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

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

                                    FORM 20-F

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

                   For the fiscal year ended December 31, 2000

                        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)

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

                     Sunil Bhardwaj, Chief Financial Officer
                               2029 Stierlin Court
                             Mountain View, CA 94043
                                  650-864-2000

            (name, address, including zip code, and telephone number,
              including area code of agent for service of process)


         ---------------------------------------------------------------
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, 2000).

     Ordinary Shares, par value NIS 0.05                        16,925,022

     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]

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                                                                               2

<PAGE>

                                     PART I


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
and majority-owned  subsidiaries,  Commtouch Inc., Commtouch (UK) Ltd, Commtouch
Latin America Inc., Wingra Technologies Inc. and Commtouch K.K. (Japan).

The selected  consolidated  statements  of  operations  data for the years ended
December 31, 1998,  1999 and 2000 and the selected  consolidated  balance  sheet
data as of December 31, 1999 and 2000 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,  1996  and 1997  and the  selected  consolidated  balance  sheet  data as of
December  31,  1996,  1997 and 1998  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,
                                                               --------------------------------------------------------------------
                                                                 1996           1997           1998           1999           2000
                                                               --------       --------       --------       --------       --------
                                                                             (in thousands, except per share data)
<S>                                                            <C>            <C>            <C>            <C>            <C>
Consolidated Statements of Operations Data:
Revenues:
 Email services .........................................      $   --         $   --         $    389       $  4,251       $ 17,965
 Software licenses, maintenance and services ............         3,134            899             --           --            1,150
                                                               --------       --------       --------       --------       --------
   Total revenues .......................................         3,134            899            389          4,251         19,115
Cost of revenues:
 Email services .........................................          --             --              569          3,643         11,864
 Software licenses, maintenance and services ............           463            165             --           --             --
                                                               --------       --------       --------       --------       --------
   Total cost of revenues ...............................           463            165            569          3,643         11,864
                                                               --------       --------       --------       --------       --------
Gross profit (loss) .....................................         2,671            734           (180)           608          7,251
                                                               --------       --------       --------       --------       --------
Operating expenses:
 Research and development, net ..........................         1,478          1,108          1,149          2,942         10,357
 Sales and marketing ....................................         1,965          2,202          2,001          7,722         26,585
 General and administrative .............................           465            829            604          4,328         13,621
 In-process research and development.....................          --             --             --              --           1,280
 Amortization of prepaid marketing expenses .............          --             --             --            3,263          4,508
 Amortization of stock-based employee
   deferred compensation ................................          --             --               91          3,436          3,050
                                                               --------       --------       --------       --------       --------
   Total operating expenses .............................         3,908          4,139          3,845         21,691         59,401
Operating loss ..........................................        (1,237)        (3,405)        (4,025)       (21,083)       (52,150)
Interest and other income (expenses), net ...............           (45)           (68)          (326)         1,232          2,870
Write-off impaired investments..........................           --             --             --              --          (5,000)
Minority interest........................................          --             --             --              --              55
                                                               --------       --------       --------       --------       --------
Net loss ................................................      $ (1,282)      $ (3,473)      $ (4,351)      $(19,851)      $(54,225)
                                                               ========       ========       ========       ========       ========
Basic and diluted net loss per share ....................      $  (0.66)      $  (2.40)      $  (3.00)      $  (2.65)      $  (3.51)
                                                               ========       ========       ========       ========       ========
Weighted average number of shares used in
Computing basic and diluted net loss per share .........          1,934          1,450          1,450          7,487         15,462
                                                               ========       ========       ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                         ---------------------------------------------------------------------------
                                                           1996             1997            1998             1999             2000
                                                         --------         --------        --------         --------         --------
                                                                                      (in thousands)
<S>                                                      <C>              <C>             <C>              <C>             <C>
Consolidated Balance Sheet Data:
 Cash and cash equivalents ......................        $    690         $    324        $    834         $  65,996       $  20,831
 Marketable securities ..........................            --               --              --              18,050           8,607
 Working capital (deficit) ......................             539           (1,264)          (1,440)          88,053          23,768
 Total assets ...................................           2,180            1,065            2,366          100,336          77,280
 Long-term liabilities ..........................             371              366              530              497           1,825
 Shareholders' equity (deficit) .................             777           (1,108)            (815)          95,312          61,728



                                                                                                                                   3
</TABLE>

<PAGE>

CAPITALIZATION AND INDEBTEDNESS

The following table sets forth the  capitalization and indebtedness of Commtouch
as of March 31, 2001:


                                                             MARCH 31, 2001
                                                            ----------------
                                                              (UNAUDITED)
                                                            (IN THOUSANDS)
                                                            ----------------


Long-term liabilities  ...................................    $      763
                                                                 --------
Shareholders' equity:
  Ordinary shares, NIS 0.05 par value; 40,000,000 shares
     Authorized, 16,970,584 actual shares issued and
     outstanding..........................................           236
  Additional paid-in capital..............................       151,021
  Deferred compensation...................................        (2,247)
  Notes receivable from shareholders......................          (891)
  Accumulated other comprehensive income..................             2
  Accumulated deficit.....................................      (102,884)
                                                                 --------
          Total shareholders' equity......................        45,237
                                                                 --------
          Total capitalization............................    $   46,000
                                                                 ========


                           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.


                                                                               4

<PAGE>

                                  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.

RECENT DEVELOPMENTS

On January 2, 2001, we announced that, in the wake of the economic  downturn and
changes in market demand,  we had initiated  several  internal changes to better
serve the enterprise  messaging market.  These internal changes include reducing
our operating  expenses  associated  with supporting the dot-com and destination
site  markets,  closing our  e-commerce division  and email  services  for small
community  sites,  and  promoting  greater  efficiencies  in  channel  sales and
marketing to the  enterprise  market.  Those changes were designed to reduce our
worldwide  headcount by approximately 20% and, combined with other cost savings,
reduce  overall  operating  expenses by $16 million from the operating  plan for
2001.

On February 14, 2001,  we reported a net loss for the fourth  quarter of 2000 of
$24.1  million,  or a loss of  $1.51 a share,  compared  with a net loss of $7.4
million,  or a loss of $0.51 a share  for the  fourth  quarter  of  1999.  Total
revenues  rose to $5.3  million for the quarter  from $2.2 million in the fourth
quarter of 1999.  We also said we  expected  to restate our revenue and net loss
for the first three quarters of 2000. We stated that first-quarter revenue would
be restated downwards to $3.6 million from $4.3 million,  second-quarter revenue
would be restated  downwards to $5.0 million from $5.9 million and third-quarter
revenue would be restated  downwards to $5.2 million from $8.1 million.  We said
our net loss for the first  quarter would be restated to $9.1 million from a net
loss of $8.5  million,  our  second-quarter  net loss would be restated to $10.8
million  from $9.9 million and our  third-quarter  net loss would be restated to
$10.2 million from $7.6 million. On March 22, 2001, we filed amendments to Forms
6-K which included restated financial statements for the first, second and third
quarters of 2000.

On March 1, 2001, we announced that we are  reorganizing our business to enhance
our focus on enterprise messaging solutions. Accordingly, we expect to focus our
operations on three enterprise  messaging  businesses:  Commtouch core email and
messaging  service for the enterprise market which include the recently launched
Microsoft Hosted Exchange service offering;  the enterprise  messaging migration
and integration technologies business through our wholly-owned subsidiary Wingra
Technologies;  and  our  technology  development  of  next-generation  messaging
applications for marketing to worldwide  telecommunication  companies,  Internet
Data Centers and service providers. We said that as part of this reorganization,
we would be  streamlining  our global  operations  and reducing our workforce by
approximately  50%,  to about  210  people.  We noted  that the  current  global
economic environment required that we incur a significant  reduction in expenses
in order to enhance our  financial  strength  and  maintain a sharp focus on the
most promising market  opportunities.  While this  reorganization is expected to
increase  service  and  licensing  revenues,  we are  unable to  predict if this
strategy will be successful in enhancing returns to shareholders.

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 directors,  alleging violations of the antifraud  provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
While we are unable to predict the ultimate outcome of these claims,  we believe
they are without merit and intend to vigorously defend ourselves.


                                                                               5

<PAGE>

As of December  31, 2000,  we had  approximately  $29.4  million of cash to fund
operations in 2001. In 2000 we utilized  $31.2 million of cash to fund operating
losses,  $19.1  million for  purchasing  property,  plant and equipment and $7.0
million in strategic long term investments.  To limit our cash expenses in 2001,
we have significantly  reduced staff,  curtailed  discretionary  expenses,  made
available for sublease excess facilities and limited capital expenditures. These
actions  were  made  due to a  decline  in our  revenue  growth  resulting  from
competitive factors and a slowing economic  environment.  To enhance our overall
financial position, we have entered into an equity line purchase agreement under
which Torneaux Fund,  Ltd., an institutional  investor,  has agreed to invest in
the Company's  ordinary  shares  provided the share price is above $2 or a lower
amount if mutually  agreed.  Recently,  our ordinary shares have been trading at
below that price. The cash realized for the shares sold will be determined based
on the weighted average price of the shares in the month of placement.

Based  on the  cash  balance  at  March  31,  2001  of  $13.3  million,  current
projections  of  revenues,  related  expenses,  the  ability to further  curtail
certain discretionary  expenses, in accordance with a board approved contingency
plan,  and  a  potential  funding  capability  under  the  current  equity  line
arrangement or other equity arrangement,  the Company believes it has sufficient
cash to continue  operations  for at least the next twelve months.  However,  to
continue  funding  developments of its software  products,  the company needs to
raise at least $5  million  of  additional  cash by  issuing  equity  under  its
existing equity line  arrangement, and/or the Company needs to seek  alternative
sources of capital.  Accordingly,  the Board of  Directors  has retained William
Blair & Company to render  investment  banking  services  in  connection  with a
possible private placement of the Company's equity securities.

Business Risks

If the market for our outsourced email services does not grow significantly,  we
would fail to generate revenues.

Our success will depend on the acceptance and use of email that is outsourced by
enterprises as a means of communication (as opposed to in-house deployment). The
market for  outsourced  email  services is new and rapidly  evolving.  We cannot
estimate  the  size or  growth  rate of the  potential  market  for our  service
offerings. If the market for outsourced email fails to grow or grows more slowly
than we currently  anticipate,  our business will suffer  dramatically.  Even if
that market grows, our service may not achieve broad market acceptance. Since we
have only recently introduced our services, we do not have sufficient experience
to evaluate whether they will achieve broad market  acceptance.  Also, because a
preponderance  of our  revenue  is  derived  directly  or  indirectly  from  our
outsourced  email  solutions,  if that market does not grow,  our business  will
likely fail.


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

Because we have a limited operating history in the provision of outsourced email
services 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.


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

     o   The  success of our channel and direct  selling  efforts to  enterprise
         customers;

     o   The rate of adoption of  out-sourced  e-mail  solutions  by  enterprise
         customers in the current economic environment;


                                                                               6

<PAGE>

     o   The threat of  de-listing by the NASDAQ if our shares fall below $1 for
         an extended period of time;

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

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

     o   Pricing of our services; and

     o   Effectiveness of our customer support.


Because of differing  operating  factors,  period-to-period  comparisons  of our
operating  results are not a good  indication of our future  performance.  It is
likely  that  our  operating  results  in some  quarters  will be  below  market
expectations.  Because we have a limited operating history providing  outsourced
email  services  to the  service  provider,  telecommunications  and  enterprise
markets, it is difficult to evaluate our business and prospects.

We commenced  operations in 1991, but we began  commercially  selling  Web-based
email  services only in 1998 after  changing our strategic  focus from the sale,
maintenance  and service of  stand-alone  email  client  software  products  for
mainframe and personal computers. During the third quarter of 2000, we began the
process of repositioning  the company to provide  outsourced email and messaging
services to the service  provider,  telecommunications  and  enterprise  markets
primarily  through  channel  partners.  This  change  required  us to adjust our
business  processes and to restructure  Commtouch to become an outsourced  email
service  provider.  Therefore,  we have only a limited  operating  history  as a
provider  of email  services  upon  which  you can  evaluate  our  business  and
prospects.  It is too early to judge the success of this service  offering,  the
enterprise focus and distribution through channel partners.


We have  many  established  competitors  who are  offering  the same or  similar
services

The market for outsourced email services is intensely  competitive and we expect
it to be increasingly competitive. Increased competition could result in pricing
pressures,  reduced  operating  margins and loss of market  share,  any of which
could cause our business to suffer.

In the  market  for email and  messaging  services,  we  compete  directly  with
outsourced  email  service   providers,   including   Critical  Path,   Easylink
Corporation (formerly Mail.com),  USA.NET, United Messaging and USinteractive as
well as with companies that develop and maintain  in-house email  solutions such
as  Microsoft  and IBM.  In  addition,  companies  such as  Openwave,  (formerly
Software.com)  and iPlanet  currently offer email software products to ISPs, web
hosting  companies,   web  portals  and  corporations.   Furthermore,   numerous
small-scale email providers offer low-cost basic services,  but without scalable
systems  or  value-added   functionality.   These  and  other   companies  could
potentially leverage their existing  capabilities and relationships to enter the
email service  industry by redesigning  their system  architecture,  pricing and
marketing  strategies to sell through to the entire market. The ability of these
competitors to offer a broader suite of  complementary  services may give them a
considerable  advantage over us. In the future,  ISPs, web hosting companies and
outsourced  application companies may broaden their service offerings to include
outsourced email.

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 service  offerings,  we may  encounter
increased competition in the development and delivery of these services. Many of


                                                                               7

<PAGE>

our current and potential  competitors have longer operating  histories,  larger
customer bases,  greater brand recognition and greater financial,  marketing and
other  resources  than  we  do  and  may  enter  into  strategic  or  commercial
relationships on more favorable terms.  Further,  certain of our competitors may
offer services at or below cost. In addition, 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  and
increased competition may result in reduced operating margins and loss of market
share.


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

The complexity of our Internet messaging services and the emerging nature of the
outsourced email market require highly trained sales and marketing  personnel to
educate  prospective  customers  regarding the use and benefits of our services.
The majority of our sales and  marketing  personnel  have only  recently  joined
Commtouch  and have limited  experience  working  together.  In addition we have
limited experience in selling to enterprise  customers and in successful channel
selling.  It will  take  time for these  employees  to learn  how to market  our
enterprise  solutions  and  to  be  integrated  into  our  sales  and  marketing
organization.   Some  of  them  may  not  succeed  in  making  this  transition.
Additionally,  we are unable to predict the success in selling newly  introduced
additional  services  that we have no  experience  marketing  and are relying on
these  services to produce a substantial  portion of our revenues in the future.
As a result of these factors,  our sales and marketing  organization  may not be
able to compete  successfully  against the bigger and more experienced sales and
marketing organizations of our competitors.


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

We incurred net losses of  approximately  $4.4 million in 1998, $19.9 million in
1999 and $54.2 million in 2000.  As of December 31, 2000, we had an  accumulated
deficit of approximately  $85.8 million.  We have not achieved  profitability in
any period,  and we expect to  continue to incur net losses for the  foreseeable
future.  If  we do  achieve  profitability,  we  may  not  sustain  or  increase
profitability  in the  future.  This may,  in turn,  cause  our  share  price to
decline.

Need For Additional Funds

We are dependent upon raising additional funds to finance our business. Our cash
balance at March 31, 2001 was $13.3 million. We will need at least $5 million in
additional  funding in the near term in order to  continue  our  business at the
current  level of  operations  for the next twelve  months.  If we fail to raise
sufficient near term funding, we have developed a contingency plan which will be
put into  effect.  The  plan  will  require  us to  effect  cost  reductions  by
curtailing  research and development  operations,  human resources  expenses and
other costs so as to allow us to continue a reduced level of operations  for the
next twelve months.

Assuming we either raise at least $5 million in  additional  funding in the near
term or implement the contingency plan, we may nonetheless continue to be thinly
capitalized, which may adversely affect our ability to expand our operations, to
recruit  and  retain  employees,  to enter  into  agreements  with  vendors  and
customers,  and to withstand changes in business conditions.  We may, therefore,
need to raise additional  funds,  through  additional  equity or debt financing,
collaborative  relationships,  strategic alliances with commercial partners,  or
otherwise. There can be no assurance that we will be able to raise the necessary
funds or that we will be able to do so on terms  acceptable to us. 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.

Risk of Recession


Some of our  customers  continue  to  operate  in the  dot-com  market  based on
internet-centric  business  models and are  experiencing a significant  economic
slowdown and an inability to raise additional capital.

Our ability to collect outstanding  receivables is significantly impacted by the
liquidity issues of these customers and this may also impact our ability to sell
future services and recognize  future revenue despite  committed  contracts from
them.  This has had, and may continue to have, a negative  impact on our ability
to recognize  future  revenues  and as a result,  we may  experience  unexpected
shortfalls in our future revenues.


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

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


                                                                               8

<PAGE>

senior management or other key personnel. We cannot prevent them from leaving at
any time. We do not maintain  key-person  life insurance  policies on any of our
employees.

Our recent  head-count  reduction  from 486  employees to  approximately  210 is
significantly straining our managerial,  operational and financial resources. We
have  significantly  curtailed  sales  and  marketing  resources  and  this  may
compromise  our  ability to  enhance  revenues.  We also will incur  significant
expenditures  for wage  continuance  payments in connection  with this personnel
restructuring in order to comply with the WARN ACT 60 day notice requirements.


Our  business  and  operating  results  could  suffer if we do not  successfully
address the risks inherent in the expansion of our international operations.

At December 31, 2000 we had sales offices in the Israel, United States, England,
Latin  America  and Japan.  During the first  quarter of 2001,  we closed  sales
offices in New York,  Miami and  England.  We intend to continue to seek ways to
market our services in international  markets by utilizing significant financial
and managerial resources. We have limited experience in international operations
and may not be able to compete effectively in international markets. The Company
will face risks inherent in conducting business internationally, such as:

     o   difficulties   and  costs  of  staffing  and   managing   international
         operations;

     o   fluctuations in currency exchange rates;

     o   imposition of currency exchange controls;

     o   differing technology standards;

     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  international
operations  and,  consequently,  business and operating  results.  Specifically,
failure to  successfully  manage  international  growth  could  result in higher
operating  costs than  anticipated  or could  delay or preclude  altogether  the
Company's ability to generate revenues in key international markets.


Technology Risks


Because our business is based on communications and messaging  services,  we are
susceptible to system interruptions and capacity  constraints,  which could harm
our business and reputation.

Our ability to  successfully  receive and send our end users' email messages and
provide  acceptable  levels of  service  largely  depends on the  efficient  and
uninterrupted  operation of our computer and communications hardware and network
systems and those of our outsourced hosting service. In addition,  the growth in
the  use of the  Internet  has  caused  frequent  interruptions  and  delays  in
accessing  the  Internet  and  transmitting  data over the  Internet.  We do not


                                                                               9

<PAGE>

possess  insurance to cover losses caused by unplanned system  interruptions and
software  defects.  In the past, we have experienced  some  interruptions in our
email service.  We believe that these  interruptions will continue to occur from
time to time. These  interruptions may be due to hardware failures,  unsolicited
bulk  email  (also  known as  "spam"),  operating  system  failures,  inadequate
Internet  infrastructure  capacity,  and other  mechanical and human causes.  We
expect to experience  occasional,  temporary capacity constraints due to sharply
increased traffic,  which may cause  unanticipated  system  disruptions,  slower
response times,  impaired quality and degradation in levels of customer service.
If we experience  frequent or long system  interruptions that reduce our ability
to provide email  services,  we may have fewer users of our email  services.  In
addition,  we have entered into service  agreements  with some of our  customers
that require minimum performance standards.  If we fail to meet these standards,
our customers could terminate their relationships with us.

We must  continue  to expand and adapt our  network  infrastructure  to changing
requirements  and increasing  numbers of end users. The expansion and adaptation
of our network  infrastructure will require substantial  financial,  operational
and managerial  resources.  In addition, we depend on improvements being made to
the entire Internet  infrastructure  to alleviate  overloading and congestion of
the  Internet.  The  ability of our network to continue to connect and manage an
expanding  number of  customers,  end users and  messages  at high  transmission
speeds is unproven and uncertain. We face risks related to our network's and the
Internet's ability to operate with higher use levels while maintaining expected
performance  levels.  To manage any further  growth,  we will need to improve or
replace our existing operational, customer service and financial systems as well
as our procedures and controls.


Although we are a leading global provider in our particular field of outsourced,
email, we are a relatively small competitor in the electronic messaging industry
as a whole. As a result,  we may not have the resources to adapt to the changing
technological   requirements  and  the  shifting  consumer  preferences  of  our
industry.

The Internet messaging industry is characterized by rapid technological  change,
changes in end user  requirements  and  preferences,  and the  emergence  of new
industry  standards  and practices  that could render our existing  services and
proprietary technology obsolete. Our success depends, in part, on our ability to
continually enhance our existing email and messaging services and to develop new
services,  functions and technology that address the increasingly  sophisticated
and varied needs of our  prospective  customers.  The development of proprietary
technology and necessary service enhancements entails significant  technical and
business risks and requires substantial  expenditures and lead-time.  We may not
be able to keep pace with the latest technological  developments.  We may not be
able to use new  technologies  effectively  or adapt our services to customer or
end user requirements or emerging industry  standards.  Also, we must be able to
act more quickly than our competition.


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

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


                                                                              10

<PAGE>

We rely on the integrity of our network  security,  which may be  susceptible to
breaches that could harm our reputation and business.

A fundamental  requirement for online  communications is the secure transmission
of confidential  information over public networks.  Third parties may attempt to
breach our  security or that of our  customers.  Despite our  implementation  of
third party encryption technology and network security measures, our servers are
vulnerable to computer  viruses,  physical or  electronic  break-ins and similar
disruptions,  which could lead to interruptions,  delays or loss of data. We may
be liable to our  customers  and their end users for any breach in our security,
including  claims for  impersonation  or other similar fraud claims,  as well as
claims for other misuses of personal  information,  for example for unauthorized
marketing  purposes.   Also,  such  a  breach  could  harm  our  reputation  and
consequently our business. We may also be required to expend significant capital
and other resources to license encryption technology and additional technologies
to protect  against  security  breaches or to alleviate  problems  caused by any
breach.  Our failure to prevent security  breaches could have a material adverse
effect on our business and operating results.

In  addition,  the  Federal  Trade  Commission  and  several  states  have  been
investigating   some  Internet   companies   regarding  their  use  of  personal
information. We could incur additional expenses if new regulations regarding the
use of  personal  information  are  introduced,  if our  privacy  practices  are
investigated  or if our  privacy  policies  are viewed  unfavorably  by users or
potential users.


Investment Risks


We may need additional capital.

We have invested heavily in technology and infrastructure development. We expect
to continue to spend substantial financial and other resources on developing and
introducing  new service  offerings and  maintaining our sales and marketing and
corporate  management  organizations,   strategic  relationships  and  operating
infrastructure.  We also expect to invest substantial  resources in research and
development projects to develop enhanced service provider messaging solutions.

Based  on the  cash  balance  at  March  31,  2001  of  $13.3  million,  current
projections  of  revenues,  related  expenses,  the  ability to further  curtail
certain discretionary  expenses, in accordance with a board approved contingency
plan,  and  a  potential  funding  capability  under  the  current  equity  line
arrangement or other equity arrangement,  the Company believes it has sufficient
cash to continue  operations  for at least the next twelve months.  However,  to
continue  funding  developments of its software  products,  the company needs to
raise at least $5  million  of  additional  cash by  issuing  equity  under  its
existing equity line  arrangement,  and/or the Company needs to seek alternative
sources of capital.  Accordingly,  the Board of Directors  has retained  William
Blair & Company to render  investment  banking  services  in  connection  with a
possible private placement of the Company's equity securities.


We are  subject  to several  pending  lawsuits  the  outcome of 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 directors,  alleging violations of the antifraud  provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
While we are unable to predict the  ultimate  outcome of these claims we believe
they are without merit and intend to vigorously defend ourselves.


If we cannot  satisfy  Nasdaq's  maintenance  requirements,  it may  delist  our
ordinary  shares and we may not have an active  public  market for our  ordinary
shares, which would likely make our shares an illiquid investment.

Our ordinary shares are quoted on the Nasdaq National Market Market. To continue
to be listed, our shares must have a minimum bid price of $1.00 per share, among
other requirements.  Recently,  from time to time, our shares have had a minimum
bid price of less  than  $1.00 per  share.  Consequently,  we may not be able to
satisfy the Nasdaq listing  requirement in  the future. If this occurs,  trading


                                                                              11

<PAGE>

in the 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.

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 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
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  own over five percent of our ordinary
shares, beneficially own, in the aggregate, approximately 25% of our outstanding
ordinary  shares.  If they vote  together,  these  shareholders  will be able to
exercise significant  influence over all matters requiring shareholder approval,
including  the  election of  directors  and  approval of  significant  corporate
transactions.  This  concentration  of  ownership  could also delay or prevent a
change in control of Commtouch.

Jan Eddy,  the President  and Chief  Executive  Officer of Wingra  Technologies,
beneficially owns approximately 5% of our outstanding  ordinary shares issued to
her in connection  with our  acquisition of Wingra  Technologies on November 24,
2000.

InfoSpace beneficially owns approximately 5% of our 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.
The warrant is non-forfeitable,  fully vested and immediately  exercisable,  and
will expire in July 2004.  Assuming  exercise of the InfoSpace  warrant on a net
issuance basis, the warrant currently has no impact on beneficial ownership,  as
the warrant is currently underwater.

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


                                                                              12

<PAGE>

     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 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 will
be eligible for resale at various dates in the future.

As  previously  mentioned,  we have an agreement to issue equity under an equity
line agreement with Torneaux,  an  institutional  investor.  The shares we issue
under this agreement will dilute existing shareholders.

On  November  24,  2000  the  company   announced  its   acquisition  of  Wingra
Technologies for a purchase price of 1.29 million Commtouch  ordinary shares and
0.3 million fully vested Commtouch options and warrants. The Company is required
to register these shares and intends to file a registration  statement  shortly.
Upon  effectiveness of the  registration,  the shares can be freely traded which
could adversely impact our share price.


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

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


We may have liability for email content.

As a provider of email  services,  we face potential  liability for  defamation,
negligence,  copyright,  patent or trademark infringement and other claims based
on the nature and content of the materials  transmitted via email. We do not and
cannot  screen  all  of  the  content  generated  by  end  users.  Some  foreign
governments,  such  as  the  government  of  Germany,  have  enforced  laws  and
regulations  related  to  content  distributed  over  the Internet that are more


                                                                              13

<PAGE>

strict than those  currently in place in the United  States.  Any  imposition of
liability  could  damage our  reputation  and hurt our  business  and  operating
results, or could result in criminal penalties.


Governmental  regulation and legal  uncertainties could impair the growth of the
Internet  and  decrease  demand for our  services or increase  our cost of doing
business.

There are currently few laws and regulations directly applicable to the Internet
and  commercial  email  services.  However,  a number of laws have been proposed
involving  the  Internet,  including  laws  addressing  user  privacy,  pricing,
content, copyright,  antitrust,  distribution and characteristics and quality of
products and services.  Further,  the growth and  development  of the market for
email may prompt  calls for more  stringent  consumer  protection  laws that may
impose additional burdens on companies conducting business online. Moreover, the
applicability  to  the  Internet  of  existing  laws  in  various  jurisdictions
governing issues such as property  ownership,  sales and other taxes,  libel and
personal  privacy is  uncertain  and may take years to resolve.  The adoption of
additional  laws  or  regulations,  or  the  application  of  existing  laws  or
regulations to the Internet, may impair the growth of the Internet or commercial
online  services.  This could  decrease the demand for our services and increase
our  cost of doing  business,  or  otherwise  harm our  business  and  operating
results.

Due to  the  global  nature  of the  Web,  it is  possible  that,  although  our
transmissions currently originate in California, the governments of other states
or foreign  countries might attempt to regulate our  transmissions or levy sales
or other taxes relating to our activities. The European Union previously adopted
a directive  addressing data privacy that may result in limits on the collection
and use of user information.

On October 20,  1999,  The  Federal  Trade  Commission  issued the final rule to
implement the Children's  Online Privacy  Protection Act of 1998 ("COPPA").  The
main goal of the COPPA and the rule is to protect the privacy of children  using
the  Internet.  As of April 21,  2000,  certain  commercial  websites and online
services directed to, or that knowingly collect  information from, children must
obtain  parental  consent  before  collecting,  using,  or  disclosing  personal
information  from  children  under 13. The COPPA  regulations  could  reduce our
ability to engage in direct marketing. The cost to the Company of complying with
the new  requirements is not known and such cost may have a material effect upon
operating results or financial condition.


Risks Relating to Operations in Israel

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

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

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


                                                                              14

<PAGE>

Since the establishment of the State of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries.
Although Israel has entered into various  agreements with certain Arab countries
and the  Palestinian  Authority,  and various  declarations  have been signed in
connection  with efforts to resolve some of the economic and political  problems
in the Middle East, we cannot  predict  whether or in what manner these problems
will be resolved.


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

In addition,  certain of our officers and employees  are currently  obligated to
perform  annual  reserve  duty in the Israel  Defense  Forces and are subject to
being  called for  active  military  duty at any time.  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 are  generated in U.S.  dollars,
while a significant portion of our expenses are incurred in New Israeli Shekels,
our results of  operations  may be adversely  affected by inflation and currency
fluctuations.

We generate a  substantial  portion of our revenues in U.S.  dollars but incur a
significant portion of our expenses,  principally salaries and related personnel
expenses,  in New Israeli Shekels,  commonly referred to as NIS. As a result, we
are  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.  While in recent years the
rate of  devaluation  of the NIS against the dollar has  generally  exceeded the
rate of inflation,  which is a reversal from prior years, we cannot be sure 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
OCS, for the financing of a significant  portion of our research and development
expenditures  in Israel.  In 2000 we applied  for  additional  grants and we may
apply for  additional  grants in the future.  In 1998,  1999 and 2000 we did not
receive any grants from the OCS and we expect the percentage of our research and
development  expenditures financed from OCS grants will continue to remain quite
low.  The OCS  budget  has been  subject  to  reductions  which may  affect  the
availability  of funds for these 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 make  royalty  payments to the OCS on the revenue  derived from the
sale of products,  technologies and services  developed with grants from the OCS
unless such research and development projects are unsuccessful.

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  or  similar   arrangements   for  those   products  or
technologies,  without OCS approval.  We cannot be certain that the approvals of



                                                                              15

<PAGE>

the OCS will be obtained on terms that are acceptable to us. In connection  with
our grant applications, we have made representations and covenants with 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
thereafter.


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 significant portion of our research and development efforts. The portion of
our income derived from our approved  enterprise program will be exempt from tax
for a limited period  commencing in the first year in which have taxable income,
and will be subject to a reduced  tax for an  additional  period.  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.  From  time to time,  the  Government  of  Israel  has
discussed  reducing or  eliminating  the benefits  available  under the approved
enterprise  program. It is possible that these tax benefits may not be continued
in the future at their current levels or at all.


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

We  are  organized  under  the  laws  of  Israel,  and we  maintain  significant
operations in Israel. Certain of our officers and directors named in this report
reside outside of the United States. Therefore, you might not be able to enforce
any judgment  obtained in the U.S. against us or any of such persons.  You might
not be able to bring  civil  actions  under U.S.  securities  laws if you file a
lawsuit in Israel.  However,  we have been advised by our Israeli  counsel that,
subject to certain limitations, Israeli courts may enforce a final judgment of a
U.S. court for liquidated amounts in civil matters after a hearing in Israel. We
have appointed  Commtouch  Software Inc., our U.S.  subsidiary,  as our agent to
receive service of process in any action against us arising 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.


                                                                              16

<PAGE>

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

On May 4, 2000 a  committee  chaired  by the  Director  General  of the  Israeli
Ministry of Finance,  Avi  Ben-Bassat,  issued a report  recommending a sweeping
reform  in  the  Israeli   system  of  taxation.   The  proposed   reform  would
significantly alter the taxation of individuals, and would also affect corporate
taxation.  In particular,  the proposed reform would reduce,  but not eliminate,
the tax benefits  available to approved  enterprises  such as ours.  The Israeli
cabinet approved the  recommendations  in principle,  but  implementation of the
reform requires  legislation by Israel's Knesset.  In the interim, a new Israeli
government has been formed,  and there are  indications  that the new government
may eliminate  significant  aspects of the proposed reform. We cannot be certain
whether the  proposed  reform  will be adopted,  when it will be adopted or what
form any reform will ultimately take.


The new  Israeli  Companies  Law,  to  which  we are  subject,  has not yet been
interpreted by the courts.

The  new  Israeli  Companies  Law  became  effective  as of  February  1,  2000,
instituting major and  comprehensive  changes to Israeli corporate law. To date,
Israeli courts have not fully reviewed or interpreted  certain important aspects
of the new Israeli Companies Law.  Furthermore,  to date the Israeli Minister of
Justice has promulgated only a portion of the regulations  required to implement
the new  Israeli  Companies  Law.  As a  result,  there  remain  many  questions
concerning the  application  of the law, and  shareholders  instituting  actions
against Israeli companies,  or against their directors,  officers or controlling
shareholders,   may  experience  difficulties,   as  well  as  uncertainties  in
protecting their interests.


Item 4. Information on the Company.


Recent Acquisition

Please refer to Item 18 "Note 4: Wingra Acquisition"


Overview

We are a leading global provider of outsourced email and messaging  solutions to
small,  medium and large  enterprises  and their service  providers,  as well as
internet-centric organizations including web portals and web sites.

Our main  target  customers  include  companies  that  specialize  in  providing
communications  applications  to  enterprises:   ASPs,  ISPs,  telecoms,  CLECs,
wireless carriers, data centers, systems integrators, and IT consultants.

Email and  messaging is complex and  requires  focus to  implement,  deliver and
maintain.  Today's  robust  solutions  include:  the  ability  to  address  both
front-end and back-end requirements,  anytime-anywhere access, and features such
as anti-virus protection, unified messaging, calendaring, group scheduling, file
sharing,  and collaboration.  Technologies for the future are necessitating that
email and messaging adapt and change with the new  innovations.  With outsourced
email and messaging being less expensive to construct and maintain than in-house
"build"  solutions,  and with IT developers and  administrators in short supply,
and companies  needing to focus resources on their area of core  expertise,  the
demand for outsourced  email and messaging has  proliferated in the last several
years. Our flexible technology and economies of scale enable us to provide email
solutions in a cost-effective manner, allowing businesses to achieve significant
economic advantages. As rapid time to market is often critical to our customers,
our reputation for quick deployment is a significant advantage in the outsourced
email and marketing industry. Additionally, we provide comprehensive maintenance
and  administration  of our email  services,  which  eliminates the need for our
customers to undertake the  significant  burden of developing and maintaining an
in-house email system.


                                                                              17

<PAGE>

With 10 years of experience in email and messaging and providing  services in 26
languages in 180 countries, we have proven that our solutions, which utilize the
cost-efficient  Microsoft NT(R)  platform,  are quickly  deliverable,  scalable,
reliable, and integrate well with a variety of communications  applications that
enterprises  view as critical to providing them with a mission  critical service
and competitive advantage in the marketplace.

In addition to providing the  infrastructure  and software for  enterprise-grade
email and messaging solutions, we are also a service-driven  company,  providing
24/7 management for the customer,  either remotely or onsite. We offer a variety
of professional services to enterprises: facilitating the transition from legacy
email and messaging  systems to new, advanced systems (via our subsidiary Wingra
Technologies);  integrating  email  and  messaging  with  such  applications  as
wireless communications,  video and audio communications, and customer relations
management;  and allowing  for unified  communications  in which email,  instant
messaging,   voice,  and  other  data  communications  are  accessible  anytime,
anywhere.

We are  recognized  as one of the few  companies  with the depth and  breadth of
expertise  in email and  messaging.  We  currently  partner  with a  variety  of
organizations. We provide service level agreements (SLAs) for our customers that
use our enterprise-grade email and messaging solutions.


Email & Messaging Industry Background

According to the Computer  Industry  Almanac,  there will be  approximately  490
million  Internet users by year-end 2002, with more than 765 million by year-end
2005. The Almanac  predicts that by 2002, the US will have 1/3 of total Internet
users and the number will decline to 27% at year-end 2005. According to a report
by e-Marketing,  Inc.,  email is by far the most popular  Internet  application,
used by 96% of all active Internet users.  Many industry experts consider email,
the "killer app" of the Internet.

Most industry  analysts  agree that the market for email and messaging is poised
for growth  within the next four years.  According  to IDC,  the number of email
mailboxes  worldwide  will  reach 983  million  by 2005 and the  number of email
messages sent on an average day will be 34.6 million in 2005.

There are a number of  emerging  technologies  that  provide  opportunities  for
further use of email and messaging:  anytime-anywhere  communications  including
further use of wireless, broadband, DSL, and unified communications.

Ovum says 484 million people will make wireless connections by 2005. As a result
short message  service  (SMS) has evolved.  The GSM  Association  states that 15
billion  SMS  messages  were sent  worldwide  via the  global  system for mobile
communications (GSM).

Forrester says that by 2004,  broadband  will reach 52% of online  households in
North  America.  Cable modem and DSL  penetration  will jump from  one-tenth  of
American households to more than half of online US homes in four years.

While  consumers  will  eventually  benefit  from the  advent  of  wireless  and
broadband  technologies,  the first to use anytime/anywhere  email and messaging
are likely to be small,  medium and large  enterprises.  Radicati has  projected
that this  segment of the market will attain  revenue  levels of $4.2 billion in
2004.  Email  and  messaging  will  be  delivered  to  enterprises  directly  by
infrastructure  providers,  and also via channels - the service  providers  that
enterprises  have  traditionally  turned  to  for a  variety  of  communications
applications.

The term  Application  Service Provider (ASP) has steadily emerged over the last
year and a half.  IDC has  indicated  that while the model for the ASP market is
focused on small and mid-sized  enterprises  (SMEs),  larger businesses  figured
more prominently than  anticipated.  Gartner predicts that worldwide ASP service
revenue  will  grow to  $25.3  billion  by the end of  2004.  ASPs  will  become
increasingly  characterized  by focus on industry  verticals in the medium-term,
offering  services geared  primarily  towards the Financial  Services and Public
sectors.  Those  organizations  that are  effective  at  integrating  email  and



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<PAGE>

messaging   with   applications   and  services  can  capitalize  on  a  massive
opportunity.  According  to a  study  conducted  by  Zona  Research,  email  and
messaging  are the  "killer  apps" for ASPs,  accounting  for 60% of the type of
applications used through an ASP.


Commtouch Offerings

We offer  outsourced  anytime-anywhere  email and  messaging  solutions to three
segments of the market:

    Large enterprises and their service providers

         o   Hosted Exchange

                  o     Our carrier-grade  messaging and  collaboration  hosting
                        service  enables small and medium  enterprises and their
                        service   providers   to   create,   store   and   share
                        information,  as well as act on  that  information  with
                        speed and intelligence.

                  o     Our  service  is  built  on  top-quality-hardware.   The
                        Microsoft(R)   Exchange  Hosting  service  includes  the
                        complete management and monitoring of systems, technical
                        support and comes with a 99.5% availability guarantee.

                  o     Our users benefit from McAfee(TM)  virus  protection and
                        spam blocking, full Outlook functionality,  and enhanced
                        Outlook  Web Access as well as public  folders.  Another
                        feature,  xManage(TM),  a  Commtouch  developed,  secure
                        web-based   administration   tool,   is  brandable   for
                        resellers.

                  o     xManage  is a  web-based  service  management  tool that
                        provides enterprises and resellers the ability to enable
                        end-customers   and  users  to   self-administer   their
                        otherwise complex hosted Exchange  environments  without
                        training, support or technical knowledge. xManage is the
                        industry's  leading  tool for  delivering  Total Cost of
                        Ownership  (TCO)  savings  to  corporations,  as well as
                        speed to market and customer value for new Exchange 2000
                        hosting resellers.

                  o     Our  optional  services  include  VPN  (virtual  private
                        network)  support,  a  99.9%  high-availability  Service
                        Level  Agreement  (SLA) and automated mail migration via
                        Exchange Migrator(TM), built by our subsidiary Wingra.

                  o     Our growing list of advanced features that are scheduled
                        to be rolled out during 2001  include  wireless  access,
                        content  filtering  and  policy  management,  as well as
                        unified messaging features.


    Service Providers Targeted at Small and Medium Size Enterprises

         o   Our Service Provider  Solution enables service  providers to easily
             manage the email and messaging  features/services that they in turn
             provide  to  their  end  users,   mainly   small  and  medium  size
             enterprises. Our solution provides:

                  o     Anytime,  anywhere  access  to  accounts  from  standard
                        desktop email clients (e.g. Microsoft Outlook,  Qualcomm
                        Eudora,  or  Netscape   Messenger),   Web  browsers  and
                        wireless devices, such as WAP-enabled mobile phones.

                  o     Message notification on an advanced platform, to pagers,
                        mobile  phones,   instant  messengers  and  other  email
                        addresses.

                  o     Integrated, Web-based applications,  including calendar,
                        task  manager,  contact  center,  notes,  short  message
                        service (SMS), and more.

                  o     Customization  of the  Web  email  client  interface  to
                        extend an organization's brand.

                  o     Multiple language support for a multilingual user base.


                                                                              19

<PAGE>

         o   We also offer  Service  Providers the option to license and install
             our software and  technology,  where  circumstances  allow. In this
             offering,  the  customer  licenses the Service  Provider  Solution,
             installs it in-house,  and offers  messaging and email from its own
             data center facility. Advantages and features include:

                  o     A  complete  software  version of the  Service  Provider
                        Solution,  including  all  advanced  features  mentioned
                        above.

                  o     Complete design of the required architecture for running
                        the Software.

                  o     A dedicated  installation team to install the system and
                        software in a timely and cost effective fashion.

                  o     A pricing model based on an upfront  license fee, and an
                        annual 20% support contract.

                  o     An   optional   24/7   remote   monitoring   and  system
                        administration   function  for  customers  that  require
                        on-going management.


         o   Our Service Provider Solution provides comprehensive administrative
             capabilities

                  o     Our  well-documented  XML APIs (application  programming
                        interface)  allow a service  provider to integrate email
                        administrative  activities  and  customer  data into its
                        current applications and systems.

                  o     Our  domain-level  management gives the service provider
                        the option of delegating  administration to its customer
                        to lower the service provider's support costs.

                  o     Our detailed reports provide  essential  information for
                        billing and usage statistics.

                  o     Our ability to fully secure SSL management  transactions
                        ensure that service provider's data is safe.

                  o     Our Online  Management Center (OMC) provides the service
                        provider with a user-friendly  administration  interface
                        equipped  with a  broad-range  of  account  provisioning
                        functionality, as an alternative to using APIs.


    Internet-centric  organizations (web portals and web sites that provide free
    email and messaging to their customers and site visitors)

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

         o   The  value  of  our  solution  is  increased  by our  provision  of
             additional  services,  such as those  which allow end users to send
             and  receive  voicemail  and pages  from the  emailbox;  access the
             Web-based  emailbox  from an  off-line  client  (such as  Microsoft
             Outlook); and have email forwarded to other addresses.

         o   Our  solutions  are  aimed  at  increasing  the  potential  for our
             customers to generate  revenue by increasing  the  "stickiness"  of
             their websites.  We believe that traffic to our customers' websites
             should increase as end users  frequently visit the website to check
             their email. The benefits of increased website  stickiness  include
             more  frequent  communication  with end  users,  enhanced  customer
             loyalty and the  potential  opportunity  to generate  revenues from
             advertising, direct marketing and e-commerce transactions.


                                                                              20

<PAGE>

Commtouch Strategy For Delivery of Its Core Services

Our  objective  is to be a leading  global  provider  of  outsourced,  email and
messaging  services  to  enterprises  and their  service  providers,  while also
continuing to provide email and messaging to internet-centric  organizations. We
plan to achieve this goal by pursuing the following key strategies:

         o   Partner  with  well-respected  providers  and  resellers of various
             communications applications to small, medium and large enterprises

         o   Leverage our existing  partnerships with  well-respected  providers
             and  resellers of  applications  (e.g.  Exodus,  Intel,  Microsoft,
             Network  Associates)  to do business  with service  providers  that
             effectively sell to small, medium and large enterprises

         o   Utilize  our  subsidiary  Wingra  Technologies  and  its  migration
             expertise to move enterprises from their existing, legacy messaging
             systems  to  new  advanced  systems,  including  those  offered  by
             ourselves.

         o   Maintain our cost-effective technology platform.

                  o     Our proprietary, open and scalable architecture gives us
                        the  flexibility to use servers that provide us with the
                        best   cost-quality    combination   and   to   leverage
                        third-party  hosting  providers.   This  enables  us  to
                        achieve   a   low   service    cost-per-emailbox   while
                        maintaining  a high  level of service  quality.  We will
                        seek to maintain this cost-effective technology platform
                        as we add additional  functionality  and features to our
                        set of solutions.

         o   Provide   outsourced   email  and  messaging   solutions  and  24/7
             management.

         o   License our solutions.


Competitive Landscape

In the market for email and messaging  services,  we primarily  compete directly
with email and messaging service providers,  including  Critical Path,  Easylink
Corporation (formerly Mail.com),  USA.NET, United Messaging and USinteractive as
well as with  companies  that develop and  maintain  in-house  email  solutions.
Openwave, Mirapoint and iPlanet each currently offers email software products to
ISPs, web hosting companies, web portals and corporations.

Numerous small-scale email providers offer low-cost basic services,  but without
scalable systems or value-added functionality.  In the future, telcos, ISPs, web
hosting companies and outsourced application companies may broaden their service
offerings to include outsourced email.

Our subsidiary Wingra  Technologies is an expert at helping  enterprises migrate
from legacy systems to new, advanced email and messaging  solutions.  The Wingra
migration  capability may provide us with a channel  through which we may supply
our advanced  email and  messaging  solutions.  Also,  Wingra  migration  may be
employed by enterprises themselves and/or our competitors.

The level of competition is likely to increase as current  competitors  increase
the  sophistication of their offerings and as new participants enter the market;
conceivably  partnerships,  alliances  and even  mergers  among  once-considered
`competitors' are increasingly plausible.

Many of our current and potential  competitors have longer operating  histories,
larger  customer  bases,   greater  brand  recognition  and  greater  financial,
marketing  and  other  resources  than we do and may  enter  into  strategic  or
commercial  relationships  on more  favorable  terms.  Further,  certain  of our
competitors may offer services at or below cost. In addition,  new  technologies
and the expansion of existing technologies may increase competitive pressures on
us. Increased  competition may result in reduced  operating  margins and loss of
market share.


                                                                              21

<PAGE>

We believe that our solution has the following competitive advantages:

         o   Highly customizable and flexible;

         o   Rapidly deployable;

         o   Availability in 26 languages;

         o   Designed to integrate numerous messaging applications; and

         o   Ability to effectively address multiple market needs.

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


Intellectual Property

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

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

We also intend to continue to  strategically  license  certain  technology  from
third parties,  including our mail server and SSL encryption technology.  In the
future,  if we add  certificate  technology  to  its  systems,  we  may  license
additional  technology from third-party vendors. We cannot be certain that these
third-party content licenses will be available to us on commercially  reasonable
terms or that we will be able to successfully  integrate the technology into our
products and services.  These third-party in-licenses may expose us to increased
risks,  including risks associated with the assimilation of new technology,  the
diversion of resources from the development of our own  proprietary  technology,
and our inability to generate revenues from new technology  sufficient to offset
associated  acquisition  and maintenance  costs.  The inability to obtain any of
these licenses could result in delays in product and service  development  until
equivalent  technology  can be  identified,  licensed and  integrated.  Any such
delays in services could cause our business,  financial  condition and operating
results to suffer.


                                                                              22

<PAGE>

Government Regulation

There are currently few laws and regulations directly applicable to the Internet
and commercial email services.  Examples  include the Children's  Online Privacy
Protection  Act and related  regulations  in the U.S.  and  restrictions  on the
export of personal  data from the European  Community.  However,  it is possible
that a  number  of laws and  regulations  may be  adopted  with  respect  to the
Internet or  commercial  email  services  covering  issues such as user privacy,
pricing,  content,  copyright,  distribution,  antitrust and characteristics and
quality of products and services.  Further,  the growth and  development  of the
market for online email may prompt calls for more stringent consumer  protection
laws that may impose additional burdens on companies conducting business online.
The  adoption of  additional  laws or  regulations  may impair the growth of the
Internet or  commercial  online  services,  which could,  in turn,  decrease the
demand for our products and services and increase our cost of doing business, or
otherwise have a material adverse effect on our business,  operating results and
financial  condition.  Moreover,  the  applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership, sales
and other taxes,  libel and personal  privacy is uncertain and may take years to
resolve.  Any such new  legislation or regulation,  the  application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the application of existing laws and regulations to the Internet could have a
material  adverse  effect  on our  business,  operating  results  and  financial
condition.


Employees

As of  December  31,  2000,  1999 and  1998,  we had 486,  214 and 47  full-time
employees,  respectively.  We  restructured  our business units to further focus
resources,  and on March 31, 2001, we had 210 full-time  employees.  None of our
U.S. employees are covered by a collective bargaining agreement. We believe that
our relations with our employees are good.

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

Description of Property

Our  principal  executive  offices  are  located  at  6  Hazoran  Street,  Poleg
Industrial  Park,  Netanya  42504,   Israel,   where  our  telephone  number  is
011-972-9-863-6888,  and 2029 Stierlin Court,  Mountain View,  California 94043,
where our telephone  number is (650) 864-2000.  During the first quarter of 2001
we closed sales offices in New York,  Miami and England.  All of our  properties
are leased.


                                                                              23

<PAGE>

Item 5. Operating and Financial Review and Prospects.

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

Overview

We are a leading global  provider of outsourced  integrated  Web-based email and
messaging   solutions  to  businesses.   Our  solutions  are  flexible,   highly
customizable  and enable us to satisfy the unique email and  messaging  needs of
our customers worldwide.  Our customers are large and small businesses who offer
our Web-based email through their website to their end users and employees.

Revenue Sources

Service  Fees.  During 2000,  most of our email  service  revenues resulted from
contracts  that required our  customers to pay us either a share of  advertising
revenues  subject  to a minimum  annual  revenue  commitment  or 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.

Prior to 1999,  some of our contracts with customers  provided for email service
fees based solely on a share of banner advertising revenue, recognized only when
such revenues were earned by the customers, with no minimum annual commitment.

Direct  E-marketing.  E-commerce  vendors seek  channels  through which they can
market goods and services. Because of our installed user base and our agreements
with our customers,  we can assist  e-commerce  companies in distributing  their
services to our  customers' end users who have opted to receive offers by email.
We share with our customers the revenues from this direct e-marketing, which are
earned either on a per-message  basis, a referral  basis,  or as a commission on
products  sold.  In the  fourth  quarter  of 1998,  we  began  to  offer  direct
e-marketing  opportunities  to e-commerce  vendors on a test basis.  In 1999, we
recognized  11% of our total revenues from  MyPoints,  a permission  based email
service company.  In 2000, no direct e-marketing  customer provided more the 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 an 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 are
offering  InfoSpace's  end users a private  label email  service,  including our
email,  calendaring and other services.  The services are customized to the look
and feel of InfoSpace's websites.  The terms of this agreement are substantially
the same as our commercial  agreements with other customers  except that we have
agreed to share a materially  greater portion of our  advertising  revenues with
InfoSpace than we are 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



                                                                              24

<PAGE>

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,  is being amortized to operating expenses ratably over the minimum term
of the agreement,  which is one year. Simultaneously with the sale of the shares
in the initial public offering,  we sold 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 customers  who provide us with a large base of potential
end  users.  We may also have to provide  these  customers  with more  favorable
commercial terms than we have previously provided to our customers. The issuance
of in-the-money  warrants and the grant of more favorable terms to customers may
further dilute our  shareholders,  increase our operating loss in the future and
cause our stock price to fall.

Results of Operations

<TABLE>
The following  table sets forth  financial data for the years ended December 31,
1998, 1999 and 2000 (in thousands):
<CAPTION>

                                                                             Year Ended December 31,
                                                                   --------------------------------------------
                                                                     1998              1999              2000
                                                                   --------          --------          --------
<S>                                                                <C>              <C>                <C>
Revenues:

 Email services ................................................   $    389         $   4,251          $ 17,965
 Software license revenues......................................         --                --             1,150
                                                                   --------          --------          --------
   Total revenues ..............................................        389             4,251            19,115
                                                                   --------          --------          --------
Cost of revenues:
 Email services ................................................        569             3,643            11,864
 Software license revenues .....................................         --                --                --
                                                                   --------          --------          --------
   Total cost of revenues ......................................        569             3,643            11,864
                                                                   --------          --------          --------
 Gross profit (loss) ...........................................       (180)              608             7,251
                                                                   --------          --------          --------
Operating expenses:
 Research and development.......................................      1,149             2,942            10,357
 Sales and marketing ...........................................      2,001             7,722            26,585
 General and administrative ....................................        604             4,328            13,621
 In-process research and development............................         --                --             1,280
 Amortization of prepaid marketing expenses ....................         --             3,263             4,508
 Amortization of stock-based employee deferred compensation ....         91             3,436             3,050
                                                                   --------          --------          --------
   Total operating expenses ....................................      3,845            21,691            59,401
                                                                   --------          --------          --------
Operating loss .................................................     (4,025)          (21,083)          (52,150)
 Interest and other income (expenses), net .....................       (326)            1,232             2,870
 Write-off impaired investments.................................         --                --            (5,000)
 Minority interest..............................................         --                --                55
                                                                   --------          --------          --------
Net loss .......................................................   $ (4,351)         $(19,851)         $(54,225)
                                                                   ========          ========          ========
</TABLE>

Comparison of Years Ended December 31, 2000 and 1999

Revenues.  Email service  revenues  increased  323% from $4.3 million in 1999 to
$18.0 million in 2000.  We  recognized  revenue of $1.1 million from the sale of
licenses in 2000.  Revenues  from  MyPoints,  a permission  based email  service
company,  represented  11% of total  revenues  during 1999. In 2000, no customer
accounted for more than 10% of revenues.

Cost of Revenues.  Cost of revenues  increased 226% from $3.6 million in 1999 to
$11.9 million in 2000, due to the increase in contracts  with  customers  during
2000 and the related service provided.  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.  Recently, in light
of the economic  slowdown and a significantly  lower estimate of revenue growth,
we have limited the increase in our hosting  infrastructure  costs.  As revenues
increase  over  current  levels we expect  cost of  revenues  to  decrease  as a
percentage of email service revenues due to economies of scale.


                                                                              25

<PAGE>

Research and Development.  Research and development expenses increased 252% from
$2.9  million in 1999 to $10.4  million in 2000 due to an increase in  personnel
and other related costs. In previous years, we received  royalty-bearing  grants
from the Israeli government, 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  success  of the  related
projects.  We believe that we have no  obligation  for  royalties as the related
projects were unsuccessful. However, the ultimate liability is subject to review
by the Israeli government.

We have recently reduced research and development personnel by eliminating other
than a few core projects  aligned with our strategic  direction.  Based on these
eliminations we expect costs to decline on an absolute basis.

Sales and  Marketing.  Sales and  marketing  expenses  increased  244% from $7.7
million in 1999 to $26.6 million in 2000, due to increased personnel and related
costs, public relations, other marketing expenses and direct sales costs to
support the growth of our email service  revenues.  Recently we have reduced our
sales and  marketing  personnel  in line with  expected  revenue  levels  and to
reflect the  Companies  new  channel  selling and  marketing  focus.  Previously
company personnel were focused on direct sales efforts.

General and Administrative. General and administrative  expenses increased 215%
from  $4.3  million  in  1999  to  $13.6  million  in  2000,  due  primarily  to
substantially  higher personnel and related costs,  facility costs,  higher fees
for outside  professional  services and other costs to support the growth of our
email service revenues.

Amortization  of  Prepaid  Marketing  Expenses.   Our  amortization  of  prepaid
marketing expenses related to the InfoSpace and Microsoft warrants increased 38%
from $3.3 million  for 1999 to $4.5  million  for 2000.  The  prepaid  marketing
expense is being  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 11% from $3.4 million for 1999
to $3.1 million for 2000. The deferred compensation is being amortized using the
sum-of-digits method over the vesting schedule, generally four years.

Interest  and Other  Income  (Expense),  Net.  Our  interest  and  other  income
(expense),  net,  increased  from a net income of $1.2 million for 1999 to a net
income of $2.9 million for 2000,  due  primarily to  increased  interest  income
earned from cash equivalents and marketable securities.

Write-Off  Impaired  Investments.  The Company  invested $7 million in the first
nine months of 2000 in certain Internet centric  businesses 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  businesses,  the Company
believes a portion of these investments are impaired.  Accordingly,  the Company
recorded a charge of $5 million to reflect  impairment  of this asset  below its
recorded cost.

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

Income  Taxes.  As of December 31, 2000, we had  approximately  $38.0 million of
Israeli net operating loss  carry-forwards and $33.6 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 2021.  The  Israeli  net  operating  loss  carry-forwards  have no
expiration date.


                                                                              26

<PAGE>

Comparison of Years Ended December 31, 1999 and 1998

Revenues.  Email service revenues  increased 993% from $0.4 million 1998 to $4.3
million in 1999. One customer,  Excite,  represented 54% of the revenue in 1998.
Revenues from MyPoints,  a permission based email service  company,  represented
11% of total revenues during 1999.

Cost of Revenues.  Cost of revenues  increased 540% from $0.6 million in 1998 to
$3.6 million in 1999,  due to the increase in contracts  with  customers  during
1999 and the related service provided.  Cost of revenues consisted  primarily of
costs  related to Internet data center  services  from a  third-party  provider,
depreciation of equipment, Internet access, personnel and related costs.

Research and Development Costs. Research and development expenses increased 156%
from  $1.1  million  in 1998 to $2.9  million  in  1999  due to an  increase  in
personnel   and  other   related   costs.   In  previous   years,   we  received
royalty-bearing  grants from the Israeli government,  recorded as a reduction of
research and  development  costs.  We have an obligation to pay royalties to the
Israeli  government with a remaining future liability of $0.3 million.  In 1998,
we  transferred  several  key  research  and  development   personnel  into  our
operations  group to support and maintain our newly  developed  Web-based  email
services infrastructure. Costs relating to these personnel were included in cost
of revenues in 1998.

Sales and  Marketing.  Sales and  marketing  expenses  increased  286% from $2.0
million in 1998 to $7.7 million in 1999, due to increased  personnel and related
costs,  public  relations,  other  marketing  expenses and direct sales costs to
support the growth of our email service revenues.

General and Administrative.  General and administrative  expenses increased 617%
from  $0.6  million  in  1998  to  $4.3  million  in  1999,   due  primarily  to
substantially  higher personnel and related costs,  facility costs,  higher fees
for outside  professional  services and other costs to support the growth of our
email service revenues.

Amortization of Prepaid  Marketing  Expenses.  Amortization of prepaid marketing
expenses  related to the  InfoSpace  and  Microsoft  warrants  and totaled  $3.3
million for 1999. The prepaid  marketing  expense is being  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 increased from $0.1 million for 1998 to
$3.4 million for 1999. The deferred  compensation  is being  amortized using the
sum-of-digits method over the vesting schedule, generally four years.

Interest  and Other  Income  (Expense),  Net.  Our  interest  and  other  income
(expense),  net,  increased from a net expense of $0.3 million for 1998 to a net
income of $1.2 million for 1999,  due  primarily to  increased  interest  income
earned from cash equivalents and marketable securities.

Income  Taxes.  As of December 31, 1999, we had  approximately  $22.5 million of
Israeli net operating loss  carry-forwards and $14.2 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 2020.  The  Israeli  net  operating  loss  carry-forwards  have no
expiration date.


                                                                              27

<PAGE>

Quarterly Results of Operations (Unaudited)

The  following  table sets  forth  certain  unaudited  quarterly  statements  of
operations data for the eight quarters ended December 31, 2000. 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,
                                                1999       1999       1999       1999       2000       2000       2000        2000
                                               -------    -------    -------    -------    -------    -------    -------    -------
                                                                                   (in thousands)
                                                                                    (unaudited)
<S>                                            <C>        <C>        <C>        <C>        <C>       <C>        <C>        <C>
Email service revenues .....................   $   346    $   552    $ 1,117    $ 2,236    $ 3,597   $  5,009   $  4,747   $  4,612
Software license revenues...................       --         --         --         --         --         --         500        650
                                               -------    -------    -------    -------    -------    -------    -------    -------
Total revenues..............................       346        552      1,117      2,236      3,597      5,009      5,247      5,262
                                               -------    -------    -------    -------    -------    -------    -------    -------
Cost of email service revenues .............       435        605      1,043      1,560      2,121      2,784      3,025      3,934
Cost of software license revenues...........       --         --         --         --         --         --         --         --
                                               -------    -------    -------    -------    -------    -------    -------    -------
Total cost of revenues......................       435        605      1,043      1,560      2,121      2,784      3,025      3,934
                                               -------    -------    -------    -------    -------    -------    -------    -------
Gross profit (loss) ........................       (89)       (53)        74        676      1,476      2,225      2,222      1,328
                                               -------    -------    -------    -------    -------    -------    -------    -------
Operating expenses:
 Research and development...................       340        510        857      1,235      1,993      2,270      2,561      3,533
 Sales and marketing .......................       608      1,363      2,368      3,383      4,746      6,404      6,337      9,098
 General and administrative ................       617        683      1,345      1,683      2,106      2,576      3,184      5,755
 In-process research and development........       --         --         --         --         --         --         --       1,280
 Amortization of prepaid
   marketing expenses ......................       --         --       1,464      1,799      1,941      1,941        476        150
 Amortization of stock-based
   employee compensation ...................       386      1,013      1,096        941        763        762        763        762
                                               -------    -------    -------    -------    -------    -------    -------    -------
   Total operating expenses ................     1,951      3,569      7,130      9,041     11,549     13,953     13,321     20,578
                                               -------    -------    -------    -------    -------    -------    -------    -------
Operating loss .............................    (2,040)    (3,622)    (7,056)    (8,365)   (10,073)   (11,728)   (11,099)   (19,250)
Interest and other income
 (expenses), net ...........................      (271)         6        577        920        938        931        883        118
Write-off impaired investments.............        --         --         --         --         --         --         --      (5,000)
Minority interest...........................       --         --         --         --         --         --         --          55
                                               -------    -------    -------    -------    -------    -------    -------    -------
Net loss ...................................   $(2,311)   $(3,616)   $(6,479)   $(7,445)   $(9,135)  $(10,797)  $(10,216)  $(24,077)
                                               =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

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 and of email usage;

     o   demand for Web-based email services;

     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 email services;

     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  services by our
         competitors;


                                                                              28

<PAGE>

     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  email  in
         particular.

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

Liquidity and Capital Resources

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

As of December  31, 2000,  we had  approximately  $29.4  million of cash to fund
operations in 2001. In 2000 we utilized  $31.2 million of cash to fund operating
losses,  $19.1  million for  purchasing  property,  plant and equipment and $7.0
million to invest in companies who we had  strategic  alliances  with.  Net cash
provided by financing  activities  was $2.3  million in 2000.  To limit our cash
expenses in 2001 we have  significantly  reduced  staff from 486 at December 31,
2000 to approximately 210 at March 31, 2001, curtailed  discretionary  expenses,
made available for sub-lease excess facilities and limited capital expenditures.
These actions were possible due to a significant  decline in our revenue  growth
due to competitive factors and a slowing economic environment.

On January 23, 2001 we entered into an ordinary  share  purchase  agreement with
Torneaux Fund Ltd., a Bahamian limited liability  company.  Beginning on January
23, 2001 and continuing for 24 months thereafter,  we may in our sole discretion
sell our ordinary shares, par value NIS .05 per share, to Torneaux. The 24-month
period is divided into 18 pricing periods, each consisting of 20 trading days on
the  Nasdaq  National  Market  or any  other  market  which  is at the  time the
principal  trading market for our ordinary shares.  In addition,  at the time of
each sale, we may issue to Torneaux call options to purchase  ordinary shares up
to a maximum of the same  number of shares to be  purchased  by  Torneaux in the
share issuance,  which expire at the end of the pricing period unless exercised.
We must deliver  shares  purchased in the draw down or on exercise of the option
in two  installments,  one at the end of each  10-day  period  during the 20-day
pricing period, at which time we will receive payment.

Torneaux's purchase price, and consequently the number of shares purchased, will
fluctuate  based  upon the daily  volume  weighted  average  price over a 20-day
trading  period.  In each draw down we will notify Torneaux of the dollar amount
of shares which we will sell, the commencement  date of the pricing period,  and
the  threshold  price  which must be at least $2 or a lower  amount if  mutually
agreed.  The  threshold  price is the  lowest  price  per  share  (less a stated
discount) at which we will issue shares.

In the first quarter of 1999, we issued Series C Convertible Preferred Shares to
investors  resulting in net proceeds of $5.3 million.  In the second  quarter of
1999, we issued to investors Convertible  Promissory Notes which later converted
into 42,081 Series D Convertible Preferred Shares,  resulting in net proceeds of
approximately   $13.2  million.   All  of  our  convertible   preferred   shares
automatically  converted  into  ordinary  shares upon the closing of our initial
public offering on July 16, 1999. On July 16, 1999, we raised $70.8 million, net
of underwriters  commissions,  from our initial public  offering  (including the
exercise of the underwriters' overallotment option) and the private placement of
our ordinary shares in connection with the strategic  partnership with InfoSpace
and Vulcan Ventures.  On December 29, 1999 we raised an additional $20.0 million
from the sale of ordinary shares to Microsoft Corporation upon the exercise of a
warrant issued in connection with an email services agreement with Microsoft.


                                                                              29

<PAGE>

No  additional  amounts  were  raised,  received or borrowed  during 2000 except
proceeds  received from the issuance of shares  related to the exercise of stock
options and receipt of funds from an investor in Commtouch Japan. As of December
31, 2000, we had $20.8 million in cash and cash  equivalents and $8.6 million in
marketable securities.

As of December 31, 2000, we had net working capital of $23.8 million.

Based  on the  cash  balance  at  March  31,  2001  of  $13.3  million,  current
projections  of  revenues,  related  expenses,  the  ability to further  curtail
certain discretionary  expenses, in accordance with a board approved contingency
plan,  and  a  potential  funding  capability  under  the  current  equity  line
arrangement or other equity arrangement,  the Company believes it has sufficient
cash to continue  operations  for at least the next twelve months.  However,  to
continue  funding  developments of its software  products,  the company needs to
raise at least $5  million  of  additional  cash by  issuing  equity  under  its
existing equity line  arrangement,  and/or the Company needs to seek alternative
sources of capital.  Accordingly,  the Board of Directors  has retained  William
Blair & Company to render  investment  banking  services  in  connection  with a
possible private placement of the Company's equity securities.


Effective Corporate Tax Rates

Our tax  rate  will  reflect  a mix of the U.S.  statutory  tax rate on our U.S.
income and the  Israeli  tax rate  discussed  below.  We expect that most of our
taxable  income will be generated in Israel.  Israeli  companies  are  generally
subject to corporate tax at the rate of 36% of taxable  income.  The majority of
our income,  however,  is derived from our company's capital  investment program
with Approved  Enterprise  status under the Law for the Encouragement of Capital
Investments in 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  2000,  we have not yet
used the tax benefits for which we are eligible.

Impact of Inflation and Currency Fluctuations

Mostof our sales are in U.S.  dollars.  However,  a  significant  portion of our
costs  relates  to our  operations  in  Israel.  A  substantial  portion  of our
operating  expenses,   primarily  our  research  and  development  expenses,  is
denominated in NIS. 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.  We might  also be  affected  by the  dollar  exchange  rate to the  major
European  and Asian  currencies,  due to the fact that we derive  revenues  from
customers in Europe and Asia.

The annual rate of inflation in Israel was 0% in 2000,  1.3% in 1999 and 8.6% in
1998. The NIS was devalued  against the U.S.  dollar by  approximately  -2.7% in
2000, 0.17% in 1999 and 17.6% in 1998. The  representative  dollar exchange rate
for converting the NIS to U.S. dollars,  as reported by the Bank of Israel,  was
NIS 4.041 for one U.S. dollar on December 31, 2000. Note that the representative
dollar exchange rate was NIS 4.192 at April 1, 2001.

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 in current operations.


                                                                              30

<PAGE>

Item 6. Directors, Senior Management and Employees

The  following  table sets forth  certain  information  regarding  our executive
officers and directors at May 1, 2001:
<TABLE>
<CAPTION>
                                Beneficial
                                Ownership
Name                       Age  >1%(3)                         Position
----                       ---  ---------                      --------
<S>                         <C>   <C>               <C>
Allan Barkat(1) ........... 41    4.6%              Director
Amir Lev .................. 41    3.3%              President, Chief Technology Officer and Director
Carolyn Chin............... 53     --               Chairman of the Board of Directors
Elton King................. 54     --               Director
Gideon Mantel(1) .......... 41    3.0%              Chief Executive Officer and Director
Nahum Sharfman(1) ......... 53    2.2%              Director
Richard Sorkin ............ 39     --               Director
Sunil Bhardwaj ............ 45     --               Chief Financial Officer
Thomas Calandra(2) ........ 44     --               Director
Thomas Camp(2) ............ 37    5.4%              Director
Yair Safrai(2) ............ 42    2.3%              Director
<FN>
------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(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  March
    31, 2001. Unless otherwise indicated,  to the Company's knowledge the person
    named  has sole  voting  and  investment  power,  or  shares  voting  and/or
    investment  power  with such  person's  spouse,  with  respect to all shares
    beneficially owned by that person.
</FN>
</TABLE>

Other Management Employees:

The  following  table sets  forth the names and  positions  of other  management
employees:

Name                  Age                      Position
----                  ---                      --------
Aviel Tenenbaum......  37  Vice President, Asia Pacific
Avner Amram..........  38  Senior Vice President, Operations, Commtouch Inc.
Eliezer Parnafes.....  35  Vice President, Finance and IR, Commtouch Ltd.
Griffin Palmer.......  46  Vice President, North American Sales, Commtouch, Inc.
Jan Eddy.............  51  President, Wingra Technologies Inc.
Ronni Zahavi.........  33  Vice President, Human Resources

Allan  Barkat has served as a Director of  Commtouch  since  February  1996.  In
addition,  Mr.  Barkat  served as Chairman of the Board of Directors  from April
1999 to April  2001.  From  June  1999 to the  present,  Mr.  Barkat  has been a
Managing  Director of Apax Partner Ventures Israel,  Ltd. From March 1997 to the
present,  Mr. Barkat has been a Managing Director of Apax-Leumi  Partners,  Ltd.
the investment advisor to Israel Growth Fund, LP, a  technology-focused  venture
capital fund. From January 1995 to March 1997, Mr. Barkat served as an Assistant
Director of Apax-Leumi  Partners  Ltd.  From 1992 to 1994,  Mr. Barkat served as
Vice  President  of  Marketing  & Sales of DSP  Communications  Group,  Inc.,  a
wireless  semiconductor  company.  Mr.  Barkat has also  served as a director of
Fundtech  Ltd.  and  Ceragon  Networks.  Mr.  Barkat  received a B.Sc.  from the
Technion,  Haifa and has  completed  an Executive  MBA from the  Kellog-Recanati
program.

Amir Lev is a  co-founder  of Commtouch  and has served as its Chief  Technology
Officer and as a Director since its inception in 1991. Mr. Lev has also been the
General  Manager of  Commtouch  since  January  1997 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.


                                                                              31

<PAGE>

Elton King joined the  Commtouch  Board of Directors in October  2000.  Mr. King
brings extensive experience in the telecommunications  industry to the Commtouch
Board.  At BellSouth,  Mr. King served as the Group  president of  35,000-person
strong  Network  and  Carrier   Services  and  was  responsible  for  marketing,
provisioning and maintaining network products and services to telecommunications
providers  including  BellSouth  Telecommunications,  Inc.'s Customer Operations
Units, long distance carriers and CLECs (competitive  local exchange  carriers).
Mr.  King  was a member  of the  executive  committee  and  board  of  BellSouth
Telecommunications,  Inc.,  and is currently a member of the boards of directors
for Cleco Corporation,  Hibernia Corporation and Hibernia National Bank where he
serves  on  the  executive  committee,  audit  committee,  chairman-compensation
committee  and  governance  committee.  Mr.  King  has held  numerous  community
affiliated  positions including chairman of the New Orleans and the River Region
Chamber of Commerce, chairman of the Economic Development Council of New Orleans
and the River  region,  chairman  Unit 1 for United  Way,  and  chairman  of the
Greater New Orleans U.S. Savings Bonds Campaign.

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  stepped down
as Chief  Executive  Officer to become a founder of  Dealtime.com.  Mr. Sharfman
remained  Chairman of the Board of Commtouch  until he resigned in 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, 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.

Sunil Bhardwaj joined Commtouch as Chief Financial Officer in December 2000. Mr.
Bhardwaj  has over 25 years of senior  financial  experience,  most  recently as
Chief Financial Officer of Consolidated Freightways Corporation where he advised
the company on acquisitions, negotiated deals and worked on refinancing lines of
credit.  He previously held positions as assistant  controller,  Vice President,
Internal Control and Treasurer. Mr. Bhardwaj's prior experience also includes 14
years in public  accounting,  most  recently at Arthur  Andersen & Company.  Mr.
Bhardwaj  holds a Bachelor  degree in accounting and finance from the University
of Delhi.

Thomas  Calandra  has served as a Director of  Commtouch  since April 2000.  Mr.
Calandra has served as Editor-in-Chief and Executive Vice President of News, CBS
MarketWatch.com  (MKTW),  since  October  1997.  He is also  editor-in-chief  of
Financial  Times  MarketWatch  in London.  From March 1996 to October 1997,  Mr.
Calandra  was Editor-in-Chief and Vice  President  of News at Data  Broadcasting
(DBCC), the predecessor to CBS MarketWatch. From December 1993 to February 1996,
Mr.  Calandra  was editor of USA  Today's  Online  Money  Section and editor and
financial  reporter at Bloomberg  London.  Mr. Calandra received a B.A. from the
City  University of New York at Brooklyn  College and a M.A. in English from the
University of Arizona.


                                                                              32

<PAGE>

Thomas Camp has served as a Director of Commtouch since July 1999. Since October
2000, Mr. Camp has served as Senior Vice  President,  Business  Development,  at
InfoSpace, a global provider of private label hosted software and infrastructure
services on wireless,  broadband and  narrowband  platforms.  From April 1999 to
October  2000,  Mr.  Camp served as Vice  President,  Business  Development,  at
Go2Net, a network of branded,  technology and community  driven websites,  which
merged with InfoSpace in October 2000. From September 1990 to April 1999, he was
an attorney with the law firm of Hutchins, Wheeler & Dittmar, most recently as a
stockholder.  Mr. Camp received a B.A.  from Tufts  University,  an M.B.A.  from
Boston College  Graduate School of Management and a J.D. from Boston College Law
School.  Go2Net and Vulcan Ventures  Incorporated entered into an agreement with
us in which they purchased shares and received a warrant to purchase  additional
shares.  Under that  agreement,  they have the right to name one director to our
board, as long as they continue to hold at least 25% of their combined number of
shares and the shares available to Go2Net upon exercise of the warrant. Mr. Camp
was appointed to the board pursuant to that  agreement.  In connection  with the
merger of Go2Net and InfoSpace,  Go2Net's shares, warrants and rights under that
agreement were assumed by InfoSpace.

Yair Safrai has served as a Director  of  Commtouch  since  January  1999.  From
September  1996 to the present,  Mr.  Safrai has served as a General  Partner of
Concord Ventures, a  technology-focused  venture capital fund. From July 1994 to
September  1996,  Mr.  Safrai  served as Vice  President of Nitzanim,  a venture
capital fund.  Mr. Safrai  received a B.A. in Management  and Economics from Tel
Aviv University, an M.A. from the University of Pennsylvania, and an M.B.A. from
the Wharton Business School, University of Pennsylvania.

Aviel Tenenbaum has served as Vice President of Asia Pacific Sales for Commtouch
Software Ltd. since July 2000.  Mr.  Tenenbaum has 10 years of experience in the
IT industry in management,  international  business  development and sales.  His
background includes: CEO of the largest portal in Israel; founder and CEO of two
start-up  technology  companies,  in the  fields  of  messaging,  ecommerce  and
electronic content. Mr. Tenenbaum served as a captain in the Israeli army, where
he  gained  extensive  experience  in  macro  economic  analysis  and  long-term
assessments  on  global  subjects.  Mr.  Tenenbaum  holds  an MBA  in  Marketing
Management  and Global  Business  Studies from Tel Aviv  University  and a BA in
Economics and East Asian Studies from the Hebrew University in Jerusalem.

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

Eliezer Parnafes has served as Vice President of Finance & Investor Relations of
Commtouch,  Ltd.  since  September  2000.  From June 1996 to  August  2000,  Mr.
Parnafes  was Chief  Financial  Officer  and Vice  President  of Finance for The
Payton Group, a public Israeli High-Tech concern with operations in Israel, USA,
Taiwan and India.  From June 1994 to May 1996,  Mr.  Parnafes was controller for
The Payton Group.  Prior to June 1994, Mr.  Parnafes  obtained  experience  with
various  public  accounting  firms.  Mr.  Parnafes  holds an MBA from the Hebrew
University in Jerusalem in addition to a Bachelor of Academics in Accounting and
Economy. Mr. Parnafes is a Certified Public Accountant.

Griffin Palmer has served as Vice  President of Sales & Business  Development of
Commtouch,  Inc. since September 2000. Before joining Commtouch,  Mr. Palmer was
Vice President of Sales at High End Systems in Austin,  Texas. His experience in
the automated electronics and imbedded software business helped High End acquire
other industry leaders in the control  software  platform space and successfully
develop  distributor  and dealer  channels  through  which he more than  tripled
annual  revenues.  Mr.  Palmer  opened sales offices for High End Systems in six
locations including Los Angeles,  Miami, Orlando,  Toronto, New York and London.
Prior  to his role at High End  Systems,  Mr.  Palmer  was the  Chief  Executive
Officer and owner of Core Systems, a technical integration firm.


                                                                              33

<PAGE>

Jan Eddy has served as President of Wingra  Technologies  Inc.  since 1991.  Ms.
Eddy has over 25 years of experience in the computer  software  industry in both
public and private sectors. Prior to acquiring Wingra in 1991, she was president
of Office Solutions,  Inc., a PC software  development company listed in the INC
500,  which  she sold to a public  corporation.  Her  software  engineering,  IT
management, and entrepreneurial skills provide a unique blend of perspectives as
she manages Wingra's  strategic business  operations.  Ms. Eddy is involved with
economic development,  entrepreneurial,  and technology related activities,  and
holds various directorships.

Ronni  Zahavi  has  served  as  a  Vice  President Human Resources for Commtouch
Software  Ltd.  since  July  1999.  From  June 1997 to July 1999, Mr. Zehavi was
Human  Resources and Training Manager at Mondex -- Electronic Cash, a subsidiary
of  Mastercard  International.  From  January  1994  to  June  1997,  he  was an
organizational  consultant. Mr. Zehavi received his BA in Educational Psychology
and  History  from  Tel Aviv University, and received his M.A. in Organizational
Sociology from Bar-Ilan University.

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 annual general  meeting or
general  meeting at which such  Director is elected and until his  successor  is
elected or until he is removed. An annual general meeting shall be held at least
once in every  calendar  year,  but not more than fifteen  months after the last
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 as aforesaid,
the Board of Directors may appoint new directors  temporarily  to fill vacancies
on the Board of Directors.  The Articles of Association  of Commtouch  authorize
ten directors or such greater  number as may be determined  from time to time by
an ordinary  resolution of the shareholders.  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
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 new Israeli  Companies Law, which took effect on February 1, 2000,  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.


                                                                              34

<PAGE>

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, as that term is defined in the Companies
         Law, 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.

However,  regulations  under the new Companies  Law relating to foreign  private
issuers  include  provisions  allowing  for  directors  appointed  prior  to the
effective  date of such Law to act as  outside  directors  without  the need for
shareholder approval, provided they meet certain criteria.

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. 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 our  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. An audit committee may
not approve an action or a transaction with a controlling  shareholder,  or with
an office  holder,  unless at the time of  approval  two outside  directors  are
serving  as  members  of the audit  committee  and at least  one of the  outside
directors was present at the meeting in which an approval was granted.

Internal Auditor

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.  During 2000,
the Company appointed a qualified internal auditor.


                                                                              35

<PAGE>

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

The Israeli  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 Israeli  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 Israeli  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  Israeli  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.


                                                                              36

<PAGE>

Under the Israeli  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,  voting in 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
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 Israeli
Companies Law does not describe the substance of this duty.

Compensation Committee Interlocks and Insider Participation

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

Conflicts of interest may arise as a consequence of the  relationship  of one of
our directors,  Thomas Camp,  with  InfoSpace,  including  conflicts  related to
corporate  opportunities  that could be  pursued  by us, on the one hand,  or by
InfoSpace  or their  affiliates,  on the other  hand,  or  conflicts  related to
existing or new  contractual  relationships  between us, on the one hand,  or by
InfoSpace or their affiliates,  on the other hand.  Transactions  between us and
our officers and directors,  and extraordinary  transactions  between us and our
principal  shareholders  or a  third  party  if a  principal  shareholder  has a
personal  interest  in such  transaction  generally  require  the  approval of a
majority of the board of directors,  including a majority of the independent and
disinterested outside directors, and in some circumstances,  audit committee and
shareholder approvals as well (See "Approval of Certain Transactions").

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 new  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.

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 at a general meeting. 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.


                                                                              37

<PAGE>

The  aggregate  direct  remuneration  paid by  Commtouch  to all  directors  and
executive officers (11 persons) in 2000 was approximately  $543,000.  During the
same period Commtouch  accrued or set aside  approximately  $28,000 for the same
group to provide  pension,  retirement or similar  benefits.  As of December 31,
2000,  directors  and  executive  officers of Commtouch  (11 persons) held stock
options to purchase an aggregate of 825,080 ordinary shares.

Options to Purchase Securities from Registrant or Subsidiaries.

As of March 31, 2001,  stock options to purchase  3,621,933  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  2,476,919 had not been  exercised and had exercise  prices  ranging
from $0.01 to $66.50 per share and a weighted  average per share  exercise price
of $19.51,  and were held by 332 persons;  these options have termination  dates
ranging  from April 2005 to May 2011.  At March 31, 2001,  the persons  named in
Item 6 as a group (11 persons) held options to acquire 795,080  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 March 31, 2001:

     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 and investment power 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 with respect to all shares  beneficially  owned. The
applicable  percentage of ownership for each  shareholder is based on 16,970,584
ordinary  shares  outstanding  as of March 31,  2001  (Note  that the  InfoSpace
warrant of 1,136,000  shares is  underwater  based the market price on March 31,
2001 and an exercise  price of $12.80 per share,  as such the  warrants  have no
impact on the percentage of ownership  computation).  Ordinary  shares  issuable
upon  exercise  of  options  and other  rights  beneficially  owned  are  deemed
outstanding for the purpose of computing the percentage  ownership of the person
holding  those  options and other  rights,  but are not deemed  outstanding  for
computing the percentage ownership of any other person.


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


Thomas Camp (InfoSpace)(1)                               911,682    5.37%
Jan Eddy (President: Wingra Technologies Inc.)           881,947    5.20%
All directors and officers as a group (11 persons)     3,590,208   20.85%


(1) Mr. Camp,  who is a director of the Company,  is the Senior Vice  President,
Business  Development at InfoSpace,  and as such, may be deemed to  beneficially
own such shares.  Mr. Camp disclaims  beneficial  ownership of all such ordinary
shares.


                                                                              38

<PAGE>

Interest of Management in Certain Transactions.

Relationship with InfoSpace

Concurrent with the closing of the initial public offering, our U.S. subsidiary,
Commtouch Inc., entered into a Customized Web-based Email Service Agreement with
InfoSpace.  Under that agreement, we provide customer email services,  including
calendaring and other products and services, to end users of InfoSpace's various
properties,  which may include cable subscribers of Charter  Communications  and
its  affiliates,  users of services  offered by High Speed Access Corp.  and any
browser,  website,  ISP or similar  service that InfoSpace  sponsors or provides
content to. Under the  agreement,  Commtouch  hosts,  serves and  maintains  the
email,  calendaring  and other  services and InfoSpace  sells  advertising to be
displayed in the products and services.  InfoSpace will pay Commtouch a share of
revenues from  advertising  generated from email,  calendaring or other services
and related upgrades provided by Commtouch for InfoSpace's  users. The agreement
between Commtouch and InfoSpace has a three year duration, but InfoSpace has the
right on each  anniversary  to terminate the  agreement.  InfoSpace also has the
right to  terminate  the  agreement  if there are  technical  problems  with the
products or services provided by Commtouch.  The performance  specifications set
forth in the agreement  include requiring us to maintain certain levels of email
system  availability  and  response  time,  as  well  as  technical  support  to
InfoSpace's email end users and to InfoSpace, among other things.

In  connection  with entering into the 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 email
service agreement.

Concurrent with our entering into the email services agreement,  we issued $13.3
million in ordinary  shares to InfoSpace and $6.7 million in 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.  Camp was
appointed  to the board  pursuant to that  agreement.  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.

Preferred Share Financings

Mr. Yair  Safrai,  a director  of  Commtouch,  is a Managing  Partner of Concord
Ventures,  which  manages the  Concord  Funds (as  defined  below).  Pursuant to
Preferred  Share Letter  Agreements  entered into in December  1998 and February
1999,  we issued and sold (i) 41,570 Series C  Convertible  Preferred  Shares to
k.t.  Concord  Venture Fund (Cayman) L.P.,  k.t.  Concord  Venture Fund (Israel)
L.P.,  k.t.  Concord  Venture  Advisors  (Cayman) L.P. and k.t.  Concord Venture
Advisors  (Israel)  L.P.  (the  "Concord  Funds"),  for a  total  investment  of
approximately $3.0 million; (ii) 16,249 Series C Convertible Preferred Shares to
IGF for a total  investment  of  approximately  $1.2  million;  and (iii) 12,779
Series C Convertible Preferred Shares to GIF for approximately $922,000.


                                                                              39

<PAGE>

Option  Exercises  and  Purchases  of  Shares  Subject  to Repurchase By Certain
Officers

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

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 March
31, 2001 is $341,272.

Loan  to  Dr.  Nahum  Sharfman and Relationship among Commtouch and DealTime.com
Ltd.

Dr. Nahum  Sharfman was a co-founder  of Commtouch  and served as a director and
Chairman of the Board of Directors of Commtouch  from  inception  until  January
1999. Dr. Sharfman also served as the Chief Executive Officer of Commtouch until
March 31, 1998. Dr. Sharfman  rejoined the Board as a director in March 2000. On
December  31,  1995,  Commtouch  made a loan  of  approximately  $58,000  to Dr.
Sharfman.  The loan plus linkage to the Israeli Consumer Price Index was to have
been repaid  within three  years,  or within 30 days of the  termination  of Dr.
Sharfman's employment,  if earlier. At December 31, 1998 the outstanding balance
of this loan was approximately $55,000,  payable in NIS. Dr. Sharfman repaid the
loan in the third quarter of 1999.

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

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

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

The  second  agreement,  which  is  between  Commtouch  and  DealTime.com  Ltd.,
confirms  that DealTime.com Ltd. shall be solely responsible for all obligations
of   Commtouch   under   the  Stock  Alert  Agreement.  DealTime.com  Ltd.  also
acknowledges  that  Commtouch  is  the  sole  owner  of  the  Multimedia Desktop
Software  Technology  that  Commtouch  developed  and  that was licensed to News
Alert   Inc.,   and   Commtouch   grants   DealTime.com   Ltd.  a  royalty-free,
non-exclusive,  limited  license  to  use  that  technology  to  provide support
services  under  the Stock Alert Agreement. DealTime.com Ltd. also agreed to pay


                                                                              40

<PAGE>

$50,000  to  Commtouch for all of the services rendered by Commtouch and for the
license  fees  that  DealTime.com Ltd. received under the Stock Alert Agreement,
and  to  divide  any  future  revenues and license fees received under the Stock
Alert  Agreement  equally  with  Commtouch.  Commtouch, for its part, waived any
claim  to  an  equity interest in DealTime.com Ltd., and agreed that it does not
own  intellectual  property  developed by DealTime.com Ltd. other than in breach
of the agreements with DealTime.com Ltd. and Messrs. Sharfman and Ashkenazi.

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

Loan to Amir Lev

Amir Lev has been a  director  and  executive  officer  of  Commtouch  since its
inception in 1991.  In 1999,  Mr. Lev exercised  options for Commtouch  ordinary
shares. We loaned him $364,000 so that he could make an estimated tax payment in
connection  with this option.  This full recourse loan was linked to the Israeli
Consumer  Price Index and interest  accrued at a rate of 2% per annum.  The loan
was repaid in full on February 10, 2000.

Item 8. Financial Information.

See Item 18:  Financial Statements

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  Company's  initial  public
offering price was $16.00 per share.

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)         $ 22.625   $ 11.0625
  Fourth Quarter                                    49.125     14.3125

2000:
  First Quarter                                   $ 66.50    $ 35.5625
  Second Quarter                                    38.5625    14.625
  Third Quarter                                     33.9375    16.50
  October                                           18.9375    11.9375
  November                                          13.8125     7.5625
  December                                           7.25       3.8125

2001:
  January                                         $  4.6875  $  2.00
  February                                           3.625      1.25
  March                                              1.0625     0.75

If the Company decides to distribute a cash dividend out of income that has been
exempted from tax, the income out of which the dividend is  distributed  will be
subject to the 25% Israeli corporate tax rate. 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.


                                                                              41

<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.

                    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.

Proposed Tax Reform

On May 4, 2000,  a  committee  chaired by the  Director  General of the  Israeli
Ministry of Finance,  Avi  Ben-Bassat,  issued a report  recommending a sweeping
reform  in  the  Israeli   system  of  taxation.   The  proposed   reform  would
significantly alter the taxation of individuals, and would also affect corporate
taxation.  In particular,  the proposed reform would reduce,  but not eliminate,
the tax benefits  available to approved  enterprises  such as ours.  The Israeli
cabinet approved the  recommendations  in principle,  but  implementation of the
reform requires  legislation by Israel's Knesset.  In the interim, a new Israeli
government has been formed,  and there are  indications  that the new government
may eliminate  significant aspects of the proposed reform. The Company cannot be
certain whether the proposed reform will be adopted,  when it will be adopted or
what form any reform will ultimately take.

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.


                                                                              42

<PAGE>

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

In addition,  subject to certain  limitations,  depreciation on fixed assets and
loss 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  considered to qualify 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.


                                                                              43

<PAGE>

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

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 15.0% if the dividends are paid
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 25.0% 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 would also  generally be subject to the 15.0% tax rate but 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,
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


                                                                              44

<PAGE>

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,
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 sale of the product  developed in
accordance with the program,  if successful,  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.


                                                                              45

<PAGE>

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 tax
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  participated  in programs  sponsored  by the OCS for the support of
research and development activities.  Through December 31, 2000, the Company had
recorded  grants from OCS  aggregating  $653,000  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  success of the  related  projects.  As of December  31,  2000,  there is no
contingent liabilities for royalties to the OCS.


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. On January 31,  2001,
the Company submitted an application to the OCS. In the application, the Company
described  relevant R&D expenses  for the year 2001  amounting to  approximately
$3.2 million, which would entitle it to funding up to 50% of those expenses upon
approval of the application. The application was approved on May 8, 2001.

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,


                                                                              46

<PAGE>

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
the ordinary share is sold by such U.S. Holder.

Sale or Exchange of Ordinary Shares

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


                                                                              47

<PAGE>

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

Treatment of Dividend Distributions

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

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

Information Reporting and Backup Withholding

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

Tax Status of Commtouch for U.S. Federal Income Tax Purposes

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


                                                                              48

<PAGE>

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-2000
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-2000  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  stock 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 39.6% on its
undistributed personal holding company income (generally limited, in the case of
a foreign corporation, to United States source income).

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


                                                                              49

<PAGE>

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) 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.  However,  a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was  signed in 1994 and,  since  1993,  several  agreements  between  Israel and
Palestinian  representatives  have been signed. In addition,  Israel and several
Arab  States  have  announced  their  intention  to  establish  trade  and other
relations and are discussing  certain projects.  Israel has not entered into any
peace  agreement  with  Syria or  Lebanon,  and  there  have  been  difficulties
accompanied by violence in the negotiations with the Palestinians.  We cannot be
certain as to how the peace process will develop or what effect it may have upon
Commtouch.

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

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

Economic Conditions

Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant  inflation  in the early to  mid-1980s,  low foreign  exchange
reserves,  fluctuations in world commodity prices,  military conflicts and civil


                                                                              50

<PAGE>

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 restrictions on transactions in foreign currency.
These  restrictions  affected our  operations in various ways, and also affected
the right of  non-residents  of Israel to convert into foreign  currency amounts
they received in Israeli  currency,  such as the proceeds of a judgment enforced
in Israel.  Despite these  restrictions,  foreign investors who purchased shares
with foreign currency were able to repatriate in foreign currency both dividends
(after  deduction  of  withholding  tax) and the  proceeds  from the sale of the
shares.  There  are  currently  no  Israeli  currency  control  restrictions  on
remittances of dividends on the ordinary shares or the proceeds from the sale of
the shares;  however,  legislation  remains in effect pursuant to which currency
controls can be imposed by administrative action at any time.

Trade Agreements

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

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

Assistance from the United States

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

Item 11. Qualitative and Quantitative Disclosure about Market Risk.

We develop our  technology  in Israel and provide our services  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.

See Note 10 section b.


                                                                              51

<PAGE>

                                     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. Reserved

Item 16. Reserved



                                    PART III


Item 17. Financial Statements.

The Company has responded to Item 18.

Item 18. Financial Statements


  (a)  (1) 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-6

   (a) (2) Financial Statement Schedule:

The following  financial  statement schedule of Commtouch Software Ltd. for each
of the three years in the period ended December 31, 2000 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.

   (b) Exhibits

  Exhibit 4.1--Consent of Independent Auditors


                         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, 1999 and
2000,  and  the  related  consolidated  statements  of  operations,  changes  in
shareholders' equity (deficiency), and cash flows for each of the three years in
the  period  ended  December  31,  2000.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.


                                                                              52

<PAGE>

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, 1999 and 2000,
and the consolidated  results of their operations and cash flows for each of the
three years in the period ended December 31, 2000, in conformity  with generally
accepted accounting principles in the United States.

Tel-Aviv, Israel
February 14, 2001


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


                                                                             F-1
<PAGE>
OMMTOUCH SOFTWARE LTD.
<TABLE>

                                                       COMMTOUCH SOFTWARE LTD.

                                                     CONSOLIDATED BALANCE SHEETS
                                           (In thousands, except share and per share data)
<CAPTION>

                                                                                                             December 31,
                                                                                                    -------------------------------
                                                                                                      1999                  2000
                                                                                                    ---------             ---------
<S>                                                                                                 <C>                   <C>
Assets
Current Assets:
   Cash and cash equivalents ...........................................................            $  65,996             $  20,831
   Marketable securities ...............................................................               18,050                 8,607
   Trade receivables, net ..............................................................                2,378                 4,355
   Prepaid marketing expenses ..........................................................                4,508                   --
   Prepaid expenses and other accounts receivable ......................................                1,648                 3,626
                                                                                                    ---------             ---------
      Total current assets .............................................................               92,580                37,419
                                                                                                    ---------             ---------
Long-term lease deposits ...............................................................                1,254                 1,440
Severance pay fund .....................................................................                  354                   949
Property and equipment, net ............................................................                6,148                19,417
Long-term investment....................................................................                  --                  2,000
Goodwill and other purchased intangibles, net...........................................                  --                 16,055
                                                                                                    ---------             ---------
                                                                                                    $ 100,336             $  77,280
                                                                                                    =========             =========

Liabilities and Shareholders' Equity
Current Liabilities:
   Bank credit line and current maturities of bank loans and capital leases ............            $     120              $  1,115
   Accounts payable ....................................................................                1,510                 4,205
   Employees and payroll accruals ......................................................                1,032                 3,279
   Deferred revenues ...................................................................                  561                 1,523
   Accrued expenses and other liabilities ..............................................                1,304                 3,529
                                                                                                    ---------             ---------
      Total current liabilities ........................................................                4,527                13,651
                                                                                                    ---------             ---------
   Long-term maturities of bank loans and capital leases................................                   44                   841
   Accrued severance pay ...............................................................                  453                   984
                                                                                                    ---------             ---------
                                                                                                          497                 1,825
                                                                                                    ---------             ---------

   Minority interest....................................................................                  --                     76
                                                                                                    ---------             ---------
Commitments and Contingencies

Shareholders' Equity
   Ordinary Shares, nominal value NIS 0.05 par value-
    Authorized: 40,000,000 shares as of
    December 31, 1999 and 2000; Issued and
    outstanding: 15,199,344 and 16,925,022 shares
    as of December 31, 1999 and 2000, respectively .....................................                  213                   236
   Additional paid-in capital ..........................................................              133,403               150,994
   Deferred stock compensation .........................................................               (5,779)               (2,729)
   Notes receivable from shareholders ..................................................               (1,060)               (1,041)
   Accumulated other comprehensive income ..............................................                   63                    21
   Accumulated deficit .................................................................              (31,528)              (85,753)
                                                                                                    ---------             ---------
      Total shareholders' equity........................................................               95,312                61,728
                                                                                                    ---------             ---------
                                                                                                    $ 100,336             $  77,280
                                                                                                    =========             =========
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>


                                                                             F-2

<PAGE>

<TABLE>
                                                      COMMTOUCH SOFTWARE LTD.

                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                (In thousands, except per share data)
<CAPTION>

                                                                                                    Year ended
                                                                                                   December 31,
                                                                                   ------------------------------------------------
                                                                                     1998                1999                2000
                                                                                   --------            --------            --------
<S>                                                                                <C>                  <C>                <C>
Revenues:
   Email services ......................................................           $    389             $ 4,251            $ 17,965
   Software licenses ...................................................               --                  --                 1,150
                                                                                   --------            --------            --------
      Total revenues ...................................................                389               4,251              19,115
                                                                                   --------            --------            --------
Cost of revenues:
   Email services ......................................................                569               3,643              11,864
   Software licenses ...................................................               --                  --                  --
                                                                                   --------            --------            --------
      Total cost of revenues ...........................................                569               3,643              11,864
                                                                                   --------            --------            --------
Gross profit (loss) ....................................................               (180)                608               7,251
                                                                                   --------            --------            --------
Operating expenses:
   Research and development.............................................              1,149               2,942              10,357
   Sales and marketing .................................................              2,001               7,722              26,585
   General and administrative ..........................................                604               4,328              13,621
   In-process research and development .................................               --                   --                1,280
   Amortization of the prepaid marketing expenses.......................               --                 3,263               4,508
   Amortization of stock-based employee compensation(1).................                 91               3,436               3,050
                                                                                   --------            --------            --------
      Total operating expenses .........................................              3,845              21,691              59,401
                                                                                   --------            --------            --------
Operating loss .........................................................             (4,025)            (21,083)            (52,150)
   Interest and other income (expenses), net ...........................               (326)              1,232               2,870
   Write-off impaired investments.......................................               --                  --                (5,000)
   Minority interest....................................................               --                  --                    55
                                                                                   --------            --------            --------
Net loss ...............................................................           $ (4,351)           $(19,851)           $(54,225)
                                                                                   ========            ========            ========
Basic and diluted net loss per share ...................................           $  (3.00)           $  (2.65)           $  (3.51)
                                                                                   ========            ========            ========
Weighted average number of shares used in computing
 basic and diluted net loss per share ..................................              1,450               7,487              15,462
                                                                                   ========            ========            ========


                                                                                                    Year ended
                                                                                                   December 31,
                                                                                   ------------------------------------------------
                                                                                     1998                1999                2000
                                                                                   --------            --------            --------

(1) Stock-based Employee Compensation Relates to the following:

   Cost of revenues                                                                $   --              $    113            $    102
   Research and development                                                             60                  320                 284
   Sales and marketing                                                                  25                  897                 795
   General and administrative                                                            6                2,106               1,869
                                                                                   --------            --------            --------
           Total                                                                   $    91             $  3,436            $  3,050
                                                                                   ========            ========            ========
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>


                                                                             F-3
<PAGE>

<TABLE>

                                                       COMMTOUCH SOFTWARE LTD.

                                      STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
                                                  (In thousands, except share data)
<CAPTION>


                                                                   Convertible
                                                                 Preferred shares                 Ordinary shares        Additional
                                                           --------------------------      -------------------------      paid-in
                                                             Shares          Amount          Shares         Amount        capital
                                                           ----------      ----------      ----------     ----------     ----------
<S>                                                           <C>           <C>             <C>            <C>           <C>
Balance as of December 31, 1997 .......................       183,637       $      63       1,450,040      $      27     $    6,295
 Issuance of shares, net ..............................        37,628              11            --             --            4,061
 Warrants issued for services received and
  bank line of credit .................................          --              --              --             --              391
 Deferred stock compensation ..........................          --              --              --             --              509
 Amortization of deferred stock compensation ..........          --              --              --             --             --
 Net loss .............................................          --              --              --             --             --
                                                           ----------      ----------      ----------     ----------     ----------
Balance as of December 31, 1998 .......................       221,265              74       1,450,040             27         11,256
 Issuance of shares, net ..............................       134,225              33            --             --           18,417
 Issuance of shares at initial public offering,
  net .................................................          --              --         4,794,086             58         65,948
 Conversion of preferred shares to ordinary
  shares ..............................................      (355,490)           (107)      7,109,800            107           --
 Fair value of warrants issued for services
  and bank line of credit .............................          --              --              --             --            8,131
 Deferred stock compensation ..........................          --              --              --             --            8,797
 Ordinary shares issued for notes .....................          --              --           670,180              8          1,029
 Issuance of shares upon exercise of warrants,
  net .................................................          --              --         1,105,378             12         19,808
 Issuance of shares upon exercise of options ..........          --              --            69,860              1             17
 Amortization of deferred stock compensation ..........          --              --              --             --             --
 Repayment of notes receivable ........................          --              --              --             --             --
 Other comprehensive income-unrealized
  holding gains on marketable securities ..............          --              --              --             --             --
 Net loss .............................................          --              --              --             --             --
 Total comprehensive loss .............................          --              --              --             --             --
                                                           ----------      ----------      ----------     ----------     ----------
Balance as of December 31, 1999 .......................          --              --        15,199,344            213        133,403
 Issuance of shares upon exercise of options ..........          --              --           440,384              6          1,701
 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
  Japan-Note 2i........................................          --              --              --             --            1,090
 Issuance of shares and vested options and warrants
  in consideration of the acquisition of Wingra........          --              --         1,285,294             17         14,800
 Net loss .............................................          --              --              --              --             --
 Total comprehensive loss .............................          --              --              --              --             --
                                                           ----------      ----------      ----------     ----------     ----------
Balance as of December 31, 2000 .......................          --        $     --        16,925,022     $      236     $  150,994
                                                           ==========      ==========      ==========     ==========     ==========
</TABLE>



<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 December 31, 1997 ..........................   $     --         $    (77)     $    --       $  (7,326)       $(1,018)
 Issuance of shares, net .................................         --             --             --            --            4,072
 Warrants issued for services received and
  bank line of credit ....................................         --             --             --            --              391
 Deferred stock compensation .............................         (509)          --             --            --             --
 Amortization of deferred stock compensation .............           91           --             --            --               91
 Net loss ................................................         --             --             --          (4,351)        (4,351)
                                                               --------       --------       --------      --------        -------
Balance as of December 31, 1998 ..........................         (418)           (77)          --         (11,677)          (815)
 Issuance of shares, net .................................         --             --             --            --           18,450
 Issuance of shares at initial public offering,
  net ....................................................         --             --             --            --           66,006
 Conversion of preferred shares to ordinary
  shares .................................................         --             --             --            --             --
 Fair value of warrants issued for services
  and bank line of credit ................................         --             --             --            --            8,131
 Deferred stock compensation .............................       (8,797)          --             --            --             --
 Ordinary shares issued for notes ........................         --           (1,037)          --            --             --
 Issuance of shares upon exercise of warrants,
  net ....................................................         --             --             --            --           19,820
 Issuance of shares upon exercise of options .............         --             --             --            --               18
 Amortization of deferred stock compensation .............        3,436           --             --            --            3,436
 Repayment of notes receivable ...........................         --               54           --            --               54
 Other comprehensive income--unrealized
  holding gains on marketable securities .................         --             --               63          --               63
 Net loss ................................................         --             --             --         (19,851)       (19,851)
                                                                                                                           -------
 Total comprehensive loss ................................         --             --             --            --          (19,788)
                                                               --------       --------       --------      --------        -------
Balance as of December 31, 1999 ..........................       (5,779)        (1,060)            63       (31,528)        95,312
 Issuance of shares upon exercise of options .............         --             --             --            --            1,707
 Amortization of deferred stock 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 of Wingra...........         --             --             --            --           14,817
 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
                                                               ========       ========       ========      ========        ========
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>

                                                                             F-4

<PAGE>

<TABLE>

                                                       COMMTOUCH SOFTWARE LTD.

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (In thousands)
<CAPTION>


                                                                                                     Year Ended
                                                                                                    December 31,
                                                                                    ----------------------------------------------
                                                                                      1998               1999               2000
                                                                                    ---------          ---------         ---------
<S>                                                                                 <C>                <C>               <C>
Cash flows from operating activities:
   Net loss ...............................................................         $  (4,351)         $ (19,851)        $ (54,225)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization .......................................               236              1,706             6,009
      Amortization of stock-based employee deferred
      compensation and warrants issued for services
      received and bank line of credit ....................................               482              3,796             3,050
      Increase in trade receivables, net ..................................               (84)            (2,245)           (1,719)
      Amortization of prepaid marketing expenses ..........................              --                3,263             4,508
      Amortization of in-process research and development..................              --                 --               1,280
      Write-off of impaired investments....................................              --                 --               5,000
      Increase in prepaid expenses and other
       accounts receivable ................................................              (164)            (1,028)           (1,933)
      Increase in accounts payable ........................................                91              1,064             2,142
      Increase in employee and payroll accruals
       and other liabilities ..............................................               128              1,645             4,076
      Increase in deferred revenues .......................................                74                487               656
      Increase (decrease) in accrued severance pay, net ...................                19                (44)              (64)
      Other ...............................................................              --                   (9)               (5)
                                                                                    ---------          ---------         ---------
Net cash used in operating activities .....................................            (3,569)           (11,216)          (31,225)
                                                                                    ---------          ---------         ---------
Cash flows from investing activities:
   Proceeds from sales of marketable securities ...........................              --                  --             18,969
   Purchases of marketable securities .....................................              --              (17,987)           (9,568)
   Purchase of long-term investments.......................................              --                  --             (7,000)
   Long-term lease deposits ...............................................              --               (1,254)             (163)
   Advance to related party ...............................................              --                 (364)               --
   Proceeds from acquisition of Wingra.....................................              --                   --               305
   Proceeds from sale of property and equipment ...........................              --                   13               337
   Purchase of property and equipment .....................................              (442)            (6,938)          (19,102)
                                                                                    ---------          ---------         ---------
Net cash used in investing activities .....................................              (442)           (26,530)          (16,222)
                                                                                    ---------          ---------         ---------
Cash flows from financing activities:
   Short-term bank credit, net ............................................               595             (1,328)              --
   Repayment of note receivable by shareholder ............................              --                   54                19
   Principal payment of capital lease .....................................              (146)              (112)             (610)
   Proceeds from issuance of shares, net ..................................             4,072            104,294             1,707
   Proceeds from minority interest in subsidiary ..........................                --                 --             1,090
   Contribution from minority interest of consolidated subsidiary .........                --                 --                76
                                                                                    ---------          ---------         ---------
Net cash provided by financing activities .................................             4,521            102,908             2,282
                                                                                    ---------          ---------         ---------
Increase (decrease) in cash and cash equivalents ..........................               510             65,162           (45,165)
Cash and cash equivalents at the beginning of the year ....................               324                834            65,996
                                                                                    ---------          ---------         ---------
Cash and cash equivalents at the end of the year ..........................         $     834          $  65,996         $  20,831
                                                                                    =========          =========         =========
Supplemental disclosure of cash flows activity:
   Cash paid during the year:
   Interest ...............................................................         $      97          $     117         $      31
                                                                                    =========          =========         =========
Supplemental disclosure of non-cash activity:
   Capital lease obligations ..............................................         $     328          $    --           $    --
                                                                                    =========          =========         =========
   Ordinary shares issued for notes receivable from
    shareholders ..........................................................         $    --            $   1,037         $    --
                                                                                    =========          =========         =========
   Issuance of Warrants for Prepaid Marketing Expenses ....................         $    --            $   7,771         $    --
                                                                                    =========          =========         =========
The proceeds from the acquisition of Wingra are as follows (in thousands):


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

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

   Cash acquired:                                                     305
                                                                ---------
   Purchase price                                               $  15,146
                                                                =========
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>

                                                                             F-5

<PAGE>
                             COMMTOUCH SOFTWARE LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1: GENERAL

Commtouch  Software  Ltd.  was  incorporated  under  the laws of Israel in 1991.
Unless otherwise  indicated,  all references in these notes to "Commtouch," "the
Company,"  "we,"  "us" or  "our"  are to  Commtouch  Software  Ltd.  or/and  its
wholly-owned and  majority-owned  subsidiaries,  Commtouch Inc.,  Commtouch (UK)
Ltd,  Commtouch Latin America Inc., Wingra  Technologies Inc. and Commtouch K.K.
(Japan).  We are a leading global  provider of outsourced  integrated  Web-based
email and messaging solutions to businesses.  Our solutions are flexible, highly
customizable  and enable us to satisfy the unique email and  messaging  needs of
our customers worldwide.  Our customers are large and small businesses who offer
our  Web-based  email  through  their  website to their end users.  The  Company
generates  revenues by providing email services to its customers.  Email service
revenues are derived from contracts that provide for either a monthly  per-email
box fee and fees for direct marketing and communications  services or a share of
advertising  revenues  subject  to  a  minimum  annual  revenue  commitment.  In
September  2000,  the Company began to derive  revenue from the sale of software
licenses to enterprises.

During 2000,  no single  customer  accounted  for more than 10% of the revenues.
During  1999,  approximately  11% of the  revenues  were  derived  from a single
customer.  During 1998,  approximately  54% of the revenues  were derived from a
single customer.


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  have been prepared in accordance  with
generally accepted accounting principles in the United States.

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 Denominated in United States Dollars:

Most of the Company's  revenues are  denominated  in United States  dollars.  In
addition,  a substantial portion of the Company's costs are incurred in dollars.
Since the dollar is the primary  currency in the economic  environment  in which
the  Company  and its  subsidiaries  operate,  the  dollar  is their  functional
currency,  and,  accordingly,  monetary accounts  maintained in currencies other
than the dollar are re-measured  using the foreign  exchange rate at the balance
sheet date in  accordance  with  Statement  of  Financial  Accounting  Standards
("SFAS")  No. 52  "Foreign  Currency  Transactions."  Operational  accounts  and
non-monetary  balance  sheet  accounts  are measured and recorded at the rate in
effect  at  the  date  of the  transaction.  The  effects  of  foreign  currency
re-measurement are reported in current operations.


                                                                             F-6

<PAGE>

c. Principles of Consolidation:

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

d. Cash, Cash Equivalents and Marketable Securities:

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

The Company  accounts for its marketable  securities in accordance with SFAS No.
115,  "Accounting for Certain  Investments in Debt and Equity  Securities".  All
debt  securities  are  designated  as   available-for-sale.   Available-for-sale
securities are carried at fair value,  which is determined based upon the quoted
market prices of the securities,  with  unrealized  gains and losses reported in
shareholders' equity, as items of other comprehensive income.

e. Prepaid Marketing Expenses:

The Company recorded prepaid marketing expenses,  representing the fair value of
warrants which have been issued to InfoSpace  Inc. and Microsoft  Corporation in
connection  with  commercial  agreements  into which the Company  entered during
1999.

The prepaid marketing expenses are amortized using the straight-line method over
the minimum term of the  agreements  (twelve  months).  These amounts were fully
amortized as of December 31, 2000.

f. 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  periodically  assesses the recoverability of the carrying amount of
property and equipment and provides for any possible  impairment loss based upon
the difference  between the carrying amount and fair value of such assets. As of
December 31, 2000, no impairment losses have been identified.

g. Long-Term Investments:

Long-term  investments  are recorded at lower of cost or  estimated  fair value,
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.  Measurement  of an
impairment loss for long-term  investments  that management  expects to hold are
based on the fair value of the investment.  Impaired  long-term  investments are
reported  at the lower of carrying  amount or fair value less costs to sell.  At
December  31,  2000,  based on a  comprehensive  review of the  Company's  three
strategic  investments,  the Company recorded a non-cash charge of $5 million to
write-down  a  portion  of the  recorded  investment  values  of  two  of  these
investments,  in  accordance  with SFAS 121  "Accounting  for the  Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."

h. Goodwill and Other Purchased Intangible Assets:

Goodwill and other intangibles  assets are amortized over their estimated useful
lives ranging from three to five years.

i. Minority Interest:

Minority interest represents the common stockholders' proportionate share of the
equity of  Commtouch,  K.K.  (Japan).  At December 31, 2000,  the Company  owned
94.17%  issued and  outstanding  common stock and voting  rights.


                                                                             F-7

<PAGE>

j. Research and Development Costs:

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

Based on the Company's product development process, technological feasibility is
established  upon  completion of a working model.  The Company 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,  the Company has charged all  software  development  costs to research and
development expense in the period incurred.

k. Advertising Costs:

The Company accounts for advertising costs as expense in the period in which the
costs are incurred.  Advertising  expense for the years ended December 31, 1998,
1999 and 2000 were none, $0.6 million and $3.1 million, respectively.

l. Revenue Recognition:

In December  1999, the  Securities  and Exchange  Commission  (SEC) issued Staff
Accounting  Bulletin (SAB) 101,  Revenue  Recognition  in Financial  Statements.
During the year the Company implemented SAB 101 which became effective in 2000.

Since 1998, the Company has derived its revenues from providing  Web-based email
services.  Revenues from  contracts  that are not  dependent  upon the number of
mailboxes and provide  non-refundable fixed payments are recognized ratably over
the contract  term.  Revenues from contracts  specifying a contractual  rate per
mailbox per month are recognized monthly for mailboxes covered by the respective
contracts  and  collectibility  of a fixed  and  determinable  amount  is deemed
probable.  Revenues  from  contracts  based on a share of  advertising  revenues
earned by business  partners are  recognized  when such  revenues are earned and
collectibilty  of a fixed and determinable  amount is deemed  probable.  Amounts
billed or  received  in advance of service  delivery  are  recorded  as deferred
revenues.

Revenues from  non-recurring  engineering  services are recognized  upon meeting
specified milestones as deemed earned by the agreement.

The Company recognizes revenue from sales of software licenses to end users upon
persuasive  evidence of an arrangement,  delivery of the software to a customer,
determination  that  there  are no  significant  post-delivery  obligations  and
collection of a fixed and determinable license fee is considered probable.

The Company recognizes  software license revenue in accordance with Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended. 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 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.

m. Concentrations of Credit Risk:

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist  principally  of trade  receivables,  cash  equivalents  and
marketable securities.  The majority of the Company's cash, cash equivalents and
marketable  securities are invested in dollar and dollar linked  investments and
are deposited in major banks in United  States,  Israel and Ireland.  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.


                                                                             F-8

<PAGE>

The Company's  trade  receivables are derived from  transactions  with companies
located primarily in North America, Europe, Israel and the Far East. The Company
maintains an allowance for doubtful  trade  receivables  based upon the expected
collectibility  of trade  receivables.  The allowance for doubtful  accounts was
$0.4 million and $0.9 million at December 31, 1999 and 2000,  respectively.  Bad
debt expense for the  years-ended  December  31, 1998,  1999 and 2000 were none,
$0.4 million and $2.0 million, respectively.

n. 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  Interpretation No. 44
"Accounting  for  Certain   Transactions   Involving  Stock   Compensation,"  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.
The  pro-forma  information  with  respect to the fair  value of the  options is
provided in  accordance  with the  provisions  of SFAS No. 123  "Accounting  for
Stock-Based Compensation".

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

o. Basic and Diluted Net Loss Per Share:

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

Basic net loss per share has been computed using the weighted-average  number of
ordinary  shares  outstanding  during the period.  Diluted net loss per share is
computed  based on the weighted  average number of ordinary  shares  outstanding
during  each  year,  plus the  weighted  average  number of  dilutive  potential
ordinary shares considered outstanding during the year.

All convertible  preferred shares,  outstanding stock options, and warrants have
been  excluded  from the  calculation  of the diluted loss per share because all
such securities are anti-dilutive for all periods presented. The total number of
shares related to the  convertible  preferred  shares,  outstanding  options and
warrants  excluded  from the  calculations  of  diluted  net loss per share were
1,236,100, 2,497,470 and 4,096,455 for 1998, 1999 and 2000, respectively.

p. Severance Pay:

The Company's  liability  for  severance  pay is calculated  pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment  as of the balance  sheet date.  Employees are
entitled to one month's salary for each year of employment or a portion thereof.
The Company's  liability  for all of its employees is fully  provided by monthly
deposits with severance pay funds insurance policies and by an accrual.

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

Severance expenses for 1998, 1999 and 2000 were approximately $0.1 million, $0.1
million and $0.5 million, respectively.


                                                                             F-9

<PAGE>

q. 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,  marketable securities, trade receivables,  other accounts
receivable  and  accounts  payable,  approximate  their  fair  values due to the
short-term maturities of these instruments.

The fair value of  long-term  deposits is  estimated  based on current  interest
rates available to the Company for debt instruments with similar terms,  degrees
of risk and  remaining  maturities.  The  carrying  value  of these  obligations
approximates their respective fair values as of December 31, 2000.

r. Recently Issued Accounting Pronouncements:

As of July 1, 2000 the Company  adopted  SFAS 133,  "Accounting  for  Derivative
Instruments and Hedging  Activities," as amended by SFAS 137 and SFAS 138, which
requires  companies to recognize all derivatives as either assets or liabilities
in the balance  sheet and measure such  instruments  at fair value.  Because the
Company currently holds no derivative  financial  instruments as defined by SFAS
133 and does not currently engage in hedging activities, adoption of SFAS 133 is
not expected to have a material effect on the Company's  financial  position and
results of operations.

In  September  2000 the SFAS  issued SFAS 140,  "Accounting  for  Transfers  and
Servicing of Financial Assets and Extinguishments of Liabilities,  a Replacement
of FASB  Statement No. 125." FAS 140 revises the standards  for  accounting  for
securitizations  and other  transfers of  financial  assets and  collateral  and
requires  certain  additional  disclosures,  although it  continues  most of the
provisions  of FAS 125 without  consideration.  The  provisions  of SFAS 140 are
effective for periods  beginning  after  December 15, 2000. The Company does not
expect the adoption of the  provisions of SFAS 140 to have a material  impact on
the Companies financial position or results of operations.
<TABLE>
NOTE 3: MARKETABLE SECURITIES
<CAPTION>

                                                                    December 31,
                                                               ---------------------
                                                                 1999         2000
                                                               -------       -------
<S>                                                           <C>           <C>
Marketable securities are comprised of the following (in thousands):

Commercial papers .........................................   $ 2,230       $   --
Government securities .....................................     9,918         2,003
Corporate debt securities .................................     5,902         6,604
                                                               -------       -------


                                                               $18,050      $ 8,607
                                                               =======       =======
</TABLE>


During 2000, the unrealized  net holding  losses on marketable  securities  were
$42,000.


Note 4: Wingra Acquisition

On  November  24,  2000,  the  Company  entered  into a  definitive  acquisition
agreement to acquire Wingra Technologies Inc. ("Wingra").  Wingra is an industry
leader in providing  messaging  integration  and  migration  solutions for large
enterprises.  Wingra offers a wide range of products and services; each designed
with the mission of making it easier and more  cost-effective for people to take
advantage of the full power of electronic messaging.


                                                                            F-10

<PAGE>

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 $6.25 to
$9.39 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 APB 16 "Business  Combinations"  ("APB 16").  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
$15.1 million  (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 (in thousands):
          Ordinary shares                                    $  11,970
          Options and warrants                                   2,846
          Acquisition expenses                                     330
                                                             ---------
                                                             $  15,146
                                                             ---------


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

                                                   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 $1.3 million 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.


                                                                            F-11

<PAGE>

Pro forma Information:

The following  unaudited pro forma data summarizes the results of operations for
the periods indicated as if the Wingra  acquisition had been completed as of the
beginning of the periods presented.


                                                               December 31,
                                                          ---------------------
                                                            1999         2000
                                                          -------       -------

Revenues.............................................  $   6,892     $  20,871
Net Loss ............................................  $ (24,814)    $ (57,255)
Net Loss per share:
Basic and diluted ...................................  $   (2.73)    $   (3.38)



NOTE 5: PROPERTY AND EQUIPMENT, NET

                                                                December 31,
                                                           ---------------------
                                                            1999           2000
                                                           ------         ------
Property and equipment are comprised of the following (in thousands):

Computers and peripheral equipment ...............         $7,704       $20,687
Office furniture and equipment ...................            232           977
Motor vehicles ...................................            135           143
Leasehold improvements ...........................            454         5,908
                                                           ------        ------
                                                            8,525        27,715
Less accumulated depreciation ....................         (2,377)       (8,298)
                                                           ------        ------
Property and equipment, net ......................         $6,148       $19,417
                                                           ======        ======



Computers  and  peripheral  equipment  under various  capital  lease  agreements
amounted to  approximately  $0.3  million as of December 31, 1999 and none as of
December 31, 2000, and their accumulated  depreciation amounted to approximately
$0.2 million as of December 31, 1999 and none as of December 31, 2000.

Depreciation  expenses amounted to approximately $0.2 million,  $1.7 million and
$5.9 million for 1998, 1999 and 2000, respectively.

NOTE 6: BANK LOANS AND CAPITAL LEASES

As of  December  31,  2000,  except  for  the  majority  of  the  capital  lease
obligations,  the following debt was assumed in connection  with the acquisition
of Wingra:

                                                       Weighted
                                                       Average     December 31,
                                                       Interest    ------------
                                                         Rate         2000
                                                        ------       ------
Composed as follows (in thousands):

Promissory notes with shareholders .................       9.28       $886
Promissory notes with financial institutions........      10.78        692
Capital lease obligations...........................                    69
Royalties in connection with Wingra's product.......                   218
                                                                     ------
                                                                     1,865
Less - current maturities ..........................                (1,024)
                                                                     ------
Total Long-term debt..                                              $  841
                                                                     ======


                                                                            F-12

<PAGE>

       Future  maturities  of  long-term  debt  at  December  31,  2000  are  as
follows(in thousands):


                                                         2001     $   1,024
                                                         2002           841
                                                                  ----------
                                                                  $    1,865
                                                                  ==========


NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases:

The Company  leases  certain  facilities  and equipment  under  operating  lease
agreements  expiring  through 2007.  Future  minimum lease  payments under these
non-cancelable leases are as follows (in thousands):

                  2001 ............................. $  4,140
                  2002 .............................    3,623
                  2003 .............................    3,207
                  2004 .............................    2,985
                  2005 .............................    2,959
                  Thereafter .......................    3,519
                                                     --------

                                                     $ 20,433
                                                     ========


Rent expenses for 1998,  1999 and 2000 were  approximately  $0.1  million,  $0.6
million and $2.3 million,  respectively.  In connection with the lease agreement
on an office building, Commtouch, Inc. deposited $1.4 million in long term lease
deposits of which $1.1 million was held as collateral for a letter of credit.

Royalties:

The  Company  may be  required  to pay  royalties  on grants  received  from the
Government of Israel for research and development  projects at the rate of 3%-5%
of total revenues,  up to an amount equal to 100% to 150% of the original amount
received  linked to the dollar.  As of December 31, 2000 there is no  contingent
liabilities for royalties.

Bank Line of Credit:

Due to the  acquisition  of Wingra  Technologies  Inc.,  the  Company  assumed a
revolving credit arrangement with a financial institution.  The credit agreement
is collateralized by certain assets of the Company. The provisions of the credit
agreement  enable the Company to borrow up to  $100,000  on a revolving  line of
credit at annual interest rate of 14.25%. The amount outstanding at December 31,
2000 is $91,000.

Collateral and Guarantees:

Due to the  Acquisition of Wingra  Technologies  Inc.,  the Company  assumed the
following:

     o   Revolving line of credit in the amount of $0.1 million,  collateralized
         by a  chattel  security  agreement  and  the  personal  guarantee  of a
         shareholder

     o   Term  loan  with   Anchor   Bank  in  the   amount  of  $0.4   million,
         collateralized  by  a  general  business  security  agreement  and  the
         personal  guarantee  of a  shareholder.  This  amount  was  paid off in
         January 2001.

NOTE 8: LONG-TERM INVESTMENTS

The  Company  invested  $7.0  million in the first nine  months of 2000 in three
Internet  centric  businesses 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   businesses,   the  Company  believes  two  of  these
investments are impaired.  At December 31, 2000, based on a comprehensive review



                                                                            F-13

<PAGE>

of  several of the  Company's  strategic  investments,  the  Company  recorded a
non-cash charge of $5 million to write-down a portion of the recorded investment
values, in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

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 approved 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 program
received a letter of  approval  in April 1996 and the  Company's  third  program
received a letter of approval in December 2000. An application  enlargement  was
approved for the third program in December 2000.

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"  in the  period  of  benefit
mentioned above is taxed at the regular rate of 36%.

Distribution  of cash  dividends  from  income  that was tax  exempt  due to the
"approved enterprise" status are subject to a tax of 10%-25%. In addition, these
dividends will be subject to a 15% withholding tax.

The  tax  exempt  income  attributable  to  the  "Approved  Enterprise"  can  be
distributed to  shareholders  without  subjecting the Company to taxes only upon
the complete liquidation of the Company.

The Company's Board of Directors has determined that such tax exempt income will
not be  distributed as dividends.  The Company is an "industrial  company" under
the  Law for the  Encouragement  of  Industry  (Taxation),  1969  and as such is
entitled to certain tax benefits,  mainly  accelerated rates of depreciation and
the right to claim public issuance expenses.

As of December 31, 2000, Israeli net operating loss  carry-forwards  amounted to
$38.0 million.  Such net operating loss may be carried forward  indefinitely and
offset against future taxable income.

U.S. Income Tax:

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

As of December 31, 2000,  Commtouch,  Inc. had a U.S. federal net operating loss
carry-forward of approximately $33.6 million.  The net operating loss expires in
various  amounts  between  the years  2008 and  2021.  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:

The Company  expects  that during the period in which its Israeli tax losses are
utilized its Israeli income would be substantially tax exempt. Accordingly there
will be no tax benefit available from such losses and no Israeli deferred income
taxes have been included in these financial statements.


                                                                            F-14

<PAGE>

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,
                                                            -------------------
                                                             1999         2000
                                                            -------     -------
Deferred tax assets are as follows (in thousands):
U.S. operating loss carry-forwards ......................   $ 4,970     $12,594
Reserves and allowances not currently deductible .......         57       4,144
                                                            -------     -------
Net deferred tax asset before valuation allowance ......      5,027      16,738
Valuation allowance ....................................     (5,027)    (16,738)
                                                            -------     -------
Net deferred tax asset .................................    $  --       $  --
                                                            =======     =======



For the year ended  December  31,  2000 the  valuation  allowance  increased  by
approximately  $11.7  million.  No  utilization  of  Commtouch,  Inc.  tax  loss
carry-forwards is expected in the foreseeable future,  because of its history of
operating  losses.  In 1999 and 2000,  the  Company  provided  a 100%  valuation
allowance  against  the  deferred  tax assets in respect of these tax loss carry
forwards and other temporary differences because of the uncertainty of realizing
these deferred tax assets.

Pretax loss:

Pretax losses are as follows (in thousands):

                                           1998          1999           2000
                                          -------       -------       --------
Israel .................................  $ 2,497       $11,259       $23,209
U.S. ...................................    1,854         8,592        27,821
Other...................................      --           --           3,195
                                          -------       -------       --------
                                          $ 4,351       $19,851       $54,225
                                          =======       =======       ========


NOTE 10: SHAREHOLDERS' EQUITY

The ordinary shares of the Company are traded on the NASDAQ National Market.

a. Capital Shares:

In April 1999, the Company's  Board of Directors  approved:  a 20 for 1 split of
ordinary  shares,  a change  in the  conversion  ratio of  preferred  shares  to
ordinary shares to 1 to 20 and an increase to the authorized  ordinary shares to
40,000,000 shares of NIS 0.05 par value. The consolidated  financial  statements
have been  retroactively  adjusted  to  reflect  such  changes  for all  periods
presented.

In July 1999, the Company  completed an Initial Public  Offering  ("IPO") of its
ordinary  shares.  The Company  sold  3,450,000  shares to the public at $16 per
share. Concurrent with the closing of the IPO, the Company sold 1,344,086 shares
at $14.88 per share to  InfoSpace,  Inc. In  addition,  the holders of Series A,
Series B, Series C and Series D convertible  preferred shares received  ordinary
shares  pursuant  to an  automatic  conversion,  resulting  in the  issuance  of
7,109,800 ordinary shares in exchange for all outstanding  convertible preferred
shares.


                                                                            F-15

<PAGE>

b. Warrants Issued:

Warrants to Investors. In 1996, the Company issued to certain Series B investors
warrants to purchase 13,873 Series B Convertible Preferred shares at an exercise
price of $44.04. These warrants were exercised  concurrently with the closing of
the IPO.

Warrants Issued for Services Received and Financing Transactions.  Through 1999,
the Company granted warrants in connection with a bank line of credit, loans and
consulting  services  received.  At  December  31,  1999,  one warrant for 4,860
ordinary shares with an exercise price of $3.61 per share remained  outstanding.
This warrant was net exercised into 4,461 shares in January 2000.

In  connection  with the  amounts of the  warrants,  the Company  recorded  $0.3
million,  $0.4 million, and none as compensation  expenses that were included in
interest  expenses in 1998, 1999 and 2000,  respectively.  The Company  recorded
$0.1  million  in 1998 and none in 1999 and  2000 as  compensation  expense  and
included these amounts in operating expenses.

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,  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,  2000,  this  warrant  had not been
exercised.  At the grant date,  the fair value of this warrant was  estimated as
$5.9 million and is being amortized to operating  expenses over the minimum term
of the contract (twelve months).

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 currently  prohibited  from financing a third
party purchase of its shares.  Accordingly,  the loans to officers were null and
void and a violation of Israeli  Corporate Law. 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 $1.0
million.  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.  The  shares  purchased  are
subject to a right of repurchase in favor of Commtouch according to the original
vesting schedule of the options exercised,  generally four years. As of December
31, 2000, approximately 131,634 shares are subject to this right of repurchase.

d. Employee Stock Purchase Plan:

Commtouch  reserved  a total of  150,000  shares  for  issuance  under the plan.
Eligible  employees  may  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.

e. Stock Options:

The Company has reserved  5,000,000  ordinary shares for issuance under employee
stock  option  plans  and  agreements.  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.  The exercise
price of the options  granted under the  individual  agreements  may not be less
than the nominal value of the shares into which such options are  exercisable or
in the case of the subsidiary's  plan it may not be less than fair market value.
Any options that are canceled or not exercised  within the options period become
available for future grant.


                                                                            F-16

<PAGE>

In 1996, the Company adopted the 1996 CI Stock Option Plan for granting  options
to its U.S.  employees to purchase  ordinary shares of the Company.  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.

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.
<TABLE>
A summary of the Company's share option activity under the plans is as follows:
<CAPTION>

                                                                                               Weighted Average
                                                        Number of Shares                        Exercise Price
                                             ----------------------------------------   -------------------------------
                                               1998          1999          2000         1998         1999        2000
                                             ---------     --------     ----------      --------    -------    --------
<S>                                            <C>         <C>          <C>             <C>         <C>        <C>
Outstanding at beginning of period   ......    607,040     849,520      1,383,110       $  1.10     $ 1.20     $  9.62
 Granted   .................................   251,900   1,342,670      2,046,520          1.45      10.13       24.10
 Exercised   ..............................        --     (740,040)      (359,839)          --        1.42        2.66
 Canceled    ..............................     (9,420)    (69,040)      (419,336)         1.45       4.49       21.77
                                             ---------     --------     ----------      --------    -------    --------
Outstanding at end of period   ............    849,520   1,383,110      2,650,455       $  1.20     $ 9.62     $ 19.91
                                             =========     ========     ==========      ========    =======    ========
Exercisable at end of period   ............    375,580     381,315        526,986       $  1.45     $ 3.50     $  8.61
                                             =========     ========     ==========      ========    =======    ========
Deemed fair value of options granted
 at an exercise price of:
 -- Less than fair market value at
   date of grant   ........................  $    2.46     $  3.65     $      --
                                             =========     ========     ==========
 -- Equals to fair market value at
   date of grant   ........................  $     --      $ 15.75     $   24.10
                                             =========     ========     ==========
 -- Exceeds fair market value at
   date of grant   ........................  $     --      $   --      $      --
                                             =========     ========     ==========
</TABLE>

<TABLE>
The options outstanding as of December 31, 2000, have been separated into ranges
of exercise price, as follows:
<CAPTION>

                        Options              Weighted                                   Options          Weighted Average
                   Outstanding as of         Average              Weighted         Exercisable as of         Price of
                     December 31,           Remaining         Average Exercise       December 31,          Exercisable
Exercise Price           2000            Contractual Life          Price                 2000               Options
----------------   -------------------   ------------------   ------------------   -------------------   ------------------

<S>                     <C>                    <C>                  <C>                  <C>                   <C>
  $ 0.20-$12.75           749,700              8.89                 $ 6.01               343,423               $ 3.03
  $12.81-$17.75           773,270              8.87                 $16.27               128,261               $15.15
  $17.81-$35.56           987,285              9.20                 $29.60                52,952               $27.49
  $37.25-$66.50           140,200              9.13                 $46.12                 2,350               $42.14
                   -------------------   ------------------   ------------------   -------------------   ------------------
  $ 0.20-$66.50         2,650,455              9.04                 $19.91               526,986               $ 8.61
                   ===================   ==================   ==================   ===================   ==================
</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 Pricing Model with the following weighted-average
assumptions  for 1998, 1999 and 2000:  risk-free  interest rates of 6% for 1998,
5.5% for  1999 and  2000,  dividend  yields  of 0%,  volatility  factors  of the
expected  market price of the Company's  ordinary  shares of 0.5 for 1998, 0.5 -
0.56 for 1999 and 1.348 for 2000 and an expected  life of the option of 6 months
after the option is vested for 1998, 1999 and 2000.

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


                                                                            F-17

<PAGE>

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.

<TABLE>
Pro forma  information  under SFAS 123 are as follows (in  thousands  except per
share amounts):
<CAPTION>

                                                    1998         1999        2000
                                                 ---------    ---------    --------
<S>                                              <C>          <C>          <C>
Net loss as reported .........................   $  (4,351)   $ (19,851)   $(54,225)
                                                 =========    =========    ========
Pro forma net loss ...........................   $  (4,402)   $ (20,224)   $(68,309)
                                                 =========    =========    ========
Pro forma basic and diluted net loss per share   $   (3.04)   $   (2.70)   $  (4.42)
                                                 =========    =========    ========

Weighted average number of shares
used in computing basic and
diluted net loss per share ...................       1,450        7,487      15,440
                                                 =========    =========    ========
</TABLE>

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 method
over the vesting period of the options, generally four years.


Deferred compensation is as follows (in thousands):
Balance as of January 1, 2000 .....................................     $ 5,779
Deferred compensation related to options issued to employees ......         --
Less amortization of deferred compensation ........................      (3,050)
                                                                        -------
Balance as of December 31, 2000 ...................................     $ 2,729
                                                                        =======

f. Non-Employee Directors Stock Option Plan:

The Company adopted the 1999 Non-Employee Directors Stock Option Plan. Commtouch
Reserved  250,000  shares in 1999 and 250,000  shares in 2000 for issuance under
this plan.  During 1999, each individual who first joined the Board of Directors
as a nonemployee  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.
Each  option  granted  under  the  Non-Employee   Directors  Plan  would  become
exercisable  with respect to one-fourth of the number of shares  covered by such
option three months after the date of grant and with respect to one-third of the
remaining  shares  subject to the option  every three  months  thereafter.  Each
option has an  exercise  price equal to the fair  market  value of the  ordinary
shares on the grant date of such  option.  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  2000,  the Company  granted  260,000  options to directors at a weighted
average  exercise  price of $17.43 per share.  As of December 31,  2000,  73,125
options were exercisable and 310,000 were outstanding.


                                                                            F-18

<PAGE>

NOTE 11: SELECTED STATEMENTS OF OPERATIONS DATA

Geographic information:

The  Company  conducts  its  business  on the basis of one  reportable  segment.
Revenues from external customers (in thousands):

                                                        Revenues
                                        ----------------------------------------
                                         1998             1999             2000
                                        ------           ------           ------
Israel ......................           $   --           $  369          $   196
U.S.A .......................              109            3,056           11,047
Europe ......................              130              344            1,927
Japan .......................              103              250            1,295
Latin America ...............               --               38            4,085
Other .......................               47              194              565
                                        ------           ------           ------
                                        $  389           $4,251          $19,115

                                        ======           ======           ======

The  Company's  long-lived  assets as of  December  31,  2000 are as follows (in
thousands):

                                                      1999                 2000
                                                     ------               ------
Israel ...............................               $  789              $18,911
U.S.A ................................                5,359               18,016
Rest of World.........................                  --                   545
                                                     ------               ------
                                                     $6,148              $37,472
                                                     ======               ======


NOTE 12: SUBSEQUENT EVENTS (Unaudited)

a. Equity Line

On  January  23,  2001 the  Company  entered  into an  ordinary  share  purchase
agreement with Torneaux Fund Ltd.  ("Torneaux"),  a Bahamian  limited  liability
company.  Beginning on January 23, 2001 and continuing for 24 months thereafter,
the Company may in its sole discretion issue its ordinary  shares,  NIS 0.05 par
value per share,  to Torneaux.  The  24-month  period is divided into 18 pricing
periods, each consisting of 20 trading days on the Nasdaq National Market or any
other market which is at the time the principal  trading market for our ordinary
shares.  In  addition,  at the time of each  issuance,  the Company may issue to
Torneaux  call options to purchase  ordinary  shares up to a maximum of the same
number of shares to be purchased by Torneaux in the share issuance, which expire
at the end of the pricing  period  unless  exercised.  The Company  must deliver
shares  purchased  in  the  draw  down  or on  exercise  of  the  option  in two
installments,  one at the end of each 10-day  period  during the 20-day  pricing
period, at which time it will receive payment.

Torneaux's purchase price, and consequently the number of shares purchased, will
fluctuate  based  upon the daily  volume  weighted  average  price over a 20-day
trading period. In each draw down the Company will notify Torneaux of the dollar
amount of shares  which it will  issue,  the  commencement  date of the  pricing
period,  and the threshold  price which must be at least $2 or a lower amount if
mutually  agreed.  The  threshold  price is the lowest  price per share  (less a
stated discount) at which the Company will issue shares.

b.  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 directors,  alleging violations of the antifraud  provisions of the
Securities  Exchange  Act  of  1934  arising  from  the  Company's  consolidated
financial  statements.  While we are unable to predict the  ultimate  outcome of
these claims we believe they are without merit and intend to  vigorously  defend
ourselves.


                                                                            F-18

<PAGE>
c. Restructuring

On December 27, 2000 the Company's  Board of Directors  approved a restructuring
plan which was implemented in 2001. The  restructuring  was approved in light of
the economic  downturn.  The Company initiated these changes to better serve the
enterprise  messaging market.  These internal changes reduced operating expenses
supporting  the dot-com and  destination  site  markets,  closed the  e-commerce
division  and  email  services  for  small   community   sites,   and  increased
efficiencies  in channel sales and  marketing to the  enterprise  market.  These
changes reduced the worldwide  headcount by approximately 20% and, combined with
other cost savings,  reduced overall  operating  expenses.  The Company expensed
$0.6 million  allocated to the relevant  departments,  for severance  related to
this reorganization.

On February 28, 2001, the Company's Board of Directors approved a reorganization
to enhance the Company's focus on enterprise messaging solutions. The Company is
focusing its operations on three enterprise messaging businesses:  the Commtouch
core email and messaging  service  organization for the enterprise  market which
includes the recently launched  Microsoft Hosted Exchange service offering;  the
enterprise messaging migration and integration technologies business through our
wholly-owned subsidiary Wingra Technologies Inc.; and its technology development
of    next-generation    messaging    applications    marketed   to    worldwide
telecommunication  companies,  Internet Data Centers and service  providers.  As
part of this  reorganization  the Company  streamlined its global operations and
reduced its workforce by approximately 50%, to about 210 people.

d.  Repricing

On April  30,  2001  the  Company's  Board of  Directors  approved  an  optional
"repricing"  of options  previously  granted to employees,  contingent  upon the
completion of certain  regulatory  filings.  Previously  granted options will be
cancelled and new options will be 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 meet the following conditions:

     o   The exercise  price of the original  options  exceeds $10
     o   The option is issued but not exercised

The options  vest over three years with 1/3 vesting on February 15, 2002 and the
remaining 2/3 vesting every six months for the next two years.  The Company will
begin  expensing  this  effective  re-pricing  as a fixed plan over the  vesting
period as employees finalize their participation in this optional plan.

e.  Bank Guarantee

In April 2001,  the Israeli Tax  Authority  received a bank  guarantee  from the
Company totaling approximately $0.6 million. This guarantee relates to potential
payroll withholding tax liabilities.


                                                                            F-19
<PAGE>
Item 19. Exhibits




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

3.1            Memorandum of Association of the Registrant.(1)

3.2            Articles of Association of the Registrant.(6)

4.1            Specimen Certificate of Ordinary Shares.(1)

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

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

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

4.3            Form of  Tag-Along  Rights  (Right of First  Refusal and Co-Sale)
               Agreement dated as of December 23, 1998.(1)

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

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

4.6            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)

4.7            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 assets of the Registrant.

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

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

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

10.3           Registrant's  1999  Stock  Option  Plan  and  form  of  agreement
               thereunder.(1)

10.4           Commtouch  Software Ltd. 1999 Nonemployee  Directors Stock Option
               Plan.(1)

10.4.1         Amendment to Commtouch  Software Ltd. 1999 Nonemployee  Directors
               Stock Option Plan.(7)

10.5           Commtouch  Software Ltd. 1999  Employee  Stock  Purchase Plan and
               forms thereunder.(1)

10.6           Sublease  between  ASCII  of  America,  Inc.  and  Commtouch  for
               Commtouch's  offices in Santa Clara,  California,  dated December
               16, 1998.(1)


                                                                            F-20
<PAGE>
10.7           Lease  between  DeAnza  Building and  Commtouch  for  Commtouch's
               offices in  Sunnyvale,  California,  dated  February 5, 1996,  as
               amended.(1)

10.8           Form of Letter Agreement  between the Registrant and U.S. Bancorp
               Piper Jaffray.(2)

10.9           Form of  Customized  Web-based  Email  Service  Agreement  by and
               between Go2Net, Inc. and the Registrant.(3)

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

10.9.2         Form of Share  Warrant  for  Microsoft  Corporation  to  purchase
               ordinary shares of the Registrant dated October 26, 1999.(4)

10.9.3         Amendment  dated  December 29, 1999 to Form of Share  Warrant for
               Microsoft   Corporation  to  purchase   ordinary  shares  of  the
               Registrant.(4)

10.9.4         Lockup Agreement between the Registrant and Microsoft Corporation
               dated December 29, 1999.(4)

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

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

10.10.2        Form of Letter  Agreement  between  the  Registrant  and  Selling
               Securityholders extending deadline for SEC registration.(4)

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

10.12          Office Lease between  EOP-Shoreline  Technology Park,  L.L.C. and
               Commtouch Software, Inc. dated October 28, 1999.(11)

21             Subsidiaries of the Company.

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

99.1           Press Release of the Registrant, dated July 7, 1999.(2)

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

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

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

(2)       Incorporated by reference to similarly  numbered  exhibit in Amendment
          No. 4 to  Registration  Statement  on Form F-1 of  Commtouch  Software
          Ltd., File No. 333-78531.

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

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

(6)       Incorporated  by  reference to Exhibit 2 to Report on Form 6-K for the
          month of August 2000.

(7)       Incorporated  by  reference to Exhibit 3 to Report on Form 6-K for the
          month of August 2000.

(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)      Incorporated  by  reference to Exhibit 1 to Report on Form 6-K for the
          month of January 2001.




                                                                            F-21
                                   SIGNATURES

Pursuant to the requirements of Section 12 of the Securities and Exchange Act of
1934, the registrant  certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused  this annual  report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                          COMMTOUCH SOFTWARE LTD.


                                          By:        /s/ Sunil Bhardwaj
                                             -----------------------------------
                                                         Sunil Bhardwaj
                                                     Chief Financial Officer
May 16, 2001


<PAGE>

                            COMMTOUCH SOFTWARE LTD.

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



                                   Balance at
                                      the      Charged to             Balance at
                                  beginning of  cost and              end of the
                                   the period   expenses   Deductions   period
                                  ------------ ----------- ---------- ----------

Year ended December 31, 1998:
  Bad debt.......................   $ --          $ --      $  --       $  --
                                    ======        ======    =======     ======
Year ended December 31, 1999:
  Bad debt.......................   $ --          $ 405     $  --       $ 405
                                    ======        ======    =======     ======
Year ended December 31, 2000:
  Bad debt......................    $405          $1,990    $(1,533)    $ 862
                                    ======        ======    =======     ======