual   meeting  of
         shareholders  on November 18, 2002 were granted a one-time option grant
         of 50,000 ordinary shares.

 Also,  in addition to the grant of shares for her  reelection  as a director in
August 2001, Carolyn Chin, on behalf of her activities as Chairman of the Board,
received an additional grant of 221,250 ordinary shares.

Each option granted under the Non-Employee Directors Plan originally was to have
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;
however,  this  changed  pursuant  to an  amendment  to  the  plan  approved  by
shareholders  at the August 10, 2000 annual meeting of  shareholders,  such that
options under  subsequent  grants become  exercisable at a rate of 1/16th of the
shares every three months.  Each option has an exercise  price equal to the fair
market value of the ordinary  shares on the grant date of such option.  However,
certain options outstanding and unexercised at the time of the effective date of
the Tender  Offer  Statement  of July 20,  2001,  as amended,  were  repriced in
accordance with the terms of the Tender Offer Statement, as amended. Each option
has a maximum  term of ten years,  but will  terminate  earlier if the  optionee
ceases to be a member of the Board of Directors.

During 2002, the Company granted 1,000,000 options to non-employee  directors at
a weighted  average  exercise price of $0.24 per share. As of December 31, 2002,
291,560 options were vested and 1,378,750 were outstanding under the Amended and
Restated 1999 Non-Employee Directors Stock Option Plan.

NOTE 11: GEOGRAPHIC INFORMATION

The Company  conducts its business on the basis of one  reportable  segment (see
Note 1 for brief description of the Company's business). The Company has adopted
Statement of Financial Accounting Standard No. 131,  "Disclosures About Segments
of an Enterprise and Related Information".

Revenues from external customers:

                                          Revenues
                                -----------------------------
                                   2000      2001      2002
                                ---------  --------  --------
Israel....................       $   196   $    451  $    416
U.S.A.....................        10,703      5,806     1,207
Europe....................         1,927      2,500     1,436
Japan.....................         1,295        656       356
Latin America.............         4,085      2,910        23
Other.....................           565      1,265       ---
                                 -------   --------  --------
                                 $18,771   $ 13,588  $  3,438
                                 =======   ========  ========

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

                            2001      2002
                            ----      ----
Israel.............       $ 2,953   $   441
U.S.A..............         1,773       588
Other..............           426       ---
                          -------   -------
                          $ 5,152   $ 1,029
                          =======   =======

NOTE 12: SUBSEQUENT EVENTS (UNAUDITED)

a. Convertible Loan Transaction

On January 29, 2003  Commtouch  entered into a Convertible  Loan  Agreement with
certain  lenders  according  to which the Company is entitled to receive up to a
maximum possible loan (the "Loan") amount of $1,250.

                                      F-25
<PAGE>
                                                         Commtouch Software Ltd.

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

Through  June 2003 the Company has received the total Loan amount of $1,250 from
the lenders.  The Loan is to be repaid after three years,  unless converted into
Commtouch shares by the lenders or a defined event triggering early repayment is
met.  The Loan bears  interest  at a rate of ten  percent per annum and is to be
repaid together with the loan.  Furthermore,  the Loan's  principal and interest
may be  converted  by the lenders  into equity in the Company at any time during
the Loan term, at a conversion  price of $0.25 per ordinary  share  ("Conversion
Price").  Warrants  exercisable for purchase of up to 5,000,000 of the Company's
ordinary  shares  have been issued to the  lenders  (based on such Loan  amounts
advanced  divided by the Conversion  Price).  Each one-third of the warrants are
exercisable at prices per ordinary share of $0.25, $0.33 and $0.50 respectively,
and the  warrants  are  exercisable  at any time within five years of  issuance.
Warrants shall also be issued on an annual basis for any accumulated interest on
the Loan.

b. Class action litigation

In May 2003,  a  settlement  agreement  was signed  between the  plaintiffs  and
defendants and the court  thereafter  issued a preliminary  order  approving the
settlement.  The settlement  calls for the payment of $15,000 to the plaintiffs,
with this amount to be fully  funded by the  Company's  Directors  and  Officers
insurance  policy.  While the payment to plaintiffs under this settlement should
not cause the Company any financial  hardship,  the Company is unable to predict
whether the whole or a  substantial  portion of the class members will choose to
participate  in the  settlement  and whether  ultimately  the court will issue a
final  order  approving  the  settlement.  The  settlement  does not contain any
admissions  or findings of  wrongdoing  on the part of the  defendants,  and the
Company  continues to maintain that it and individual  defendants acted properly
at all time.

                                      F-26
<PAGE>

                                   SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the  undersigned to sign
this annual report on its behalf.


                                  COMMTOUCH SOFTWARE LTD.

                                  By: /s/ Devyani Patel
                                      ---------------------------------------
                                  Devyani Patel
                                  V.P. Finance July 15, 2003


<PAGE>

                                 CERTIFICATIONS


I, Gideon Mantel, certify that:

1. I have reviewed this annual report on Form 20-F of Commtouch Software Ltd.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


Date: July 15, 2003


                                /s/Gideon Mantel
                                ----------------
                                  Gideon Mantel
                             Chief Executive Officer


<PAGE>


I, Devyani Patel, certify that:

1. I have reviewed this annual report on Form 20-F of Commtouch Software Ltd.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


Date: July 15, 2003


                                /s/Devyani Patel
                                ----------------
                                  Devyani Patel
                                  V.P. Finance


<PAGE>

                             COMMTOUCH SOFTWARE LTD.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                            U.S. Dollars in thousands

<TABLE>
<CAPTION>
                                                          Balance at
                                                              the         Charged to                        Balance at
                                                         beginning of      cost and                         end of the
                                                          the period       expenses        Deductions         period
                                                          ----------       --------        ----------         ------
<S>                                                        <C>             <C>               <C>              <C>
Year ended December 31, 2000:
   Bad debt......................................          $    405        $  1,990          $(1,533)         $  862
                                                           ========        ========          =======          ======
Year ended December 31, 2001:
   Bad debt......................................          $    862        $    259          $  (551)         $  570
                                                           ========        ========          =======          ======
Year ended December 31, 2002:
   Bad debt......................................          $    570        $     40          $  (569)         $   41
                                                           ========        ========          =======          ======
</TABLE>


<PAGE>

Item 19. Exhibits

   Exhibit
    Number      Description of Document
    ------      -----------------------
    1.1         Memorandum of Association of the Registrant.(1)

    1.2         Amended and Restated  Articles of Association of the Registrant,
                as amended on May 15, 2003.

    2.1         Specimen Certificate of Ordinary Shares.(1)

    2.2         Amended and Restated  Registration  Rights Agreement dated as of
                April 19, 1999.(1)

    2.2.1       Amendment  No. 1 to Amended  and  Restated  Registration  Rights
                Agreement dated as of December 29, 1999.(4)

    2.2.2       Amendment  No. 2 to Amended  and  Restated  Registration  Rights
                Agreement dated as of March 10, 2000.(5)

    2.3         Reserved.

    2.4         Form of Drag-Along Letter dated as of April 15, 1999.(1)

    2.5         Ordinary Shares Purchase  Agreement between  Commtouch  Software
                Ltd. And Torneaux Fund Ltd., dated January 23, 2001.(9)

    2.6         Amended  and  Restated  Merger  and  Exchange   Agreement  dated
                November 24, 2000 among Commtouch Software Ltd., Commtouch Inc.,
                CW Acquisition Corporation,  Wingra, Incorporated, the holder of
                certain   of  the   outstanding   capital   stock   of   Wingra,
                Incorporated,  and the holders of all the outstanding membership
                interests in Wingra  Technologies,  LLC other than that owned by
                Wingra, Incorporated.(10)

    2.7         Registrant  hereby agrees to furnish the Securities and Exchange
                Commission,  upon  request,  with the  instruments  defining the
                rights of  holders  of  long-term  debt of the  registrant  with
                respect to which the total amount of securities  authorized does
                not  exceed  10%  of  the  total  consolidated   assets  of  the
                Registrant.

    2.8         Ordinary  Shares and  Warrants  Purchase  Agreement  dated as of
                February 27, 2002 by and between  Commtouch  Software  Ltd., and
                the Investors Listed on Exhibit A Thereto(31)

    2.9         Text of Report on Form 6-K filed by the Registrant for the month
                of April 2003 (21)

    2.9.1       Convertible Loan Agreement dated January 29, 2003,  inclusive of
                Exhibits "A" through "D" thereto. (22)

    2.9.2       Exhibit "F" to Convertible Loan Agreement dated January 29, 2003
                - Form of Guaranty (23)

    2.9.3       Exhibit "G" to  Convertible  Loan  Agreement  dated  January 29,
                2003- Form of U.S. Subsidiary Security Agreement (24)

    2.9.4       Exhibit "H" to Convertible Loan Agreement dated January 29, 2003
                - Form of Company Security Agreement (25)


<PAGE>

    2.9.5       Exhibit "I" to Convertible Loan Agreement dated January 29, 2003
                - Form of Collateral Agency Agreement (26)

    2.9.6       Exhibit "J" to  Convertible  Loan  Agreement  dated  January 29,
                2003- Form of Patent and Trademark Security Agreement (27)

    2.9.7       Exhibit "K" to Convertible Loan Agreement dated January 29, 2003
                - Opinion of Israeli Counsel to the Company (28)

    2.9.8       Exhibit "L" to  Convertible  Loan  Agreement  dated  January 29,
                2003- Opinion of US Counsel to the Company (29)

    2.9.9       Addendum 1 to Convertible Loan Agreement (30)

    2.9.10      Addendum 2 to Convertible Loan Agreement

    4.1         Registrant's  1996 CSI Stock Option Plan and forms of agreements
                thereunder.(1)

    4.2         Registrant's   form  of  Stock  Option   Agreement  for  Israeli
                Employees.(1)

    4.3         Registrant's  1999  Section  3(i) Share  Option Plan and form of
                agreement thereunder.(1)

    4.4         Form of Share  Warrant  for Go2Net,  Inc.  to purchase  ordinary
                shares of the Registrant.(3)

    4.5         Form of Share  Purchase  Agreement by and among the  Registrant,
                Go2Net, Inc. and Vulcan Ventures Incorporated.(3)

    4.5.1       Form  of  Registration   Rights   Agreement  by  and  among  the
                Registrant, Go2Net, Inc. and Vulcan Ventures Incorporated.(3)

    4.6         Commtouch Software Ltd. 1999 Section 3(I) Share Option Plan.(8)

    4.7         Wingra Technologies, LLC 1998 Unit Option Plan (13)

    4.8         Stock Purchase  Agreement  between  Commtouch  Software Ltd. and
                Rideau Ltd., dated June 1, 2001 (12)

    4.9         Form of Wingra Technologies, LLC Investor Option Agreement (14)

    4.10        Form of Wingra Technologies, LLC Investor Warrant Agreement (15)

    4.11        Stock Purchase  Agreement  between  Commtouch  Software Ltd. and
                Hughes Holdings LLC dated June 5, 2001 (16)

    4.12        Agreement of Commercial Lease between Am-Ram Pituah Drom Netanya
                (South Netanya Development) Ltd. as Lessor and Comtouch Software
                Ltd.  as Lessee  dated  June 3, 2000 for  premises  in  Netanya,
                Israel.(17)

    4.13        Conditional  Lease Termination  Agreement between  EOP-Shoreline
                Technology  Park,  L.L.C.  and Commtouch Inc. dated December 21,
                2001

    4.14        Settlement  between Compaq  Financial  Services  Corporation and
                Commtouch  Inc. and Commtouch  Software Ltd.  dated December 21,
                2001


<PAGE>

    4.15        Settlement and Termination of Services  Agreement between Exodus
                Communications, Inc. and Commtouch Inc. dated January 10, 2002

    4.16        Amended and  Restated  1996 CSI Stock  Option  Plans and form of
                agreement thereunder (18)

    4.17        Amended and  Restated  1999  Section  3(i) Share Option Plan and
                form of option agreement thereunder (19)

    4.18        Amended and Restated 1999  Non-Employee  Directors  Stock Option
                Plan

    4.19        Agreement of Merger  between CP Software  Group Inc.,  Commtouch
                Software  Ltd,  MailCentro,   Inc.  and  CPSGNEWCO,  Inc.  dated
                November 16, 2001

    4.20        Business Unit Purchase  Agreement by and between  Telecomputing,
                Inc. and Commtouch Inc. dated January 15, 2002

    4.21        Sale and Purchase  Agreement by and between  Commtouch  Software
                Ltd., Commtouch Inc., Wingra, Incorporated, Wingra Technologies,
                L.L.C., Jan Eddy and Steven Entine dated February 25, 2002

    4.22        Lease Termination  Agreement between Young Woo & Assoc., LLC and
                Commtouch Inc. and Commtouch  Software Ltd. (as guarantor) dated
                September 6, 2002

    4.23        Surrender Agreement between Omni South Beach, L.P. and Commtouch
                Latin America Inc. dated August 31, 2002

    4.24        Agreement  of  September  1, 2002  between  AxcessNet  Ltd.  and
                Commtouch   Software   Ltd.   plus   Warrant  for   purchase  of
                Registrant's ordinary shares

    4.25        Agreement  of  September  1, 2002  between  AxcessNet  Ltd.  and
                Commtouch Software Ltd., plus Amendment 1 thereto

    8           Subsidiaries  of the Company (1.  Commtouch  Inc.,  a California
                corporation,  and 2. Commtouch (UK) Ltd. - in process of winding
                up)

    10.1        Consent of Kost, Forer & Gabbay, independent auditors.

    10.2        Memorandum of Understanding between the Registrant, Go2Net, Inc.
                and Vulcan Ventures Incorporated, dated July 7, 1999.(2)

    12(a).1     Certification of Registrant's  Chief Executive  Officer Pursuant
                to 18 U.S.C. Section 1350

    12(a).2     Certification of Registrant's Chief  Financial  Officer Pursuant
                to 18 U.S.C. Section 1350

----------

(1)      Incorporated   by  reference   to  exhibits  in  Amendment   No.  1  to
         Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
         333-78531.

(2)      Reserved.

(3)      Incorporated   by  reference   to  exhibits  in  Amendment   No.  5  to
         Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
         333-78531.


<PAGE>

(4)      Incorporated by reference to exhibit in Amendment No. 1 to Registration
         Statement on Form F-1 of Commtouch Software Ltd., File No. 333-89773.

(5)      Incorporated   by  reference   to  exhibits  in  Amendment   No.  2  to
         Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
         333-89773, filed March 28, 2000.

(6)      Reserved.

(7)      Reserved.

(8)      Incorporated by reference to Exhibit 10.2 to Registration  Statement on
         Form S-8 No. 333-94995.

(9)      Incorporated  by  reference  to Exhibit 2 to Report on Form 6-K for the
         month of January 2001.

(10)     Incorporated  by  reference  to Exhibit 3 to Report on Form 6-K for the
         month of January 2001.

(11)     Reserved.

(12)     Incorporated  by  reference  to Exhibit 1 to Report on Form 6-K for the
         month of May 2001, filed June 1, 2001.

(13)     Incorporated  by  reference  to Exhibit 2 to Report on Form 6-K for the
         month of May 2001, filed June 1, 2001.

(14)     Incorporated  by  reference  to Exhibit 3 to Report on Form 6-K for the
         month of May 2001, filed June 1, 2001.

(15)     Incorporated  by  reference  to Exhibit 4 to Report on Form 6-K for the
         month of May 2001, filed June 1, 2001.

(16)     Incorporated  by  reference  to Exhibit 4 to Report on Form 6-K for the
         month of May 2001, filed June 12, 2001.

(17)     Incorporated by reference to Exhibit 10.13 to Amendment No. 1 to Annual
         Report on Form 20-F for the year ended December 31, 2000.

(18)     Incorporated  by  reference to Exhibit 4 to Schedule TO, filed July 20,
         2001.

(19)     Incorporated  by  reference to Exhibit 5 to Schedule TO, filed July 20,
         2001.

(20)     Reserved

(21)     Incorporated  by reference to Report on Form 6-K for the month of April
         2003, filed April 2, 2003.

(22)     Incorporated  by  reference  to Exhibit 1 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(23)     Incorporated  by  reference  to Exhibit 2 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(24)     Incorporated  by  reference  to Exhibit 3 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(25)     Incorporated  by  reference  to Exhibit 4 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(26)     Incorporated  by  reference  to Exhibit 5 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(27)     Incorporated  by  reference  to Exhibit 6 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(28)     Incorporated  by  reference  to Exhibit 7 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(29)     Incorporated  by  reference  to Exhibit 8 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(30)     Incorporated  by  reference  to Exhibit 9 to Report on Form 6-K for the
         month of April 2003, filed April 2, 2003.

(31)     Incorporated  by reference to Exhibit 2.8 to Annual Report on Form 20-F
         for the year ended December 31, 2001.