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

                                    FORM 20-F


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


|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 for the fiscal year ended December 31, 2003

                                       OR


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

      For the transition period from _________________ to ________________

                        Commission file number 000-26495

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

                                     Israel
                 (Jurisdiction of incorporation or organization)

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

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

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

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

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

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

                                      None

         Indicate  the  number of  outstanding  shares  of each of the  issuer's
classes of capital or common stock as of the close of the period  covered by the
annual report (December 31, 2003).

         Ordinary Shares, par value NIS 0.05        37,104,615 (34,278,498 as of
                                                    12.31.03, plus shares issued
                                                    in January 2004 due to
                                                    exercise of warrants in late
                                                    December 2003)

         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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<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
subsidiary,  Commtouch Inc., as relating to consolidated  financial  information
contained herein former wholly-owned  subsidiaries  Commtouch Latin America Inc.
(dissolved), Commtouch (UK) Ltd. (dissolved) and Wingra, Inc. (sold), and former
majority-owned  subsidiary,   Commtouch  K.K.  (Japan)  (during  2002  Commtouch
divested itself of its majority holdings and retained an equity interest in this
company, which is now known as Imatrix Corporation).

The selected  consolidated  statements  of  operations  data for the years ended
December 31, 2001,  2002 and 2003 and the selected  consolidated  balance  sheet
data as of December 31, 2002 and 2003 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,  1999  and 2000  and the  selected  consolidated  balance  sheet  data as of
December  31,  1999,  2000 and 2001  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,
                                                                  ------------------------------------------------------------------
                                                                     1999         2000           2001         2002           2003
                                                                  ---------     ---------     ---------     ---------     ---------
                                                                              (USD in thousands, except per share data)
<S>                                                               <C>           <C>           <C>           <C>           <C>
Consolidated Statements of Operations Data:
Revenues:
   Email services ............................................    $   4,251     $  17,771     $  13,318     $   3,238     $     329
   Software licenses, maintenance and services ...............         --           1,000           270           200          --
                                                                  ---------     ---------     ---------     ---------     ---------
     Total revenues ..........................................        4,251        18,771        13,588         3,438           329

Cost of revenues .............................................        3,643        11,800        13,962         1,675           581
                                                                  ---------     ---------     ---------     ---------     ---------
   Gross profit (loss) .......................................          608         6,971          (374)        1,763          (252)
                                                                  ---------     ---------     ---------     ---------     ---------
Operating expenses:
   Research and development, net .............................        2,942        10,244         5,884         2,246         1,476
   Sales and marketing .......................................        7,722        26,534        12,894         1,176         1,875
   General and administrative ................................        4,328        13,455        10,337         2,588         1,308
   Amortization of prepaid marketing expenses ................        3,263         4,508          --            --            --
   Write-off of property and equipment and other .............         --            --          10,166           750          --
   Amortization of stock-based employee
     deferred compensation ...................................        3,436         3,050         2,204           551           247
                                                                  ---------     ---------     ---------     ---------     ---------
     Total operating expenses ................................       21,691        57,791        41,485         7,311         4,906
                                                                  ---------     ---------     ---------     ---------     ---------
Operating loss ...............................................      (21,083)      (50,820)      (41,859)       (5,548)       (5,158)
Interest and other income (expenses), net ....................        1,232         2,886           583           (60)       (1,967)
Equity in earnings (losses) of affiliate .....................         --            --            --             (56)          291
Write-off of impaired long-term investments ..................         --          (5,000)       (2,000)         --            --
Minority interest ............................................         --              55           285            74          --
                                                                  ---------     ---------     ---------     ---------     ---------
Loss from continuing operations ..............................      (19,851)      (52,879)      (42,991)       (5,590)    $  (6,834)
   Gain on disposal of Wingra ................................         --            --            --           1,014          --
   Discontinued operations - Wingra ..........................         --          (1,346)      (18,016)         (335)         --
                                                                  ---------     ---------     ---------     ---------     ---------
Income (Loss) from sale of
   discontinued operations ...................................         --          (1,346)      (18,016)          679          --
                                                                  ---------     ---------     ---------     ---------     ---------
Net Loss .....................................................    $ (19,851)    $ (54,225)    $ (61,007)    $  (4,911)    $  (6,834)
                                                                  ---------     ---------     ---------     ---------     ---------
Basic and diluted net loss per share
   Loss from continuing operations ...........................    $   (2.65)    $   (3.42)    $   (2.51)    $   (0.27)    $   (0.28)
   Income (Loss) from sale of discontinued
     operations ..............................................         --           (0.09)        (1.05)         0.03     $    --
                                                                  ---------     ---------     ---------     ---------     ---------
Net loss .....................................................    $   (2.65)    $   (3.51)    $   (3.56)    $   (0.24)    $   (0.28)
                                                                  ---------     ---------     ---------     ---------     ---------
Weighted average number of shares used in
computing basic and diluted net loss per share ...............        7,487        15,462        17,152        20,854        24,573
                                                                  ---------     ---------     ---------     ---------     ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                           Year Ended December 31,
                                                                  ------------------------------------------------------------------
                                                                     1999          2000          2001          2002          2003
                                                                  ---------     ---------     ---------     ---------     ---------
                                                                                             (USD in thousands)
<S>                                                               <C>           <C>           <C>           <C>           <C>
Consolidated Balance Sheet Data:
   Cash and cash equivalents .................................    $  65,996     $  20,831     $   2,248     $   1,388     $   4,125
   Marketable securities .....................................       18,050         8,607          --            --            --
   Working capital (deficit) .................................       88,053        23,768          (607)          549         3,965
   Total assets ..............................................      100,336        77,280         9,545         2,984         6,883
   Long-term liabilities .....................................          497         1,825           940           413         2,931

   Shareholders' equity ......................................       95,312        61,728         4,059         1,437         2,457
</TABLE>


                           FORWARD LOOKING STATEMENTS

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


                                  RISK FACTORS

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


Business Risks

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

Our success will depend on the acceptance and use of our anti-spam  solutions by
enterprise and ISP customers.  We cannot estimate the size or growth rate of the
potential  market for our  anti-spam  offerings.  If the  market  for  anti-spam
solutions fails to grow or grows more slowly than we currently  anticipate,  our
business will suffer dramatically.  Even if that market grows, our solutions may
not achieve  broad  market  acceptance  and our  business  could fail.  Since we
released our first anti-spam solution for general distribution only in late June
2003,  and  anti-spam  solutions  to be  released  by us in  the  future  remain
unproven,  we  still do not have  enough  experience  to  evaluate  whether  our
offerings will achieve broad market acceptance.

                                       2
<PAGE>
Our Business May be Adversely Affected as a Consequence of Legislation  Imposing
Legal Penalties On Distributors of Unsolicited Email

On December 16, 2003, President Bush signed into law the Controlling the Assault
of  Non-Solicited  Pornography and Marketing Act of 2003 (CAN-SPAM  Act),  which
establishes a framework of  administrative,  civil, and criminal tools to combat
spam.  The law  establishes  both civil and criminal  prohibitions  to assist in
deterring the most offensive forms of spam, including unmarked sexually-oriented
messages and e-mails containing  fraudulent  headers.  Under the law, senders of
email are  required to honor a request by a consumer  not to receive any further
unsolicited messages.

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

Companies that send business-related e-mail messages from or to the countries in
the European  Union should be aware that each member state in the European Union
was  obligated  by  October  2003 to  implement  the  Electronic  Communications
Directive  that  imposes  restrictions  on the  use of  unsolicited  e-mail  for
commercial purposes.

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


Dependence upon resellers and product concentration

The Company  expects that it will continue to be dependent  upon resellers for a
significant  portion of its  revenues,  which will be derived  from sales of the
Company's  anti-spam  solutions.  Also,  the  Company  is still  developing  its
distribution channels and is currently dependent on a relatively small number of
its  global   resellers/channel   partners  to  close  the   majority  of  sales
transactions. If anticipated orders from these resellers fail to materialize, or
one of the key  resellers/distribution  channels  ceases  the  promotion  of the
Company's business, operating results and financial condition will be materially
adversely affected.

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

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

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

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

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

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

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

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

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

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

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

     o    The threat of de-listing by the NASDAQ;

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

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

     o    The substantial decrease in information technology spending;

     o    Pricing of our solutions;

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

                                       3
<PAGE>

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

Because  of  differing  operational  factors  and the  material  changes  to our
business model,  period-to-period comparisons of our operating results are not a
good  indication  of our future  performance.  It is likely  that our  operating
results in some quarters will be below market expectations. Because we have been
and will be going to  market  with new  solutions  and have been  marketing  our
enterprise  solution  only since late June 2003, it is difficult to evaluate our
business and prospects.

We commenced operations in 1991. Up to 1998, we focused on selling,  maintaining
and  servicing  stand-alone  email client  software  products for  mainframe and
personal  computers.  From 1998 through  2001,  we were a provider of outsourced
Web-based  email services and, during the first half of 2002, we concentrated on
marketing  our  software  messaging  solution.  In mid-2002,  we began  focusing
exclusively  on  completing   development  of  and  selling  our  new  anti-spam
solutions.  This change required us to once again adjust our business  processes
and to readjust the  workforce at Commtouch  (predominantly,  the sales  force).
Therefore,  we have little operating  history as a provider of our new anti-spam
solutions upon which you may be able to evaluate our business and prospects.  It
is still too early to judge whether this business will succeed.


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

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

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

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

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

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

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

                                       4
<PAGE>
Our ability to increase our revenues will depend on our ability to  successfully
execute our sales and marketing plan

The complexity of the underlying  technological base of our anti-spam  solutions
and the current  landscape of the anti-spam  market require highly trained sales
and marketing personnel to educate prospective resellers and customers regarding
the use and  benefits  of our  solutions.  It may take time for our  current and
future  employees  and  resellers  to learn how to most  effectively  market our
solutions.  Additionally,  we are unable to predict the  possibility  of success
selling newly introduced solutions for which we have little marketing experience
and on which we are relying to produce a substantial  portion of our revenues in
the future. As a result of these factors,  our sales and marketing  organization
may not be able to compete  successfully  against  bigger  and more  experienced
sales and marketing organizations of our competitors.


We have a history of losses and may never achieve profitability

We incurred net losses of  approximately  $61.0 million in 2001, $4.9 million in
2002 and $6.8 million in 2003.  As of December  31, 2003 and March 31, 2004,  we
had an accumulated  deficit of approximately  $158.5 million and approximately $
160.1  million,  respectively.  We  entered  a new and  unstable  market  due to
launching  the anti-spam  solution,  we have not achieved  profitability  in any
period,  and we might  continue to incur net losses in the future.  If we do not
achieve profitability, our share price may decline further.


Possible need for additional funds

The Company remains very thinly capitalized.  As such, we might become dependent
upon  raising  additional  funds to finance our  business.  Our cash  balance at
December  31,  2003 and  March  31,  2004 was  approximately  $4.1  million  and
approximately  $4.6 million,  respectively.  In connection  with the two private
placements that occurred in July 2003, we raised $3,040,000.  In addition,  upon
the exercise of certain  warrants by the previous  convertible  loan holders and
the closing of the new convertible loan transaction  entered into by the Company
in  late  November   2003,  the  Company   received  an  additional   amount  of
approximately  $4,000,000.  See  "Risk  Factors--Investment  Risks--We  may need
additional  capital"  below.  If we are unable to raise  additional  funds,  the
Company  could  fail.  There can be no  assurance  that we will be able to raise
necessary  funds or that we will be able to do so on terms  acceptable to us. If
needed,  our  inability to obtain  adequate  capital  would limit our ability to
continue our operations.  Any such additional  funding may result in significant
dilution to existing shareholders.

On May 18, 2004, the Company entered into a definitive agreement for the private
placement of ordinary shares of the Company to existing institutional  investors
for gross proceeds of approximately  $3.9 million.  The investment is contingent
upon shareholders  approval and additional  closing  conditions.  In the past we
have received funds for the development of our business from the State of Israel
through the Office of the Chief Scientist,  or the OCS. Grants received from the
OCS through 2002 that the Company potentially will be obligated to repay totaled
approximately $800,000.


Risk of Litigation

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

In May 2003,  Commtouch  settled the  shareholder  class action lawsuit filed on
behalf of  shareholders  against the company in early 2001.  The  litigation was
initiated  against the company and two members of  management in response to the
company's announcement that it had decided to restate unaudited earnings for the
first three quarters of 2000, alleging violations of the antifraud provisions of
the Securities Exchange Act of 1934.


Indemnification of Directors and Officers

The Company has  agreements  with its  directors,  subject to Israeli law,  that
provide for the Company to indemnify  these  directors  for any of the following
obligations  or  expenses  incurred  as a result of an act or  omission  of such
persons in their capacity as directors: (a) any monetary obligation imposed upon
them for the benefit of a third party by a judgment,  including a settlement  or
an arbitration  decision,  confirmed by the court, and (b) reasonable litigation
expenses,  including legal fees, actually incurred by such a director or imposed
upon the director by a court order,  in a proceeding  brought against him/her by

                                       5
<PAGE>
or on behalf of the  Company  or by  others,  or in  connection  with a criminal
proceeding  in which  he/she was  acquitted,  or in  connection  with a criminal
action which does not require criminal intent in which he/she was convicted.


Risk due to economic conditions

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


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

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

Our low  head-count of 48 employees  (as of March 31, 2004)  continues to strain
our operational  resources,  and although the Company added additional sales and
support  personnel during 2003 and early 2004, the lack of sufficient  personnel
may compromise our ability to enhance revenues.


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

At December 31, 2003, we had sales offices in Israel and the United  States.  We
have also begun marketing of our anti-spam solutions in international markets by
utilizing appropriate  distributorship channels.  However, we may not be able to
compete  effectively in  international  markets due to various risks inherent in
conducting business internationally, such as:

     o    differing technology standards;

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

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

     o    difficulties in collecting  accounts  receivable and longer collection
          periods;

     o    unexpected changes in regulatory requirements;

     o    political and economic instability;

     o    potentially adverse tax consequences;

     o    the  adoption  of  new  legal   penalties  which  may  discourage  the
          distribution of unsolicited email messages; and

     o    potentially reduced protection for intellectual property rights.

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


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

On September 11, 2001, the United States was the target of terrorist  attacks of
unprecedented  scope.  These attacks  caused major  instability  in the U.S. and
other financial markets.  There could be further acts of terrorism in the United

                                       6
<PAGE>
States or  elsewhere  that  could  have a similar  impact.  Leaders  of the U.S.
government  have announced  their intention to actively pursue and take military
and other  action  against  those behind the  September  11, 2001 attacks and to
initiate broader action against national and global  terrorism.  In this regard,
the U.S.  recently led a coalition of forces in attacks on Afghanistan and Iraq.
The  worldwide  ramifications  of such  attacks are unknown at this time.  Armed
hostilities  or further acts of terrorism  would cause  further  instability  in
financial  markets and could  directly  impact our  financial  condition and our
results of operations.


Technology Risks

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

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


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

Our anti-spam solutions are based in part upon new and complex software. Complex
software often contains defects,  particularly when first introduced or when new
versions  are  released.  Although  we  conduct  extensive  testing,  we may not
discover   software  defects  that  affect  our  new  or  current  solutions  or
enhancements  until after they are delivered.  Although we have not  experienced
any material software defects to date in our anti-spam solutions offering, it is
possible  that,  despite  testing by us,  defects  may exist in the  software we
license.  These defects could cause interruptions in our anti-spam solutions for
customers that could damage our reputation, create legal risks, cause us to lose
revenue,  delay market  acceptance or divert our development  resources,  any of
which could cause our business to suffer.


Investment Risks

We may need additional capital

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

Based on the cash balance at December  31, 2003,  the payment in January 2004 of
approximately $1 million on behalf of warrants exercises by previous convertible
note holders,  current  projections  of revenues,  additional  signed  financing
agreements with investors,  related  expenses and the ability to further curtail
certain discretionary  expenses,  the Company believes it has sufficient cash to
continue operations for at least the next twelve months.


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

Our ordinary shares are quoted on the Nasdaq SmallCap Market.  To continue to be
listed, we are required to maintain shareholders' equity of at least $2,500,000,
or market  value of our  outstanding  shares  (excluding  shares held by company
insiders and principal  shareholders) of at least  $35,000,000,  or we must have
realized at least $500,000 in net income from continuing  operations in our last
fiscal year or in two of our last three fiscal  years.  Since our share price as
quoted on the Nasdaq  dropped  below a price that  lowered  our market  value to
below  $35,000,000  and our  shareholders'  equity  was below $2.5  million,  we
received a Nasdaq Staff  Determination  letter on May 10, 2004  indicating  that
Commtouch  had failed to comply with the  stockholders'  equity,  net income and

                                       7
<PAGE>
market value of publicly held shares  requirements for continued listing, as set
forth in Nasdaq's  Marketplace Rule 4320(e)(2)(B),  and that its securities were
therefore  subject to delisting from The Nasdaq SmallCap Market (as noted below,
Commtouch's  submission  of an appeal has  automatically  delayed the  delisting
process).  The subject rule requires  compliance  with at least one of the above
requirements in order to maintain listing with the Nasdaq.


Commtouch  has  appealed  the Nasdaq  Staff  Determination  and has  requested a
hearing  before a  Nasdaq  Listing  Qualifications  Panel to  review  the  Staff
Determination.  The hearing is set for June 17,  2004.  The hearing  request has
stayed the delisting of  Commtouch's  securities  pending the Panel's  decision,
which means that in the interim period the Company's  shares will continue to be
traded on the Nasdaq SmallCap  Market.  There can be no assurance the Panel will
grant Commtouch's  request for continued listing although the Company is working
on a plan for compliance with the Nasdaq listing rules.

Accordingly,  there can be no assurance that we will continue to comply with the
Nasdaq listing requirements for listing on the Nasdaq SmallCap Market.

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

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

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

If our shares are delisted,  they may become  subject to the SEC's "penny stock"
rules and be more difficult to sell. In addition, it may cause the occurrence of
an event of default  according to the  November  Securities  Purchase  Agreement
signed on November 26, 2003,  and thus may result in the redemption of the notes
by the lenders, and/or penalties to be paid in cash.

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


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

Our directors and  affiliates of our directors,  our executive  officers and our
shareholders  who currently  individually  beneficially own over five percent of
our ordinary shares, beneficially own, in the aggregate, approximately 39.34% of
our  outstanding  ordinary shares as of March 31, 2004 plus warrants and options
exercisable  within 60 days thereof.  If they vote together  (especially if they
were to convert all beneficial holdings into shares entitled to voting rights in
the Company),  these shareholders will be able to exercise significant influence
over all matters  requiring  shareholder  approval,  including  the  election of
directors and approval of significant corporate transactions. This concentration
of ownership  could also delay or prevent a change in control of Commtouch.  The
above percentage of beneficial  ownership includes warrants and options totaling
2.79% of the  outstanding  ordinary  shares which are underwater as of March 31,
2004.

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


                                       8
<PAGE>
interest may arise as a consequence of these  significant  shareholders  control
relationship with us, including:

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

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

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

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


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

The sale, or  availability  for sale, of substantial  quantities of our ordinary
shares may have the  effect of further  depressing  its  market  price.  A large
number  of  our  ordinary  shares  which  were  previously   subject  to  resale
restrictions,  are  currently  eligible  for resale.  In addition a  significant
number of shares are eligible for resale in the future,  i.e.  those shares that
may be issued if the lenders in the new convertible loan transaction of November
2003 decide to exercise  warrants and/or convert the Company's loan  obligations
to equity,  as well as those  shares that will be eligible for resale due to the
exercise of other warrants issued during 2003. These shares will dilute existing
shareholders.


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

According to the agreements with the Selling  Securityholders under Registration
Statements on Forms F-3 filed with the SEC on May 15, 2002, October 20, 2003 and
January 6, 2004,  should the Company fail to maintain the effectiveness of those
Registration Statements for the periods stated in the respective agreements, the
Company  risks  having  imposed  on it  liquidated  damages  as defined in those
agreements.  For details  about the  penalties  for the 2002 private  placement,
refer to  Exhibit  2.8 of the  Report on Form 20F filed on April 26,  2002.  For
details about the penalties for the July 2003 private  placements,  refer to the
Report on Form 6K for the  month of July,  filed on July 28,  2003,  and for the
month of August filed on August 15, 2003.  For details  about the  penalties for
the November 2003 private placement, refer to Form 6K for the month of November,
filed December 2, 2003. For details about the penalties for the May 2004 private
placement, refer to Form 6K for the month of May, filed May 19, 2004.

Risk of occurrence of event of default under Securities Purchase Agreement

The Company is required to abide by the terms and  provisions of the  Securities
Purchase Agreement of November 2003. Upon failure to do so, for example, failure
to pay  principal  or  interest,  we would be in default of the  agreement.  For
details  about the  events of  default,  refer to the  Report on Form 6K for the
month of December, filed on December 2, 2003.

The lenders were granted security  interests in all of the Company's  assets. If
an event of default were not cured by the Company, the loan would accelerate and
all amounts due under the loan would immediately become due and payable.  If the
Company were unable to repay the loan amounts, the lenders,  among other things,
would have the right to foreclose on their  security  interests in the Company's
assets by seizing and selling all the Company's assets.


Intellectual Property Risks

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

We regard our patent pending technology,  copyrights, service marks, trademarks,
trade secrets and similar intellectual  property as critical to our success, and
rely on patent,  trademark  and  copyright  law,  trade  secret  protection  and
confidentiality  or license  agreements  with our  employees  and  customers  to
protect our proprietary rights. Third parties may infringe or misappropriate our
patent pending  technology,  trade secrets,  copyrights,  trademarks and similar
proprietary   rights.  We  have  recently   converted  two  provisional   patent
applications  into a formal patent  application,  and we expect to file at least
one additional  provisional patent  application  covering certain aspects of our
anti-spam technology. We may seek to patent certain additional software or other
technology  in the  future.  Any such  patent  applications  might not result in
patents  issued  within the scope of the claims we seek, or at all. We cannot be
certain that our software  does not infringe  issued  patents that may relate to

                                       9
<PAGE>
our anti-spam solutions. In addition,  because patent applications in the United
States are not  publicly  disclosed  until the  patent is  issued,  applications
previously may have been filed which relate to our anti-spam solutions.

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

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

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

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

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


Risks Relating to Operations in Israel

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

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

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

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

                                       10
<PAGE>
conflicts or political  instability  in the region could  negatively  affect our
business or harm our results of operations.

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

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

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

We have  generated a  substantial  portion of our  revenues in U.S.  dollars and
incurred a portion of our expenses,  principally  salaries and related personnel
expenses in Israel,  in New Israeli Shekels,  commonly  referred to as NIS. As a
result,  we have been  exposed to the risk that the rate of  inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the dollar or that
the timing of any  devaluation may lag behind  inflation in Israel.  In 2002 and
for a number of years prior to 1999,  the rate of devaluation of the NIS against
the dollar  exceeded the rate of inflation.  This trend was reversed in 2003. We
cannot predict the trend for future years.  If the dollar cost of our operations
in Israel increases, our dollar-measured results of operations will be adversely
affected.  Our operations  also could be adversely  affected if we are unable to
guard against  currency  fluctuations in the future.  Accordingly,  we may enter
into currency  hedging  transactions to decrease the risk of financial  exposure
from  fluctuations  in the exchange  rate of the dollar  against the NIS.  These
measures,  however,  may not adequately protect us from material adverse effects
due to the impact of inflation in Israel.

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

Prior to 1998, we received  grants from the  Government  of Israel,  through the
Office of the Chief Scientist (OCS), for the financing of a significant  portion
of our research and  development  expenditures  in Israel.  In 2001 and 2002, we
applied  for  additional  grants and we may apply for  additional  grants in the
future. In 1999 and 2000, we did not receive any grants from the OCS. In 2001 we
received $0.6 million and in 2002 we received  $0.2 million.  While we submitted
an application for an additional grant in 2003, we decided not to draw any funds
thereunder  during 2003. The OCS budget has been subject to reductions which may
affect the availability of funds for this prospective  grant and other grants in
the future.  Therefore,  we cannot be certain  that we will  continue to receive
grants at the same rate,  or at all.  In  addition,  the terms of any future OCS
grants may be less favorable than our past grants.

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

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

Grants received from the OCS through 2002 that the Company  potentially  will be
obligated to repay totaled approximately $800,000.

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

                                       11
<PAGE>

Pursuant to the Law for the Encouragement of Capital Investments, the Government
of Israel through the Investment Center has granted "approved enterprise" status
to a portion  of our  capital  investment  programs.  The  portion of our income
derived  from our  approved  enterprise  program  will be exempt  from tax for a
limited  period  of two  years  commencing  in the  first  year in which we have
taxable income, and will be subject to a reduced tax for an additional period of
five to eight years  dependent  on the  percentage  of holdings of our shares by
foreign  shareholders.  The  benefits  available to an approved  enterprise  are
conditioned upon the fulfillment of specified  conditions,  including a required
amount of investments in fixed assets and a portion of these  investments  being
made  with  net  proceeds  of  equity  capital  raised  by us as  stipulated  in
applicable  law and in the  specific  certificates  of  approval.  If we fail to
comply  with these  conditions,  in whole or in part,  we may be required to pay
additional taxes (together with linkage adjustment to the Israeli consumer price
index and interest) for the period in which we benefited  from the tax exemption
or reduced tax rates and would likely be denied these benefits in the future. In
addition,  the law and  regulations  prescribing  the  benefits  provide  for an
expiration  date for the grant of new  benefits.  The  expiration  date has been
extended  several times in the past. The expiration  date currently in effect is
June 30, 2004 (which may be extended by ministerial  decision until December 31,
2004), and no new benefits will be granted after that date unless the expiration
date is extended. We cannot assure you that new benefits will be available after
June 30, 2004 or that  benefits will be continued in the future at their current
levels or at all.

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

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

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

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


Item 4. Information on the Company.


Overview

We are a provider of anti-spam  solutions to enterprise  customers.  The Company
offers its enterprise  anti-spam solution to small, medium and large enterprises
through a variety of distribution  channels,  namely various reseller  channels.
The  solutions  are  also  available  for  integration  with  security,  content
filtering,  anti-virus  and other  filtering  solutions  through  alliances  and
strategic   partnerships,   including  OEM  (Original  Equipment   Manufacturer)
arrangements.  In the middle of 2004, the Company is expected to release a first
version of its ISP (Internet Service Provider) anti-spam solution. The solutions
are marketed  worldwide through the Company's  internal sales force and external
distribution channels.

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

                                       12
<PAGE>
Commtouch Offerings

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

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

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

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

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

     If the message  remains  suspicious,  the  Enterprise  Gateway  queries the
     Detection Center for remote spam detection and classification services.

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

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

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



In addition to working with  Microsoft  Exchange  server  platforms,  during the
first half of 2004  Commtouch  will be releasing an enterprise  class  anti-spam
solution that will work with a Lotus Notes server platform.

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

The SDK consists of a set of APIs, which receive incoming messages as input from
the vendor's application, returning the status of the message as output from the
SDK.  Each vendor can  implement  its  solution  differently,  making the unique
advantages of SDK flexible to match particular needs.

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

     o    Anti-virus applications

     o    Content filtering solutions

                                       13
<PAGE>
     o    Firewall systems

     o    Security servers

     o    Telco and cellular phone systems

     o    Internet Service Provider services

     o    Anti-spam applications

     o    Other network appliances


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


Competitive Landscape

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

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

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

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

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


Financing Transactions During 2003

To enhance the Company's  overall financial  position,  the Company entered into
the following financing transactions during 2003:

a. On January 29, 2003,  Commtouch  entered into a  Convertible  Loan  Agreement
("the January Loan"), with certain lenders.  The Company received the total loan
amount of $1,250 thousand from the lenders, which bore interest at a rate of ten
percent per annum,  and  convertible  into ordinary shares of the Company at the
price of $0.25 per share.  In connection with the January Loan, the Company also
issued  warrants  exercisable  for purchase of up to 5,000,000 of the  Company's


                                       14
<PAGE>
ordinary shares, each one-third of the warrants exercisable within five years at
prices per ordinary share of $0.25, $0.33 and $0.50 respectively.

A more complete description of this convertible loan transaction may be found in
the Company's Form 6-K filed with the SEC for the month of April 2003,  which is
incorporated  herein by  reference  under  Exhibit  2.9 to this Form 20-F.  This
description  is  qualified  in its  entirety  by  reference  to the  text of the
Convertible Loan Agreement,  as amended, which is listed in this Form 20-F under
Exhibits 2.9.1 through 2.9.11.

b. On July 10,  2003,  Commtouch  entered  into an ordinary  shares and Warrants
Purchase  Agreement with certain investors named therein.  Under this agreement,
the  company  received  an  investment  of $1,440  thousand,  and  issued to the
investors  2,880,000  ordinary shares and warrants to purchase within five years
1,440,000  ordinary  shares at an  exercise  price of $0.50.  Warrants  totaling
325,000 shares were exercised in 2003, leaving 1,115,000 warrants outstanding as
at December 31, 2003. These warrants remain exercisable and expire on August 11,
2008.

A more complete  description of this equity purchase transaction may be found in
the Company's  Form 6-K filed with the SEC for the month of July 2003,  which is
incorporated  herein by reference  under  Exhibit  4.10 to this Form 20-F.  This
description  is  qualified  in its  entirety  by  reference  to the  text of the
Ordinary Shares and Warrants  Purchase  Agreement,  which is listed in this Form
20-F under Exhibit 4.10.1.

c. On July 29, 2003,  Commtouch  entered into two identical  ordinary shares and
Warrants Purchase  Agreements with certain investors named therein.  Under these
agreements,  the company  received  investments  totaling $1,600  thousand,  and
issued to the  investors  2,666,667  ordinary  shares and  warrants  to purchase
within five years 1,600,000 ordinary shares at an exercise price of $0.65. These
warrants remain exercisable and expire on August 11, 2008.

A more complete  description of these equity purchase  transactions may be found
in the  Company's  Form 6-K  filed  with the SEC for the  month of  August  2003
(August 15),  which is  incorporated  herein by reference  under Exhibit 4.11 to
this Form 20-F.  This  description  is qualified in its entirety by reference to
the text of the Ordinary  Shares and  Warrants  Purchase  Agreements,  which are
listed in this Form 20-F under Exhibits 4.11.1 and 4.11.2.

d. On November 26, 2003, the Company  signed an agreement  (the "November  Notes
Agreement")  for a private  placement of $3,000  thousand in senior  convertible
notes (the "November Notes") and related warrants (the "November Warrants") with
a group of  institutional  investors.  The notes  mature in three years and bear
interest at a rate of 8% per annum.  The notes are  convertible  at any time, at
the lenders'  option,  into the Company's  ordinary shares at a fixed conversion
price of $1.153.  The lenders also received  warrants to purchase 600,000 shares
of the Company, exercisable within three year at an exercise price of $1.153 per
share.  The issuance of the November  Notes was  contingent on the conversion of
the January  Loan and the  exercise of the January  Warrants  into  equity.  The
lenders retain the option to invest an additional $3 million on similar terms to
those of the original loan, with such option open for six months as from January
20, 2004 (the date that a registration  statement  covering the initial loan was
declared effective by the SEC).

A more complete description of this convertible loan transaction may be found in
the Company's  Form 6-K filed with the SEC for the month of November 2003 (filed
December 2, 2003), which is incorporated  herein by reference under Exhibit 2.10
to this Form 20-F. This description is qualified in its entirety by reference to
the text of the Securities Purchase Agreement, which is listed in this Form 20-F
under Exhibits 2.10.1 through 2.10.7.


Intellectual Property

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

                                       15
<PAGE>
It may be possible for  unauthorized  third parties to copy or reverse  engineer
certain portions of our products or obtain and use information that we regard as
proprietary.  In  addition,  the laws of some  foreign  countries do not protect
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that our means of protecting our  proprietary  rights in the
United States or abroad will be adequate or that  competing  companies  will not
independently develop similar technology.

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

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


Government Regulation

Laws aimed at  curtailing  the spread of spam have been  adopted by the  federal
government,   i.e.  CAN-SPAM  Act,  and  some  states,  with  the  CAN-SPAM  Act
superseding  some state laws or certain  elements  thereof.  See also disclosure
under "Item 3. Key Information- RISK FACTORS--Business Risks-- "Our Business May
be Adversely  Affected as a Consequence of Legislation  Imposing Legal Penalties
On Distributors of Unsolicited  Email".  Despite this  legislation,  we have not
seen an abatement in the amount of spam traffic on the Internet.

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


Employees

As of  December  31,  2003,  2002  and  2001,  we had  40,  22 and 92  full-time
employees,  respectively. None of our U.S. employees are covered by a collective
bargaining agreement. As of March 31, 2004, we had 48 employees. We believe that
our relations with our employees are good.

Israeli law and  certain  provisions  of the  nationwide  collective  bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordinating  Bureau  of  Economic  Organizations  (the  Israeli  federation  of
employers'   organizations)  apply  to  Commtouch's  Israeli  employees.   These
provisions  principally  concern the maximum length of the workday and workweek,
minimum  wages,  contributions  to a pension fund,  insurance  for  work-related
accidents,  procedures for dismissing employees,  determination of severance pay
and other  conditions of employment.  Furthermore,  pursuant to such provisions,
the wages of most of Commtouch's Israeli employees are subject to cost of living
adjustments,  based on changes in the Israeli  Consumer Price Index. The amounts
and frequency of such  adjustments  are modified from time to time.  Israeli law
generally  requires the payment of severance pay upon the retirement or death of
an employee or upon  termination  of  employment  by the employer or, in certain
circumstances,  by  the  employee.  We  currently  fund  our  ongoing  severance
obligations by making monthly payments for insurance policies and by an accrual.
A general  practice  in Israel  followed  by  Commtouch,  although  not  legally
required,  is the  contribution  of funds on behalf of certain  employees  to an
individual insurance policy known as "Managers' Insurance." This policy provides
a  combination  of savings  plan,  insurance  and  severance pay benefits to the
insured  employee.  It provides for payments to the employee upon  retirement or
death and secures a substantial  portion of the severance  pay, if any, to which
the  employee  is  legally  entitled  upon   termination  of  employment.   Each
participating employee contributes an amount equal to 5% of such employee's base
salary, and the employer  contributes  between 13.3% and 15.8% of the employee's
base salary. Full-time employees who are not insured in this way are entitled to
a savings  account,  to which  each of the  employee  and the  employer  makes a
monthly  contribution  of 5% of the  employee's  base  salary.  We also  provide


                                       16
<PAGE>
certain Israeli  employees with an Education  Fund, to which each  participating
employee contributes an amount equal to 2.5% of such employee's base salary, and
the employer  contributes an amount equal to 7.5% of the employee's base salary,
up to a certain maximum base salary.


Description of Property

The legal name of the Company is  Commtouch  Software  Ltd.,  and its  principal
executive  offices  are located at 1A Hazoran  Street,  Poleg  Industrial  Park,
P.O.Box  8511,   Netanya   42504,   Israel,   where  our  telephone   number  is
011-972-9-863-6888.  The Company's wholly owned  subsidiary,  Commtouch Inc., is
located at 1300 Crittenden Lane,  Suite 103,  Mountain View,  California  94043,
where our telephone number is (650) 864-2000.  All of our facilities are leased.
We were  incorporated as a limited liability company in Israel under the laws of
Israel on February 5, 1991.  Our Articles of  Association  are on file in Israel
with the office of the Israeli  Registrar of Companies  and available for public
inspection from the Registrar.

Revenues for Last Three Financial Years

See Item 5. Operating and Financial Review and  Prospects-"Revenue  Sources" and
the F pages to this Form 20-F below.

Capital Expenditures and Divestitures for Last Three Financial Years

Commtouch  divested  itself of four subsidiary  companies  during the last three
financial  years:  1) Commtouch  (UK) Ltd,  which was dissolved  during 2003, 2)
Commtouch Latin America Inc., which was dissolved  during 2002, 3) Wingra,  Inc.
("Wingra"),  which was sold during 2002 and 4) Commtouch K.K. (Japan) (now known
as Imatrix  Corporation),  which we previously  owned a majority of and,  during
2002,  reduced such holdings to a 32% interest and is being  accounted for under
the equity method.




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

During 2003, our business was to develop and sell,  through a reseller  program,
anti-spam  solutions to enterprise class  customers.  During 2002, we outsourced
integrated  Web-based  email and messaging  solutions to a few  businesses  that
remained as customers following the transfer of our consumer outsource web-based
email business and sale of our Hosted  Exchange email business  during late 2001
and early 2002 in  transactions  with MailCentro  Inc. and  Telecomputing,  Inc.
respectively.  During  early  2002,  concurrent  with  the  divestiture  of  the
Company's  above-stated  businesses,  the  Company  began  marketing  to service
providers its messaging software platform ("CMP"), which had been in development
by the Company prior to that time. Following a concerted effort to penetrate the
email server market and a determination that the continuing unfavorable economic
conditions would hamper potential sales of CMP, and given the Company's inherent
knowledge  of  anti-spam  solutions  based  on its  many  years as an ASP in the
outsourced  email  market  and the  growing  worldwide  attention  that has been
directed  to the  problem of spam,  the  Company  transitioned  its focus to the
anti-spam market in mid-2002.  While no uniform  definition of spam exists,  the
Company  generally  defines "spam" as the sending of unsolicited  bulk email for
commercial and non-commercial purposes.

                                       17
<PAGE>
In February 2002, the Company sold off its migration service business, Wingra,
to Wingra's senior management. The operations of Wingra were eliminated from the
operations of the entity as a result of the disposal transaction. The Company
ceased its activity in the migration service business. The results of operations
including revenue, operating expenses and other income and expense, of Wingra
for 2001, have been reclassified in the accompanying statements of operations as
discontinued operations.


Critical Accounting Policies and Estimates

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


Revenue recognition

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


Contingencies

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

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

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


Revenue Sources

Service Fees.

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

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

Direct  E-marketing.  During 2002,  we did not  recognize any revenues from this
type of activity,  as our business model had changed (see above discussion under
"Overview").  Prior  to  2002,  because  of our  installed  user  base  and  our


                                       18
<PAGE>
agreements  with our  customers,  we could assist  e-commerce  companies  (those
seeking marketing channels) in distributing their services to our customers' end
users who opted to receive  offers by email.  We shared with our  customers  the
revenues from this direct e-marketing, which were earned either on a per-message
basis, a referral  basis, or as a commission on products sold. In 2001 and 2000,
no direct e-marketing customer provided more then 10% of revenues.


Results of Operations

The following  table sets forth  financial data for the years ended December 31,
2001, 2002 and 2003 (in thousands):
<TABLE>
<CAPTION>
                                                                                                  Year Ended December 31,
                                                                                       ---------------------------------------------
                                                                                         2001              2002              2003
                                                                                       --------          --------          --------
<S>                                                                                    <C>               <C>               <C>
Revenues:
   Email services ............................................................         $ 13,318          $  3,238          $    329
   Software license revenues .................................................              270               200              --
                                                                                       --------          --------          --------
   Total revenues ............................................................           13,588             3,438               329
Cost of revenues .............................................................           13,962             1,675               581
                                                                                       --------          --------          --------
   Gross profit (loss) .......................................................             (374)            1,763              (252)
                                                                                       --------          --------          --------
Operating expenses:
   Research and development, net .............................................            5,884             2,246             1,476
   Sales and marketing .......................................................           12,894             1,176             1,875
   General and administrative ................................................           10,337             2,588             1,308

   Amortization of stock-based employee deferred compensation ................            2,204               551               247
   Write-off of property and equipment and other .............................           10,166               750              --
                                                                                       --------          --------          --------
   Total operating expenses ..................................................           41,485             7,311             4,906
                                                                                       --------          --------          --------
Operating loss ...............................................................          (41,859)           (5,548)           (5,158)
   Interest and other income, net ............................................              583               (60)           (1,967)
   Equity in earnings (losses) of affiliate ..................................             --                 (56)              291
   Write-off impaired long-term investments ..................................           (2,000)             --                --
   Minority interest .........................................................              285                74              --
                                                                                       --------          --------          --------
Loss from continuing operations ..............................................          (42,991)           (5,590)           (6,834)
Gain on disposal of Wingra ...................................................             --               1,014              --
Discontinued Operations - Wingra .............................................          (18,016)             (335)             --
                                                                                       --------          --------          --------
Income (Loss) from sale of discontinued operations ...........................          (18,016)              679              --
                                                                                       --------          --------          --------
Net loss .....................................................................         $(61,007)         $ (4,911)         $ (6,834)
                                                                                       ========          ========          ========
</TABLE>

Comparison of Years Ended December 31, 2003 and 2002

Revenues.  Due to the sale of its migration  (Wingra  Inc.) and hosted  exchange
services, as well as its consumer class business in 2001, the Company's revenues
for 2003 had decreased  significantly  comparing to 2002,  mainly because of the
Company's change of focus during 2003.

Revenues  decreased  $3.1  million  from $3.4 million in 2002 to $0.3 million in
2003. 2003 revenues  represent royalty income from email services and from sales
of  anti-spam  solutions  (see  Note 2h to the Notes to  Consolidated  Financial
Statements). We are expecting revenues to rise from $0.3 million in 2003, as the
anti-spam  solutions  will be available  for the full year and as we gain market
share.  In 2003 and 2002, we had three and two  customers,  respectively,  whose
revenue exceeded 10% of the Company's revenues,  representing 70% and 57% of the
2003 and 2002 revenues, respectively.

Cost of Revenues.  Cost of revenues  decreased  65% from $1.7 million in 2002 to
$0.6  million in 2003.  Cost of revenues is not expected to increase at the same
rate as revenues from the anti-spam solution increases.  The cost includes costs

                                       19
<PAGE>
of running the anti-spam  detection center,  which are not as labor intensive as
when we were providing hosted email services.

Research and Development,  Net. Research and development  expenses decreased 32%
from  $2.2  million  in 2002 to $1.5  million  in 2003  due to the  decrease  in
personnel and other related costs. In 2003 and 2002, we received royalty-bearing
grants  totaling  zero  and  $0.2  million,   respectively,   from  the  Israeli
government,  which were  recorded as a reduction  of  research  and  development
costs.  The  Israeli  government  requires  beneficiaries  of such grants to pay
royalties to the Israeli  government based on the revenues derived from the sale
of  products,  technologies  and  services  developed  with such  grants.  It is
possible  that an  obligation  to pay  royalties in 2004 and future years may be
imposed on the Company,  as we started to generate  revenues  from our anti-spam
solutions in the middle of 2003,  although it is the Company's  position that no
royalty  bearing   technologies  are  utilized  in  relation  to  its  anti-spam
solutions. The ultimate liability is subject to review by the OCS.

Sales  and  Marketing.  Sales and  marketing  expenses  increased  59% from $1.2
million in 2002 to $1.9  million in 2003,  due to the  increase in  personnel in
connection with the launch of our new product in the middle of 2003.

General and  Administrative.  General and administrative  expenses decreased 49%
from $2.6 million in 2002 to $1.3 million in 2003,  due primarily to curtailment
of  costs.  These  expenses  include  net  income  from  the  recovery  of notes
receivables  totaling $0.3 million related to notes granted to former  employees
during 1999, for which a valuation allowance was recorded in 2002.

Amortization  of Stock-Based  Employee  Deferred  Compensation.  Our stock-based
employee deferred compensation expenses decreased 55% from $0.6 million for 2002
to $0.2 million for 2003. The deferred compensation is being amortized using the
sum-of-digits   method  over  the  vesting   schedule,   generally  four  years.
Amortization  of these  amounts  concluded  during  the third  quarter  of 2003.
Deferred  compensation  expenses also included $0.2 million in each of the years
in 2003 and 2002,  respectively,  relating  to the  repricing  of stock  options
during  2001.  The total  amortization  charge of $1.0  million  related  to the
repricing is amortized using the straight-line  method over a three year vesting
schedule, which will conclude by the middle of 2004.

Interest and Other Income,  Net. Our interest and other income,  net,  increased
from a net loss of $0.1 million for 2002 to $2 million for 2003,  due  primarily
to a  non-cash  charge of $1.9  million  in 2003  relating  to the  issuance  of
convertible loans and warrants.

Minority Interest. At December 31, 2002, the Company owned 32% of the equity and
voting rights of Imatrix (formerly  Commtouch,  K.K. (Japan)).  During 2002, the
Company's  investment in Imatrix  changed from a  consolidated  subsidiary to an
equity investment; as such we ceased to have minority interest in 2003.

Income  Taxes.  As of December 31, 2003, we had  approximately  $31.5 million of
Israeli  net  operating  loss  carry-forwards.  We also  had  U.S.  federal  net
operating loss  carry-forwards  available to offset future taxable  income.  The
Israeli net operating loss  carry-forwards have no expiration date. The U.S. net
operating loss  carry-forwards  will expire in various amounts in the years 2009
to  2023.  Utilization  of U.S.  net  operating  losses  may be  subject  to the
substantial annual limitation due to the "change in ownership" provisions of the
Internal  Revenue  Code  of  1986  and  similar  state  provisions.  The  annual
limitation  may  result  in  the  expiration  of  net  operating  losses  before
utilization.


Comparison of Years Ended December 31, 2002 and 2001

Revenues.  Email  service  revenues  decreased 74% from $13.3 million in 2001 to
$3.2 million in 2002.  We recognized  revenue of $0.3 million,  from the sale of
licenses in 2001 and $0.2 million in 2002.  In 2002 we had two  customers  whose
revenue  exceeded  10%,  representing  57% of the  2002  revenues.  No  customer
accounted for more than 10% of revenues in 2001.

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

Research and Development,  Net. Research and development  expenses decreased 62%
from  $5.9  million  in  2001to  $2.2  million  in 2002 due to the  decrease  in
personnel and other related costs. In 2002 and 2001, we received royalty-bearing
grants  totaling  $0.2  and  $0.6  million,   respectively,   from  the  Israeli
government,  which were  recorded as a reduction  of  research  and  development
costs. During 2001, we reduced research and development personnel by eliminating
certain  projects,  while  only  maintaining  a core  project  aligned  with our
strategic direction.

                                       20
<PAGE>
Sales and  Marketing.  Sales and  marketing  expenses  decreased  91% from $12.9
million in 2001 to $1.2 million in 2002,  due to the agreement  with  MailCentro
and sale of the Hosted  Exchange  business,  as well as the  change in  business
strategy.

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

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

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

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

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

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

Income  Taxes.  As of December 31, 2002, we had  approximately  $28.0 million of
Israeli  net  operating  loss  carry-forwards.  We also  had  U.S.  federal  net
operating loss  carry-forwards  available to offset future taxable  income.  The
Israeli net operating loss  carry-forwards have no expiration date. The U.S. net
operating loss  carry-forwards  will expire in various amounts in the years 2008
to  2022.  Utilization  of U.S.  net  operating  losses  may be  subject  to the
substantial annual limitation due to the "change in ownership" provisions of the
Internal  Revenue  Code  of  1986  and  similar  state  provisions.  The  annual
limitation  may  result  in  the  expiration  of  net  operating  losses  before
utilization.


Quarterly Results of Operations (Unaudited)

The  following  table sets  forth  certain  unaudited  quarterly  statements  of
operations data for the eight quarters ended December 31, 2003. 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.

                                       21
<PAGE>
<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                               -------------------------------------------------------------------------------------
                                               Mar. 31,    Jun 30,   Sept. 30,  Dec. 31,   Mar. 31,   Jun. 30,  Sept. 30,   Dec. 31,
                                                 2002       2002       2002       2002       2003       2003       2003       2003
                                               -------    -------    -------    -------    -------    -------    -------    -------
                                                                                   (in thousands)
                                                                                    (unaudited)
<S>                                            <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Email service revenues .....................   $ 1,271    $ 1,005    $   525    $   637    $   106    $    70    $    84    $    69
Cost of email service revenues .............       933        406        153        183        174        143        130        134
                                               -------    -------    -------    -------    -------    -------    -------    -------
Gross profit (loss) ........................       338        599        372        454        (68)       (73)       (46)       (65)
                                               -------    -------    -------    -------    -------    -------    -------    -------
Operating expenses:
Research and
   development, net ........................       573        530        621        522        346        362        387        381
Sales and marketing ........................       521        244        221        190        188        340        609        738
General and administrative .................       766        421        379      1,022        442        332        561        (27)
Amortization of stock-based
   employee compensation ...................       138        138        138        137         63         63         63         58
Write-off of property and
   equipment and other .....................      --         --         --          750       --         --         --         --
                                               -------    -------    -------    -------    -------    -------    -------    -------
Total operating expenses ...................     1,998      1,333      1,359      2,621      1,039      1,097      1,620      1,150
                                               -------    -------    -------    -------    -------    -------    -------    -------
Operating loss .............................    (1,660)      (734)      (987)    (2,167)    (1,107)    (1,170)    (1,666)    (1,215)
Interest and other income
   (expenses), net .........................        44        (20)       (48)       (36)       (37)      (105)      (141)    (1,684)
Equity in earnings
   (losses) of affiliate ...................      --           18        (47)       (27)      --          238         44          9
Minority interest ..........................        63         11       --         --         --         --         --         --
                                               -------    -------    -------    -------    -------    -------    -------    -------
Loss from continuing
   operations ..............................    (1,553)      (725)    (1,082)    (2,230)    (1,144)    (1,037)    (1,763)    (2,890)
                                               -------    -------    -------    -------    -------    -------    -------    -------
Gain on disposal of Wingra .................     1,014       --         --         --         --         --         --         --
Discontinued
   operations - Wingra .....................      (335)      --         --         --         --         --         --         --
                                               -------    -------    -------    -------    -------    -------    -------    -------
Income from sale of
   discontinued operations .................       679       --         --         --         --         --         --         --
                                               -------    -------    -------    -------    -------    -------    -------    -------
Net loss ...................................   $  (874)   $  (725)   $(1,082)   $(2,230)   $(1,144)   $(1,037)   $(1,763)   $(2,890)
                                               =======    =======    =======    =======    =======    =======    =======    =======

</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 including entering a new and unstable market
due to launching the anti-spam  product. A relatively large expense in a quarter
could have a  negative  effect on our  financial  performance  in that  quarter.
Additionally,  as a strategic response to a changing competitive environment, we
may elect  from time to time to make  certain  pricing,  service,  marketing  or
acquisition  decisions  that  could  have a  negative  effect  on our  quarterly
financial performance. Other factors that may cause our future operating results
to fluctuate include, but are not limited to:

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

     o    demand for anti-spam solutions;

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

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

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

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

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

     o    technical difficulties or system outages;

                                       22
<PAGE>

     o    foreign exchange rate fluctuations;

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

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

     o    the pricing policies of our competitors;

     o    failure to increase our sales; and

     o    governmental  regulation relating to the Internet,  and spam practices
          in particular.

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


Liquidity and Capital Resources

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

As of December 31, 2003 and March 31, 2004  respectively,  we had  approximately
$4.1 million and approximately $ 4.5 million of cash to fund operations in 2004.
In 2003 we utilized  $4.5  million of cash to fund  operating  losses.  Net cash
provided by financing  activities were  approximately $7.2 million mainly due to
proceeds from the issuance of shares,  and receipt of two convertible loans (one
convertible  loan was converted  into equity).  Net cash utilized from investing
activities was insignificant.

As of December  31,  2003 and March 31,  2004,  we had  working  capital of $4.0
million and $2.9 million, respectively.

According to the November  Notes  Agreement,  any delay in  registration  and/or
effectiveness of the November Notes according to the registration  requirements,
can cause the  occurrence of an event of default and  redemption of the notes by
the lenders, and/or penalties to be paid in cash.

On May 18, 2004, the Company entered into a definitive agreement for the private
placement of ordinary shares of the Company to existing institutional  investors
for gross proceeds of approximately  $3.9 million.  The investment is contingent
upon shareholders approval and additional closing conditions.

Based on the cash balance at December 31, 2003, current projections of revenues,
related expenses,  and the completion of the convertible loan  transaction,  the
Company believes it has sufficient cash to continue  operations for at least the
next twelve months through December 31, 2004.


Effective Corporate Tax Rates

Our tax  rate  will  reflect  a mix of the U.S.  statutory  tax rate on our U.S.
income and the  Israeli  tax rate  discussed  below.  We expect that most of our
taxable  income will be generated in Israel.  Israeli  companies  are  generally
subject to  corporate  tax at the rate of 36% of taxable  income.  A part of our
income,  however,  is derived from the Company's capital investment program with
Approved  Enterprise  status  under  the Law for the  Encouragement  of  Capital
Investments in three separate plans,  and is therefore  eligible for certain tax
benefits.  The  Company  has  three  approved  programs,  out of which  two were
cancelled  in prior  years.  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.  The
period  of tax  benefits  is  subject  to  limits  of 12 years  from the year of
commencement of production, or 14 years from the grant of approval, whichever is
earlier. Moreover,  notwithstanding our Approved Enterprise status in Israel, we
may be required to pay income or withholding taxes in other countries.  Since we
have  incurred tax losses in every year through  2003,  we have not yet used the
tax benefits for which we are  eligible.  See Item 10 below for a discussion  on
tax reform.

                                       23
<PAGE>
Impact of Inflation and Currency Fluctuations

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

The annual rate of inflation in Israel  was-1.9% in 2003,  6.5% in 2002 and 1.4%
in 2001. The NIS was devalued against the U.S. dollar by approximately  -6.4% in
2003, 7.3% in 2002and 9.3% in 2001. The representative  dollar exchange rate for
converting the NIS to U.S. dollars,  as reported by the Bank of Israel,  was NIS
4.379 for one U.S.  dollar on December  31, 2003.  Note that the  representative
dollar exchange rate was NIS 4.528 at March 31, 2004.

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  operating  results  and  period-to-period  comparisons  of our
results.  The effects of foreign  currency  re-measurements  are reported in the
consolidated  financial  statements  for  relevant  periods in the  statement of
operations.

The Company's  affiliates  (Imatrix's)  functional currency is the Japanese Yen.
Consequently  Imatrix's  results of operations are translated into USD.  Because
exchange rates between the Yen and the dollar fluctuate  continuously,  exchange
rate  fluctuations  will have an impact on the Company's  equity in earnings and
losses of affiliate.



Item 6. Directors, Senior Management and Employees

The following  table sets forth certain  information  regarding our directors at
March 31, 2004:

<TABLE>
<CAPTION>
                                                     Beneficial
                                                      Ownership
                  Name                  Age             >1%(3)                          Position
                 -----                  ----          ----------                        --------
<S>                                      <C>            <C>                  <C>
Amir Lev............................     43             2.8%                 Director
Carolyn Chin(1).....................     56             1.1%                 Chairman of the Board of Directors
Gideon Mantel(1)....................     44             5.9%                 Director
Nahum Sharfman(1)...................     55             3.8%                 Director
Lloyd E. Shefsky(2)(4)..............     63             1.8%                 Director
Richard Sorkin......................     42               --                 Director
Udi Netzer (2)......................     48              --                  Director (Outside Director)
Ofer Segev(1)(2)....................     44              --                  Director (Outside 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, 2004. Unless otherwise indicated, to the Company's knowledge the person
     named has sole  voting and  investment  power and the right to receive  the
     economic  benefits,  or share  such  power and  rights  with such  person's
     spouse,  with  respect  to all shares  held by that  person.  Warrants  and
     options  that were  underwater  as of March 31,  2004 were  included in the
     calculation of beneficial ownership.

(4)  This percentage  represents Mr. Shefsky's  individual holdings and holdings
     of LENE L.P., for which he acts as General Partner.
</FN>
</TABLE>

                                       24
<PAGE>


Other Management Employees:

The  following  table  sets  forth  the names and  positions  of our  management
employees at March 31, 2004:
<TABLE>
<CAPTION>

             Name             Age      Ownership >1%                       Position
            ------            ----    --------------                      ----------
<S>                            <C>    <C>                   <C>
Gideon Mantel............      44     See table above       CEO
Amir Lev.................      43     See table above       President and Chief Technical Officer
Devyani Patel............      43            --             Vice President, Finance
Avner Amram..............      42            --             Executive Vice President, Commtouch Inc.
Gary Davis...............      42            --             General Counsel and Corporate Secretary
Udi Trugman..............      33            --             Vice President, Research and Development,
                                                              Commtouch Software Ltd.
Ronni Zehavi.............      38            --             Vice President, Operations, Commtouch Software Ltd.
Haggai Carmon............      45            --             Vice President, Marketing, Commtouch Software Ltd.
Timothy Straight.........      49            --             Vice President, Sales, Commtouch Inc.
Mark Uicker..............      40            --             Vice President, Business Development, Commtouch Inc.
</TABLE>


Amir Lev is a  co-founder  of Commtouch  and has served as its Chief  Technology
Officer  and as a Director  since its  inception  in 1991.  Mr. Lev was also the
General  Manager of Commtouch  from January 1997 through April 2000,  and in May
2000 became President. Mr. Lev received a B.A. in Computer Science and Economics
from Hebrew University, Jerusalem.

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

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

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

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

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

                                       25
<PAGE>
Ofer Segev has served as a Director of Commtouch  since February 2002. Mr. Segev
has been CEO of Teleknowledge since January 2002 and its CFO from May 2001. From
May 2000 to April 2001 served as CFO for Tundo.  Prior to his position at Tundo,
Segev  spent 15  years  with  Ernst & Young.  Segev  has a BA in  economics  and
accounting  from Bar Ilan  University in Israel,  and has studied at the Kellogg
Graduate School of Management at Northwestern University.

Lloyd E. Shefsky has served as a Director of Commtouch since October 2003. He is
a Clinical  Professor  of  Entrepreneurship  and  Co-Director  of the Center for
Family Enterprises at the Kellogg School of Management and has taught in several
countries.  In 1970, he founded the Chicago law firm,  Shefsky & Froelich  Ltd.,
where he is Of Counsel since 1996.  Since 1981 he has represented the Government
of  Israel  throughout  the  Midwestern  U.S.  For  nearly  forty  years  he has
represented  hundreds of entrepreneurs and their companies,  and during the past
twenty-five  years, such  representation has included numerous Israeli companies
with U.S.  operations.  Mr. Shefsky  authored  Entrepreneurs  Are Made Not Born,
which was translated into five foreign languages.  He received his J.D. from the
University of Chicago Law School, a B.S.C. from De Paul University (accounting),
is a member of the  Illinois  and Florida  Bars,  and has a CPA  certificate  in
Illinois.

Avner Amram joined  Commtouch  in 1996 and  currently  serves as Executive  Vice
President. Mr. Amram has over 15 years of experience in the areas of technology,
operational  management and  leadership,  and is also a founder of CVDO.  Before
2002,  Mr. Amram served as COO of Commtouch  and was  responsible  for worldwide
operations.  Mr. Amram also held a number of  positions  at  Commtouch  prior to
being  appointed COO. From 1995 to 1996, Mr. Amram served as project manager for
Medatech,  a  leading  provider  of  customer   relationship   management  (CRM)
solutions, developing and managing complex installations at large organizations.
Prior to Medatech, Mr. Amram acted as General Manager of Fuga Nursery in Israel,
where he was responsible for operations, production, marketing and distribution.
Mr.  Amram holds a Bachelors  of Science  (BSC),  in  Computer  Engineering  and
graduated Cum Laude from the Technion, Israel Institute of Technology.

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

Gary Davis joined  Commtouch in September 1999 and serves as General Counsel and
Corporate  Secretary.  Mr. Davis has over 18 years of legal  experience  in both
private law firm and corporate practices. Mr. Davis is certified to practice law
in both the State of Israel and  California.  Prior to September 1999, Mr. Davis
was  in-house  counsel  to  Israel  Military  Industries  and  Elta  Electronics
Industries. He received a B.A. in Political Economy of Industrial Societies from
U.C. Berkeley and a J.D. in law from Golden Gate University.

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

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

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

Tim  Straight  joined  Commtouch  in July 2003 and serves as Vice  President  of
Sales.  Mr  Straight  is a 20-year  veteran of  technology  sales,  and was most
recently  Western Region Director at NetScreen  Technologies.  He is responsible
for Commtouch's North American sales  objectives,  continuing the development of
the  channel   operations   as  well  as  building   existing   and  future  OEM
relationships.  Prior to  joining  Netscreen,  Mr  Straight  held  domestic  and
international sales and business development  positions with Mirapoint,  Gadzoox
Networks,   Vitalsigns   Software,   CheckPoint   Software   Technologies,   and

                                       26
<PAGE>
Synoptics/Bay  Networks.  He has a  Bachelors  degree  in  Journalism  from  the
University of Rhode Island.

Mark Uicker was appointed Vice President of Business  Development in December of
2003. He is responsible for managing all of Commtouch's  relationships  with OEM
partners,  identifying  and  pursuing  new  business  opportunities  as  well as
negotiating  agreements  to embed and license  Commtouch's  anti-spam  detection
engine in OEM enterprise,  service provider and consumer  software  applications
and messaging and security appliances.  Mr. Uicker brings 14 years experience in
the software  business to Commtouch,  his most recent  position having been vice
president  of  business  development,   in  charge  of  channel  sales  at  Kaon
Interactive.  Uicker  previously  served  as vice  president  of OEM  sales  and
business  development  at  anti-spam  vendor  Elron  Software  (acquired  by Zix
Corporation in fall 2003).


Election of Directors

Directors  (other than outside  directors,  as  explained  below) are elected by
shareholders at the annual general meeting of the  shareholders  and hold office
until the next annual  general  meeting  following the general  meeting at which
such  Director is elected  and until his  successor  is elected,  or until he is
removed.  An annual general meeting must be held at least once in every calendar
year,  but not more than  fifteen  months  after the  preceding  annual  general
meeting.  Directors  may be removed and other  directors may be elected in their
place or to fill  vacancies in the Board of Directors at any time by the holders
of a majority  of the  voting  power at a general  meeting of the  shareholders.
Until a vacancy  is  filled by the  shareholders,  the  Board of  Directors  may
appoint new directors  temporarily  to fill vacancies on the Board of Directors.
The  Articles  of  Association  of  Commtouch   authorize  the  shareholders  to
determine,  from time to time,  the  number of  directors.  The  number was most
recently fixed at nine directors. There are no family relationships among any of
the directors, officers or key employees of Commtouch.


Alternate Directors

The Articles of Association  of Commtouch  provide that any director may appoint
another person to serve as an alternate  director and may remove such alternate.
Any alternate  director possesses all the rights and obligations of the director
who  appointed  him,  except that the  alternate  has no standing at any meeting
while the appointing director is present,  the alternate may not in turn appoint
an  alternate  for  himself  (unless the  instrument  appointing  him  otherwise
expressly provides) and the alternate is not entitled to remuneration.  A person
who is not  qualified  to be  appointed  as a director,  or a person who already
serves as a  director  or an  alternate  director,  may not be  appointed  as an
alternate  director.  Unless the appointing director limits the time or scope of
the  appointment,  the  appointment  is  effective  for all  purposes  until the
appointing  director ceases to be a director or terminates the appointment.  The
appointment  of  an  alternate   director  does  not  in  itself   diminish  the
responsibility of the appointing director as a director.


Independent and Outside Directors

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

     o    an employment relationship;

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

     o    control; and

     o    service as an office holder.

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

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

                                       27
<PAGE>

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

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

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

In addition,  the Nasdaq SmallCap Market currently requires Commtouch to have at
least two  independent  directors on the Board of  Directors  and to maintain an
audit  committee,  at least a  majority  of whose  members  are  independent  of
management.

However,  recent Nasdaq  corporate  governance  Marketplace Rule changes require
that, by July 31, 2005  (representing an extended  compliance  period due to the
Company's  status as a foreign private  issuer),  the Company have a majority of
independent directors, as defined under Marketplace Rule 4200(a)(15), unless the
Company has cause to request and receives an exemption under the rules from this
requirement, and an audit committee of three members, each of whom must:

     (i)    be independent as defined under Marketplace Rule 4200(a)(15);

     (ii)   meet the  criteria for  independence  set forth in Exchange Act Rule
            10A-3(b)(1) (subject to the exemptions provided in Exchange Act Rule
            10A-3(c);

     (iii)  not have participated in the preparation of the financial statements
            of the Company or any current  subsidiary of the Company at any time
            during the past three years; and

     (iv)   be able to read and  understand  fundamental  financial  statements,
            including a company's balance sheet, income statement, and cash flow
            statement.

Under limited circumstances, the Company may have one audit committee member not
independent in accordance  with the above,  but such a member would only be able
to serve for a maximum of two years.

Additionally,  pursuant  to Exchange  Act Rule  10A-3(b)(1),  by July 31,  2005,
members of the audit committee must meet that rule's definition of independence,
which  requires  that an audit  committee  member may not,  except in his or her
capacity as a director or committee  member,  (i) accept  directly or indirectly
any consulting,  advisory,  or other compensatory fee from the Company or any of
its  subsidiaries  (except for fixed amounts of compensation  under a retirement
plan for prior service with the Company,  provided that such compensation is not
contingent in any way on continued service),  and (ii) be an "affiliated person"
of the Company or any of its subsidiaries.


The new Nasdaq rules also  require  that the Company (by July 31, 2005)  certify
that it has,  and will  continue  to have,  at least  one  member  of the  audit
committee who has past employment experience in finance or accounting, requisite
professional  certification in accounting, or any other comparable experience or
background which results in the individual's financial sophistication, including
being or having been a chief executive officer, chief financial officer or other
senior  officer with  financial  oversight  responsibilities.  Also,  under Item
401(h) of Regulation S-K, the Company is currently obligated to disclose whether
or not it has a "financial expert" on its audit committee, as defined under this
regulation (See Item 16A. Audit Committee Financial Expert).

Currently,  we have appointed three directors to the audit committee who qualify
as independent  directors under the current Nasdaq SmallCap Market requirements,
and  we  believe  that  these   directors  will  also  meet  the  definition  of
independence  under the new rules,  when they become  applicable  to the Company
(assuming said directors  continue to serve until such time).  Furthermore,  two
out of the  three  directors  on the  audit  committee  meet  the  qualification
requirements for outside directors, as required under the Israel Companies Law.


                                       28
<PAGE>
Audit Committee

As noted above,  the Israel Companies Law and Nasdaq  Marketplace  Rules require
public  companies to appoint an audit  committee.  The  responsibilities  of the
audit  committee  include  identifying  irregularities  in the management of the
Company's  business,  approving  management  compensation and approving  related
party  transactions  as required by law. An audit  committee  must consist of at
least three directors  meeting the independence  and outside director  standards
under the Nasdaq Marketplace Rules, Exchange Act Rules and Israel Companies Law,
as described above under "Independent and Outside Directors."  Furthermore,  the
Israel  Companies  Law  specifically  prohibits  the  chairman  of the  Board of
Directors,  any  director  employed  by or  otherwise  providing  services  to a
company,  and  a  controlling  shareholder  or  any  relative  of a  controlling
shareholder from being a member of the audit committee.


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 a  company's  actions  comply with
relevant  law and orderly  business  procedure.  Under the  Companies  Law,  the
internal  auditor may be an employee of the company but not an interested  party
or office holder, or a relative of an interested party or office holder,  and he
or she may not be the company's  independent  accountant or its  representative.
The Company appointed a qualified internal auditor during 2003.


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

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

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

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

The  Israel  Companies  Law  applies  the  same  disclosure  requirements  to  a
controlling  shareholder of a public company,  which includes a shareholder that
holds 25% or more of the voting  rights if no other  shareholder  owns more than
50% of the  voting  rights in the  company.  Extraordinary  transactions  with a
controlling  shareholder  or in which a controlling  shareholder  has a personal
interest,  and the terms of compensation of a controlling  shareholder who is an
office  holder,  require  the  approval  of the  audit  committee,  the Board of
Directors and the  shareholders of the company.  The  shareholder  approval must

                                       29
<PAGE>
either  include at least  one-third of the  disinterested  shareholders  who are
present,  in person or by proxy,  at the  meeting or,  alternatively,  the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.

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

     o    any amendment to the Articles of Association;

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

     o    a merger; or

     o    approval of interested  party  transactions  that require  shareholder
          approval.

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


Compensation Committee Interlocks

The Compensation Committee,  which was established by the Board in January 1996,
is  responsible  for  determining  salaries,   incentives  and  other  forms  of
compensation  for  Commtouch's  directors,  officers and other employees and for
administering various incentive compensation and benefit plans. The Compensation
Committee  consists of the Chief  Executive  Officer and three other  Directors.
Ofer  Segev,  as an  outside  director,  Carolyn  Chin and  Nahum  Sharfman  are
currently the three other directors on the Compensation Committee.


Indemnification of Directors and Officers; Limitations on Liability

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

Compensation of Directors and Officers.

The directors of Commtouch can be remunerated by Commtouch for their services as
directors  to the extent such  remuneration  is approved  by  Commtouch's  audit
committee,  Board of  Directors  and  shareholders.  Directors  currently do not
receive cash compensation for their services as directors but are reimbursed for
their expenses for each Board of Directors meeting attended.  However,  see Item
10 "Amended and Restated 1999 Non-Employee Directors Stock Option Plan".

The  aggregate  direct  remuneration  paid by  Commtouch  to all  directors  and
executive officers (8 persons) in 2003 was approximately $0.6million. During the
same period Commtouch  accrued or set aside  approximately  $30,000 for the same

                                       30
<PAGE>
group to provide  pension,  retirement or similar  benefits.  As of December 31,
2003,  directors  and  executive  officers of Commtouch  (8 persons)  held stock
options to purchase an aggregate of 3,931,227 ordinary shares.


Options to Purchase Securities from Registrant or Subsidiaries.

As of December 31, 2003, 7,066,635 stock options to purchase ordinary shares had
been granted to  employees,  consultants,  executive  officers and  non-employee
directors under the Company's stock option plans, net of cancelled  options.  Of
that number  6,249,108 had not been  exercised and had exercise  prices  ranging
from $0.01 to $35 per share and a weighted  average per share  exercise price of
$0.31, and were held by 35 persons; these options have termination dates ranging
from February 2006 to December  2013. At December 31, 2003, the persons named in
Item 6 as a group (8  persons -  executive  officers  and  directors  only) held
vested options to acquire 3,931,227  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, 2004, including:

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

     o    all executive officers and directors as a group.

Beneficial  ownership  is  determined  in  accordance  with  the  rules  of  the
Securities and Exchange  Commission and includes voting or investment  power, or
the right to receive the economic benefits of ownership, with respect to shares.
To  our  knowledge,  except  under  applicable  community  property  laws  or as
otherwise  indicated,  the persons  named in the table have sole voting and sole
investment  control and rights to receive economic  benefits with respect to all
shares  beneficially  owned.  The  applicable  percentage  of ownership for each
shareholder is based on 37,319,562  ordinary shares  outstanding as of March 31,
2004.  Ordinary  shares  issuable upon exercise of options and other rights held
and exercisable on or within sixty days of March 31, 2004 are deemed outstanding
for the purpose of computing  the  percentage  ownership  of the person  holding
those  options and other rights and for all  directors  and officers as a group,
but are not deemed  outstanding  for computing the  percentage  ownership of any
other person.  Major  shareholders in the Company have the same voting rights as
all other shareholders.

                                                         Amount       Percent of
                                                         Owned          Class
                                                       ----------     ----------
Israel Seed IV, L.P.                                   3,747,088        9.5%
Gideon Mantel                                          2,262,960        5.9%
OZF Ltd.                                               3,206,138        8.4%
KKB Ventures LLC                                       2,423,457        6.4%
XDL Capital Corp.                                      1,940,704        5.1%

All directors and officers as a group (8 persons)      6,202,497       14.3%

(1)  The above percentage  includes warrants and options which are underwater as
     of March 31, 2004: 2.7% of class


Significant Changes in Percentage Ownership During the Past Three Years

     o    The  percentage  beneficial  ownership  of Israel  Seed IV,  L.P.,  at
          December 31, 2003 is 9.5%. This investor was a significant participant
          in the July 29, 2003 and November 26, 2003 private placements.

     o    The percentage  beneficial  ownership of InfoSpace  (formerly Go2Net),
          which at December  31, 2002 was 8.7%,  has dropped well below the five
          percent  threshold,  due to InfoSpace's sale of 896,057 shares and the
          increase in the outstanding  shares of the Company during 2003. To the
          best  of the  Company's  knowledge,  InfoSpace  is no  longer  a major
          shareholder  in the Company.  InfoSpace  still  possesses a warrant to
          purchase  1,136,000  ordinary shares at an original  exercise price of
          $12.80 per share  (subject to  adjustment  as  described  below).  The

                                       31
<PAGE>

          warrant is non-forfeitable,  fully vested and immediately exercisable,
          and will expire five years from the date of the original email service
          agreement (July 16, 2004). If Infospace does not exercise this warrant
          and  continue  to  hold  an  amount  of  warrant  shares  representing
          twenty-five percent of its and Vulcan Ventures original  shareholdings
          purchased in 1999, they will lose the right to appoint one director to
          the Board of the  Company.  At  InfoSpace's  option,  the  warrant  is
          exercisable  pursuant  to a  cashless  exercise  based on the  average
          closing price of the ordinary  shares for the five days  preceding the
          exercise.  The holder of the warrant is  required to avoid  becoming a
          10% or greater  shareholder of the Company as a result of any exercise
          of the warrant.  The holder of the warrant is given the opportunity to
          profit from a rise in the market price of the ordinary  shares and the
          warrant.  The warrant  includes  provisions  which adjust the exercise
          price upon the  occurrence  of certain  events  which might  otherwise
          dilute  the  value  of the  warrant,  and the  Company  believes  that
          following  certain  of the  Company's  recent and  prospective  future
          financing   activities,   the  exercise   price  is  projected  to  be
          approximately $4.91.

     o    Nahum Sharfman,  who at December 31, 2002, owned beneficially 6.05% of
          the Company,  is no longer a major shareholder in the Company,  due to
          the increase in outstanding shares of the Company during 2003.

     o    Jan Eddy,  who at December  31,  2001,  owned  beneficially  5% in the
          Company,  is no  longer  a major  shareholder  due both to her sale of
          shares in the Company and the  increase in the  outstanding  shares of
          the Company during 2002 and 2003.


Interest of Management in Certain Transactions.

Lloyd  Shefsky  became a Director of  Commtouch in October  2003.  Prior to that
time, Lene L.P., for which Mr. Shefsky acts as a General  Partner,  undertook to
loan the Company  $50,000 under the  Convertible  Loan  Agreement of January 29,
2004. On May 15, 2003, pursuant to Addendum 2 to the Convertible Loan Agreement,
Mr. Shefsky  personally  committed to loan the Company  $25,000.  As a result of
these two  investments,  and  pursuant  to  Addendum 3 to the  Convertible  Loan
Agreement  of November  18, 2003 under which the various  lenders  committed  to
converting  their  loan into  equity in the  Company,  the  combined  beneficial
shareholdings  of Mr.  Shefsky and Lene L.P. as of December 31, 2003 amounted to
677,438 ordinary shares, or approximately 2% of the Company's outstanding shares
at that date.


Option Exercises and Purchases of Shares By Certain Officers

Gideon Mantel is the Chief  Executive  Officer and a Director of  Commtouch.  On
March  17,  1999,  Mr.  Mantel  exercised  certain  options  granted  to  him by
Commtouch.  In consideration  for the Ordinary Shares purchased  pursuant to the
exercise of the options,  he provided Commtouch with a full-recourse  promissory
note dated March 17, 1999 in the  original  principal  amount of  $341,272.  The
promissory note bears interest at 4.83% annually, with payments of interest only
due on March 17 of each year and with the  balance due and payable on the fourth
anniversary of the date of the promissory note. This loan was used by Mr. Mantel
to purchase  286,120 ordinary shares of Commtouch at a weighted average purchase
price of $1.19 per share. The promissory note is  collateralized  by a pledge of
the stock purchased. The outstanding principal amount of the note as of December
31, 2003 is approximately $102,000.


Item 8. Financial Information.

See Item 18:  Financial  Statements If the Company  decides to distribute a cash
dividend out of income that has been tax exempt due to an "Approved  Enterprise"
status under the Law for the  Encouragement  of Capital  Investments,  1959, the
amount of cash  dividend  will be subject to  corporate  tax at the rate then in
effect under Israeli law. The Company has never  declared or paid cash dividends
on its ordinary shares and does not anticipate  paying any cash dividends in the
foreseeable future. The Company intends to retain future earnings to finance the
development of its business.


Item 9. The Offer and Listing.

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

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

                                       32
<PAGE>
                                                          High          Low
                                                         ------      --------
1999(beginning July 13, 1999):                           $49.12      $11.0625

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

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


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

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


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


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


2004:
First Quarter ..................................         $ 1.24      $ 0.83


Most Recent Six Months:
December 2003 ..................................         $ 1.15      $ 0.79
January 2004 ...................................           1.24        0.84
February 2004 ..................................           1.15        0.91
March 2004 .....................................           1.06        0.83
April 2004 .....................................           1.09        0.85
May 2004 .......................................           0.92        0.57


Item 10. Additional Information.

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

Neither the Articles of  Association of the Company nor the laws of the State of
Israel  restrict  in any way the  ownership  or  voting  of  ordinary  shares by
non-residents of Israel,  except with respect to subjects of countries which are
at a state of war with Israel.


                              DESCRIPTION OF SHARES

Set forth  below is a summary of the  material  provisions  governing  our share
capital.  This  summary is not  complete  and should be read  together  with our
Memorandum  of  Association  and Restated and Amended  Articles of  Association,
copies of which have been filed as exhibits to this and our prior Annual Reports
on Form 20-F,  as amended  (subject  to further  amendment  of our  Articles  of
Association from time to time).

As of December 31, 2003,  our authorized  share capital  consisted of 75,000,000
ordinary  shares,  NIS 0.05 par  value.  As of  December  31,  2003,  there were
37,104,615 ordinary shares issued and outstanding.

                                       33
<PAGE>
                         DESCRIPTION OF ORDINARY SHARES

All issued and outstanding  ordinary shares of Commtouch are duly authorized and
validly issued,  fully paid and  nonassessable.  The ordinary shares do not have
preemptive  rights.  Our Memorandum of Association,  Articles of Association and
the laws of the State of  Israel do not  restrict  in any way the  ownership  or
voting of ordinary  shares by  non-residents  of Israel,  except with respect to
subjects of countries which are in a state of war with Israel.


                         DIVIDEND AND LIQUIDATION RIGHTS

The ordinary  shares are entitled to their full  proportion of any cash or share
dividend declared.

Subject  to the  rights of the  holders  of shares  with  preferential  or other
special  rights  that may be  authorized,  the  holders of  ordinary  shares are
entitled to receive  dividends in  proportion to the sums paid up or credited as
paid up on account of the  nominal  value of their  respective  holdings  of the
shares in  respect of which the  dividend  is being paid  (without  taking  into
account the  premium  paid up on the  shares)  out of assets  legally  available
therefor  and, in the event of our  winding  up, to share  ratably in all assets
remaining  after  payment of  liabilities  in proportion to the nominal value of
their respective holdings of the shares in respect of which such distribution is
being made, subject to applicable law.  Declaration of a dividend requires Board
of Director approval.


 SPECIAL PROVISIONS IN ARTICLES/MEMORANDUM OF ASSOCIATION RELATING TO DIRECTORS


The discussion regarding approval of director compensation and transactions with
the Company under "Item 6. Directors, Senior Management and Employees - Approval
of Certain Transactions; Obligations of Directors, Officers and Shareholders" is
incorporated herein by reference.


                  VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS

Holders of  ordinary  shares have one vote for each  ordinary  share held on all
matters submitted to a vote of shareholders.  Such rights may be affected by the
future  grant of any special  voting  rights to the holders of a class of shares
with preferential rights. Once the creation of a class of shares with preference
rights has been  approved,  the Board of Directors may issue  preferred  shares,
unless the Board is limited  from doing so by the Articles of  Association  or a
contractual provision.

An annual  general  meeting must be held once every  calendar  year at such time
(not more than 15 months after the last preceding annual general meeting) and at
such place,  either within or outside the State of Israel,  as may be determined
by the  Board of  Directors.  The  quorum  required  for a  general  meeting  of
shareholders consists of at least two shareholders present in person or by proxy
and  holding  at least  one-quarter  of the voting  rights of the  issued  share
capital.  A meeting  adjourned for lack of a quorum may be adjourned to the same
day in the next  week at the same time and  place,  or to such time and place as
the  Board of  Directors  may  determine  in a notice to  shareholders.  At such
reconvened  meeting any two shareholders  entitled to vote and present in person
or by proxy will  constitute a quorum.  Shareholder  resolutions  will be deemed
adopted if approved by the holders of a majority of the voting power represented
at the meeting, in person or by proxy, and voting thereon.


                   ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

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

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

                                       34
<PAGE>
made by means of tender offer if as a result of the  acquisition  the  purchaser
would become a 45% shareholder of the company, unless someone else already holds
a majority of the voting power of the  company.  These rules do not apply if the
acquisition  is made  by way of a  merger.  Regulations  promulgated  under  the
Companies  Law provide  that these  tender  offer  requirements  do not apply to
companies whose shares are listed for trading outside of Israel if, according to
the law in the country in which the shares are traded,  including  the rules and
regulations of the stock exchange on which the shares are traded, either:

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

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

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


                         TRANSFER OF SHARES AND NOTICES

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


                          MODIFICATION OF CLASS RIGHTS

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


       DESCRIPTION OF INVESTOR AND SERVICE PROVIDERS OPTIONS AND WARRANTS


INFOSPACE WARRANT

The  discussion  regarding  the Infospace  warrant  under Item 5.  Operating and
Financial Review and  Prospects--Strategic  Transaction with Go2Net  (InfoSpace)
and Item 7. "Major  Shareholders  and Related Party  Transactions--  Significant
Changes in  Percentage  Ownership  During the Past Three Years" is  incorporated
herein by reference.


EQUITY OFFICE PROPERTIES WARRANT

The  discussion  regarding the Equity Office  Properties  warrant under Item 18,
Note 10 to the Notes to Consolidated Financial Statements - Shareholders' Equity
is incorporated herein by reference.


COMPAQ WARRANT

The discussion  regarding the Compaq warrant under Item 18, Note 10 to the Notes
to  Consolidated  Financial  Statements -  Shareholders'  Equity is incorporated
herein by reference.


FEBRUARY 2002 INVESTMENT ROUND WARRANTS

The discussion  regarding the February 2002 investment round warrants under Item
18, Note 10 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.


JANUARY 2003 CONVERTIBLE LOAN WARRANTS

The discussion  regarding the January 2003  convertible loan warrants under Item
18, Note 10 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.

                                       35
<PAGE>
JULY 2003 INVESMENT ROUNDS WARRANTS

The discussion regarding the two July 2003 investment rounds warrants under Item
18, Note 10 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.


NOVEMBER 2003 CONVERTIBLE LOAN WARRANTS

The discussion  regarding the November 2003 convertible loan warrants under Item
18, Note 10 to the Notes to  Consolidated  Financial  Statements - Shareholders'
Equity is incorporated herein by reference.


AGRON WARRANT

The  discussion  regarding the Agron warrant under Item 18, Note 10 to the Notes
to  Consolidated  Financial  Statements -  Shareholders'  Equity is incorporated
herein by reference.


REGISTRATION RIGHTS

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

In addition,  if Commtouch proposes to register any of its ordinary shares under
the Securities Act other than in connection with a company employee benefit plan
or a corporate  reorganization pursuant to Rule 145 under the Securities Act, or
a registration on any registration  form that does not permit secondary sales or
does not include  substantially  the same information as would be required to be
included  in  a  registration   statement   covering  the  sale  of  Registrable
Securities,  the holders of  Registrable  Securities  may require  Commtouch  to
include  all or a portion of their  shares in such  registration,  although  the
managing underwriter of any such offering has certain rights to limit the number
of  shares  in  such  registration.  Further,  a  majority  of  the  holders  of
Registrable  Securities may require  Commtouch to register all or any portion of
their  Registrable  Securities on Form F-3,  subject to certain  conditions  and
limitations.  All expenses incurred in connection with all registrations  (other
than fees,  expenses and disbursements of counsel retained by the holders of the
Registrable  Shares,  and underwriters' and brokers'  discounts and commissions)
will be borne by Commtouch.

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

In addition, the Company granted registration rights as follows:

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

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

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

     d.   to lenders under the  Convertible  Loan Agreement of January 29, 2003,
          as amended,  whereby a loan amount of  $1,250,000  was provided to the
          Company  and  subsequently  converted  into  equity  in  the  Company.
          Following  conversion,  on January 20,  2004,  the Company  registered
          11,304,432  ordinary  shares on behalf of the lenders,  with 5,652,216
          representing shares issuable upon exercise of warrants (with a term of
          five years).

                                       36
<PAGE>
     e.   to  investors  under the two private  placements  of July 10, 2003 and
          July 29, 2003,  whereby  Commtouch  issued  5,546,667  ordinary shares
          against the  investment  of  $3,040,000.  The investors in the private
          placement  also  received  five-year  warrants  to  purchase  up to an
          additional  3,040,000  ordinary shares.  The shares issued under these
          private placements, including shares to be issued upon the exercise of
          the warrants,  were registered on November 3, 2003;  however,  given a
          delay in the registration  process,  additional  "liquidated  damages"
          shares  totaling  40,926  ordinary shares were issued to the investors
          and registered on January 20, 2004;

     f.   to lenders  under the  Securities  Purchase  Agreement of November 26,
          2004, as amended,  whereby a loan amount of $3,000,000 was provided to
          the Company.  Under this agreement,  the Company (i) granted rights to
          convert  the loan into  equity  at a  conversion  price of $1.153  per
          Ordinary Share,  and (ii) issued warrants  exercisable for purchase of
          up to 600,000 of the Company's  Ordinary  Shares,  exercisable  within
          three years at a price per Ordinary  Share of $1.153.  Pursuant to the
          agreement,  the Company registered  4,162,479 ordinary shares with the
          SEC on January 20, 2004.  For six months as from January 20, 2004, the
          lenders  retain  the  option to invest an  additional  $3  million  on
          similar terms to those of the original loan,  including those relating
          to  the  registration  of  additional  shares  and  shares  underlying
          warrants; and

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


                              ACCESS TO INFORMATION

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


                          TRANSFER AGENT AND REGISTRAR

The transfer  agent and  registrar  for our ordinary  shares is Wells Fargo Bank
Minnesota N.A.


MATERIAL CONTRACTS DURING PAST TWO YEARS.

Consulting and Fundraising Agreements

On September 1, 2002, Commtouch entered into two agreements with AxcessNet Ltd.,
one for the providing of consulting  services to Commtouch  ("agreement  1") and
the  other  for  the  facilitating  of  fundraising  and  strategic   commercial
transactions  ("agreement  2").  Under  agreement  1,  AxcessNet is to receive a
payment of $140,000 in cash and some warrants.  Agreement 1 was due to expire on
August 31, 2003,  but was extended  twice,  once until  December 31, 2003,  with
AxcessNet receiving $15,000 per month during this extended period, and again for
an additional year commencing January 1, 2004, with AxcessNet  receiving $10,000
per month  during  this  extended  period  (unless  terminated  earlier,  at the
Company's  discretion).  Under  agreement  2, as  amended on  December  1, 2002,
AxcessNet  is  entitled to receive 5% of proceeds  received  by  Commtouch  from
fundraising activities (and in the case of a business combination, a minimum fee
of $100,000),  as well as from commercial transactions entered into by Commtouch
through the efforts of AxcessNet.  The compensation to be paid under agreement 2
is payable in either cash or warrants,  at  AxcessNet's  discretion,  but if the
warrants  are to exceed  250,000,  Commtouch  has the right to pay any excess in
cash. Furthermore, in the event that Commtouch is acquired by a third party, any
continuing  payment  obligations of Commtouch to AxcessNet  under agreement 2 at
the time of such  acquisition may be fully liquidated by a payment of the lesser
of twenty four months worth of payments or the number of months  remaining under
Commtouch's obligations to AxcessNet.  During their relationship under agreement
1 and agreement 2, Commtouch and AxcessNet have been working together closely in
furtherance of the Company's business,  and are in constant  communications with
one another. AxcessNet was also a lender under the Convertible Loan Agreement of
January 29, 2003 (see Exhibits 2.9.1 - 2.9.11),  with its interest converting to
equity in the Company on December 26, 2003.

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

                                       37
<PAGE>
Pursuant  to the  agreement  with Young Woo,  Commtouch  and Young Woo agreed to
terminate the New York facilities lease agreement.  Within the framework of this
agreement Commtouch made certain payments to Young Woo and transferred ownership
to  certain  furniture,  and Young Woo  released  Commtouch  from the  remainder
(approximately two years) of the lease term under the original agreement and the
related guarantee.


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

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

Convertible Loan Agreement of January 2003

See "Item 4. Information on the Company - Financing Transactions During 2003".

Two Private Placements of July 2003

See "Item 4. Information on the Company - Financing Transactions During 2003".

Securities Purchase Agreement of November 2003

See "Item 4. Information on the Company - Financing Transactions During 2003".


Amended and Restated 1999 Non-Employee Directors Stock Option Plan

The allotment of shares under the original  1999  Non-Employee  Directors  Stock
Option Plan was in the amount of 180,000  ordinary  shares,  with an  additional
allotment  in 2000  bringing the plan's total  allotment to 500,000  shares,  an
allotment  in 2001  bringing the plan's total to 750,000  ordinary  shares,  two
allotments  during 2002 totaling  700,000  ordinary  shares  bringing the plan's
total to 1,450,000 and a further allotment in December 2003 of 840,000, bringing
the plan's total to 2,290,000. During 1999, each individual who first joined the
Board of Directors as a non-employee  director on or after the effective date of
the  initial  public  offering  received  an option  grant for  10,000  options.
Subsequent to July 2000,  individuals  who joined the Board  received an initial
grant of 30,000  options,  and pursuant to an amendment to the plan  approved by
shareholders  on December 26,  2003,  new  directors  are entitled to an initial
grant of 150,000 options. As from December 26, 2003, directors who are reelected
at the annual  meeting of  shareholders  are  entitled to  additional  grants of
50,000 options.  Prior to that time,  directors reelected at the August 10, 2000
annual  meeting of  shareholders  were  entitled  to a grant of 10,000  options,
directors  reelected at the August 22, 2001 annual meeting of shareholders  were
entitled to a grant of 33,750  options,  those  directors in office  immediately
after the  extraordinary  general  meeting of  shareholders on February 25, 2002
were granted a one-time  option grant of 150,000  options and those directors in
office immediately after the annual meeting of shareholders on November 18, 2002
were granted a one-time option grant of 50,000 options. Also, in addition to the
grant of shares for her  reelection as a director in August 2001,  Carolyn Chin,
in  recognition  of her  activities  as  Chairman  of  the  Board,  received  an
additional grant of 221,250 options.

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

Amended and Restated Articles of Association

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

                                       38
<PAGE>
                    ISRAELI TAXATION AND INVESTMENT PROGRAMS

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


Tax Reform

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


General Corporate Tax Structure

Israeli  companies  are  generally  subject to company tax at the rate of 36% of
taxable  income.  However,  the  effective  tax rate payable by a company  which
derives income from an approved  enterprise may be considerably less, as further
discussed  below.

Special Provisions Relating to Taxation under Inflationary Conditions

The Income Tax Law (Inflationary  Adjustments),  1985,  generally referred to as
the Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy  undergoing rapid inflation.
The  Inflationary  Adjustments  Law is highly complex.  Its features,  which are
material to us, can be described as follows:

     o    there is a special tax adjustment for the preservation of equity which
          classifies  corporate  assets into fixed assets and non-fixed  assets.
          Where  a  company's  equity,  as  defined  in  the  law,  exceeds  the
          depreciated cost of fixed assets, a deduction from taxable income that
          takes  into  account  the  effect  of the  applicable  annual  rate of
          inflation  on the  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 a linked basis.  If the  depreciated  cost of fixed
          assets exceeds a company's  equity,  then the excess multiplied by the
          applicable annual rate of inflation is added to taxable income;

     o    subject to specified  limitations,  depreciation  deductions  on fixed
          assets and losses carried  forward are adjusted for inflation based on
          the increase in the consumer price index; and

     o    in specified  circumstances,  gains on traded securities,  which might
          otherwise  be  eligible  for reduced  rates of tax,  will be liable to
          company tax at the rate of 36%.


Law for the Encouragement of Industry (Taxes), 5729-1969

The Law for the Encouragement of Industry (Taxes),  1969,  generally referred to
as the Industry  Encouragement Law, provides several tax benefits for industrial
companies.  An industrial company is defined as a company resident in Israel, at
least 90% of the income of which in a given tax year  exclusive  of income  from
specified  government loans, capital gains,  interest and dividends,  is derived
from an industrial  enterprise owned by it. An industrial  enterprise is defined
as an  enterprise  whose  major  activity  in a given  tax  year  is  industrial
production activity.


                                       39
<PAGE>
Under the Industry  Encouragement  Law,  industrial  companies are entitled to a
number of corporate tax benefits, including:

     o    deduction  of  purchase of know-how  and  patents  over an  eight-year
          period; and

     o    the right to elect, under specified conditions, to file a consolidated
          tax return with additional related Israeli industrial companies and an
          industrial holding company.

Under some tax laws and  regulations,  an industrial  enterprise may be eligible
for special  depreciation  rates for machinery,  equipment and buildings.  These
rates differ based on various  factors,  including the date the operations begin
and the  number  of work  shifts.  An  industrial  company  owning  an  approved
enterprise  may  choose  between  these  special   depreciation  rates  and  the
depreciation rates available to the approved enterprise.

Eligibility for benefits under the Industry  Encouragement Law is not subject to
receipt of prior approval from any governmental authority.

We  believe  that we  currently  qualify  as an  industrial  company  within the
definition  of the  Industry  Encouragement  Law. We cannot  assure you that the
Israeli tax authorities will agree that we qualify,  or, if we qualify,  that we
will continue to qualify as an industrial company or that the benefits described
above will be available to us in the future.


Law for the Encouragement of Capital Investments, 5719-1959

The Law for the Encouragement of Capital Investments, 5719-1959, 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 of the  Ministry  of  Industry,  Trade and  Labor,  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,  such as the equipment to be purchased and utilized pursuant to
the program.  The tax benefits  under the  Investment  Law are not available for
income derived from products manufactured outside of Israel.

A company owning an Approved Enterprise may elect to receive either governmental
grants or an alternative  package of tax benefits.  Commtouch's three investment
plans  have  been  granted  the  status  of an  Approved  Enterprise  under  the
Investment Law, in three separate investment  programs,  in 1992, 1996 and 2000,
respectively, the second and third programs cancelled in early 2002 and in 2001.
With regard to the first program,  Commtouch received long-term loans guaranteed
by the  State of  Israel.  Under the terms of  Commtouch's  Approved  Enterprise
program  pursuant to the alternative  package of tax benefits,  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,  depending on the extent of foreign  investments  in the
Company.  The  benefits  period  is  limited  to twelve  years  from the year of
completion of the investment under the approved plan, or fourteen years from the
date of approval, whichever is earlier. 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.  A Foreign Investors Company ("FIC"),
as defined in the Investment  Law, may enjoy benefits for an extended  period of
up to ten years.  A FIC is a company of which more than 25% of its  shareholders
are non-Israeli residents.

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  our  Approved  Enterprise  status in Israel,  we may be
required to pay income or withhold taxes in other countries.

All dividends are  considered to be  attributable  to the entire  enterprise and
their  effective  tax  rate  is the  result  of a  weighted  combination  of the
applicable tax rates. A company that has elected the alternative  package of tax
benefits and pays a dividend out of income derived from the Approved  Enterprise
during the exemption period will be subject to tax on the amount distributed, at
the rate that would have been  applicable  had it not  elected  the  alternative
package  of  benefits  (generally,  10%-25%  depending  on the extent of foreign
investment in the company). The Company currently intends to reinvest the amount
of its  tax-exempt  income  and not to  distribute  such  income as a  dividend.
Dividends from Approved  Enterprises are generally taxed at a rate of 15% (which
is withheld and paid by the company  paying the  dividend)  if such  dividend is
distributed during the benefits period or within twelve 12 years thereafter. The
twelve-year limitation does not apply to a FIC.

                                       40
<PAGE>
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 to approve or reject an application  for  designation as
an Approved Enterprise 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  application  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 related  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 linkage adjustment to the Israeli consumer price index and interest.

Capital  Gains  Tax on  Sale  of our  Ordinary  Shares  by  both  residents  and
non-residents of Israel.

Israeli law generally  imposes a capital gains tax on the sale of capital assets
located  in Israel,  including  shares in Israeli  resident  companies,  by both
residents and non-residents of Israel,  unless a specific exemption is available
or unless a treaty between Israel and the country of the  non-resident  provides
otherwise.  Regulations  promulgated  under the  Israeli  Income  Tax  Ordinance
provided  for an  exemption  from Israeli  capital  gains tax for gains  accrued
before  January 1, 2003 and  derived  from the sale of shares of an  "Industrial
Company",  as  defined by the  Industry  Encouragement  Law,  that are traded on
specified  non-Israeli markets,  including The NASDAQ National Market,  provided
that the sellers  purchased their shares either in the company's  initial public
offering or in public market transactions thereafter.

This exemption does not apply to shareholders who are in the business of trading
securities,  or to shareholders  that are Israeli resident  companies subject to
the Income Tax  (Adjustments  for Inflation) Law- 1985, or to  shareholders  who
acquired their shares prior to an initial public offering.  The Company believes
that  it is  currently  an  Industrial  Company,  as  defined  by  the  Industry
Encouragement  Law.  The status of a company  as an  Industrial  Company  may be
reviewed by the tax  authorities  from time to time.  There can be no  assurance
that the  Israeli  tax  authorities  will not deny the  Company's  status  as an
Industrial Company, possibly with retroactive effect.

On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment
No.132),  5762-2002,  known as the tax reform,  came into  effect thus  imposing
capital  gains tax at a rate of 15% on gains accrued on or after January 1, 2003
from the sale of shares in Israeli  companies  publicly  traded on a  recognized
stock exchange  outside of Israel.  This tax rate does not apply to: (1) dealers
in securities;  (2)  shareholders  that report in accordance with the Income Tax
Law  (Inflationary  Adjustment) - 1985; or (3)  shareholders  who acquired their
shares prior to an initial  public  offering.  The tax basis of shares  acquired
prior to January  1, 2003 will be  determined  in  accordance  with the  average
closing  share  price in the three  trading  days  preceding  January  1,  2003.
Non-Israeli  residents  shall be exempt from  Israeli  capital  gains tax on any
gains  derived  from the sale of  shares  publicly  traded  on a stock  exchange
recognized by the Israeli  Ministry of Finance,  provided such  shareholders did
not acquire their shares prior to an initial public offering.  In any event, the
provisions of the tax reform shall not affect the  exemption  from capital gains
tax for gains  accrued  before  January 1, 2003,  as  described  in the previous
paragraph.

In addition,  pursuant to the  Convention  Between the  Government of the United
States of America and the  Government of Israel with Respect to Taxes on Income,
as amended (the  "United  States-  Israel Tax  Treaty"),  the sale,  exchange or
disposition  of ordinary  shares by a person who  qualifies as a resident of the
United States within the meaning of the United  States-Israel Tax Treaty and who
is entitled to claim the benefits  afforded to such person by the United States-
Israel Tax Treaty (a "Treaty  United  States  Resident")  generally  will not be
subject to the Israeli  capital  gains tax unless  such  "Treaty  United  States
Resident" holds, directly or indirectly,  shares representing 10% or more of the
Company's  voting  power during any part of the twelve-  month period  preceding
such sale,  exchange or  disposition,  subject to certain  conditions.  However,
under the United  States-Israel Tax Treaty, such "Treaty United States Resident"
would be  permitted to claim a credit for such taxes  against the United  States
federal income tax imposed with respect to such sale,  exchange or  disposition,
subject to the  limitations  in United  States  laws  applicable  to foreign tax
credits.  The United  States-Israel  Tax Treaty does not relate to United States
state or local taxes.

                                       41
<PAGE>
Non-residents  of Israel are subject to income tax on income  accrued or derived
from  sources  in  Israel.  These  sources  of income  include  passive  income,
including dividends,  royalties and interest, as well as non-passive income from
services  rendered in Israel.  On  distribution  of  dividends  other than bonus
shares or stock dividends, income tax is withheld at source, at the rate of 25%,
or  12.5%  for  dividends  not  generated  by  an  approved  enterprise  if  the
non-resident  is a U.S.  corporation and holds at least 10% of our voting power,
and 15% for dividends generated by an approved enterprise, unless in each case a
different rate is provided in a treaty between Israel and shareholder's  country
of residence.  Under the  U.S.-Israel  tax treaty,  the maximum tax on dividends
paid to a holder of ordinary shares who is a U.S. resident will be 25%. However,
under the  Investment  Law,  dividends  generated by an approved  enterprise are
taxed at the rate of 15%.


Taxation of Non-Resident Shareholders

Non-residents  of Israel are subject to Israeli  income tax on income accrued or
derived  from sources in Israel,  including  passive  income such as  dividends,
royalties and interest.  On distributions of dividends,  other than bonus shares
and stock  dividends,  income tax at the rate of 25% is  withheld at the source,
unless  a  different  rate  is  provided  in a  treaty  between  Israel  and the
shareholder's  country of residence.  If the dividends  are  distributed  out of
Approved  Enterprise  earnings,  the applicable tax rate would be 15%. Under the
United States- Israel Tax Treaty,  the maximum tax on dividends paid to a holder
of ordinary shares who is a Treaty United States  Resident will be 25%,  however
the tax rate is reduced  to12.5%  for  dividends  not  generated  by an Approved
Enterprise  to a  corporation  which holds 10% or more of the  Company's  voting
power  during a certain  period  preceding  the  distribution  of the  dividend.
Dividends  derived from an Approved  Enterprise will still be subject to 15% tax
withholding.

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, 5744-1984

Under the Law for the  Encouragement  of  Industrial  Research and  Development,
5744-1984 (the "Research Law") and the  Instructions of the Director  General of
the Ministry of Industry, Trade and Labor, 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 expenditures if they meet certain criteria. These grants
are issued in return for the payment of royalties from the revenues derived from
the sale of the product developed in accordance with the program, as follows: 3%
of revenues  during the first three years,  4% of revenues  during the following
three  years,  and 5% of revenues in the seventh year and  thereafter,  with the
total  royalties  not to exceed 100% of the dollar value of the OCS grant (or in
some cases up to 300%).  Following the full payment of such royalties,  there is
no further liability for payment.

The  Israeli   government   further   requires  that  products   developed  with
governmental  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

                                       42
<PAGE>
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.

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  presence in Israel,  or if there is any
material deviation from the  representations  made by the Company to the Israeli
government, the Company could be required to refund to the State of Israel taxes
or other benefits  previously  received (together with linkage adjustment to the
Israeli  consumer  price  index) and would likely be  ineligible  to receive OCS
grants in the future.

The Company has participated in programs sponsored by the OCS for the support of
research and development activities.  Through December 31, 2002, the Company had
recorded grants from OCS aggregating  approximately  $1.4 million for certain of
the Company's research and development projects. These grants were recorded as a
reduction  of  research  and  development   costs.  The  Company   submitted  an
application  for an additional  grant in 2003, but decided not to draw any funds
thereunder during 2003. As noted, the Israeli government requires  beneficiaries
of such grants to pay royalties to the Israeli  government based on the revenues
derived from the sale of products, technologies and services developed with such
grants.  We believe that we have no  obligation  for  royalties in 2002 or 2003,
related to the 2002 grants  totaling  $0.2  million,  since we did not  generate
revenue from the product developed with such grants,  and for the same reason we
do not anticipate generating revenue that will trigger a repayment obligation to
the OCS during 2004.  It is possible that an obligation to pay royalties in 2004
and  future  years may be  imposed on the  Company,  as we  started to  generate
revenues from our anti-spam  solutions in the middle of 2003, although it is the
Company's position that no royalty bearing technologies are utilized in relation
to its anti-spam  solutions.  The ultimate liability is subject to review by the
OCS.With  regard to grants  before  2002,  the Company  claims that all of these
programs, which were funded at a total of $1.2 million, had failed and therefore
it will not be obligated to pay royalties.  In March 2002, the Company submitted
an application  for project  failure with regard to projects from 2001 and prior
years. This application was accepted by the OCS in August 2002. Accordingly, the
Company  has  determined  that as of December  31, 2002 there are no  contingent
liabilities  for royalties  under those  projects.  The OCS would be entitled to
revisit  the  status of these  projects  in the  future if the  Company  were to
commence utilizing technology developed under these projects.

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


Fund for the Encouragement of Marketing Activities

The Company has received grants relating to its overseas marketing expenses from
the Marketing Fund. These grants are awarded for specific  expenses  incurred by
the Company for overseas  marketing and are based upon the expenses  reported by
the Company to the  Marketing  Fund.  All  marketing  grants  recorded  from the
Marketing  Fund  until  1997 are  linked  to the  dollar  and are  repayable  as
royalties at the rate of 3% of the amount of increases in export sales  realized
by the Company from the Marketing  Fund.  Grants recorded  beginning  January 1,
1998 bear  royalties of 4% plus  interest at LIBOR rates.  The Company will face
royalty  obligations  on grants  from the  Marketing  Fund only to the extent it
actually  achieves  increases in export sales.  The proceeds of these grants are
presented  in the  Company's  consolidated  Financial  Statements  as offsets to
marketing  expenses.  Through December 31, 2000, the Company had received grants
from the Marketing Fund in the amount of approximately $279,000.

                                       43
<PAGE>
                U.S. TAX CONSIDERATIONS REGARDING ORDINARY SHARES
                           ACQUIRED BY U.S. TAXPAYERS

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


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


Tax Basis of Ordinary Shares

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


Sale or Exchange of Ordinary Shares

A U.S.  Holder's  sale  or  exchange  of  ordinary  shares  will  result  in the
recognition  of gain or loss by such  U.S.  Holder  in an  amount  equal  to the
difference  between  the  amount  realized  and the U.S.  Holder's  basis in the
ordinary shares sold. Subject to the following discussion of the consequences of
Commtouch  being treated as a Passive  Foreign  Investment  Company or a Foreign
Investment  Company,  such  gain or loss  will be  capital  gain or loss if such
ordinary  shares are a capital  asset in the hands of the U.S.  Holder.  Gain or
loss realized on the sale of ordinary  shares will be long-term  capital gain or
loss if the  ordinary  shares  sold had been  held for more than one year at the
time of their sale.  Long-term  capital gains  recognized  by certain  taxpayers
generally  are subject to a reduced rate of federal tax  (currently a maximum of
15%). If the U.S.  Holder's  holding  period on the date of the sale or exchange
was one year or less, such gain or loss will be short-term capital gain or loss.
Short-term  capital  gains  generally  are  subject  to tax at the same rates as
ordinary income.  In general,  any capital gain recognized by a U.S. Holder upon
the sale or exchange of ordinary  shares will be treated as  U.S.-source  income
for U.S. foreign tax credit purposes.

See   discussion   under  this  Item  10  "Israeli   Taxation   and   Investment
Programs--Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders"
for a  discussion  of taxation by Israel of capital  gains  realized on sales of
capital assets.

Taxation of Dividends Paid On Ordinary Shares

A U.S. Holder will be required to include in gross income as ordinary income the
amount of any distribution paid on ordinary shares,  including any Israeli taxes
withheld from the amount paid, to the extent the distribution is paid out of our
current or  accumulated  earnings and profits as  determined  for United  States
federal  income tax  purposes.  Distributions  in excess of these  earnings  and
profits will be applied  against and will reduce the U.S.  Holder's basis in the
ordinary  shares and, to the extent in excess of this basis,  will be treated as
gain from the sale or exchange of ordinary shares.

                                       44
<PAGE>
Recently  enacted  amendments  to the Code,  as amended,  provide that  dividend
income may be eligible for a reduced rate of taxation.  Dividend  income will be
taxed at the applicable long-term capital gains rate if the dividend is received
from a "qualified  foreign  corporation,"  and the  shareholder  of such foreign
corporation  holds  such  stock for more than 60 days  during the 120 day period
that  begins on the date that is 60 days  before  the  ex-dividend  date for the
stock.  The holding period is tolled for any days on which the  shareholder  has
reduced  his risk of loss.  A  "qualified  foreign  corporation"  is one that is
eligible for the benefits of a  comprehensive  income tax treaty with the United
States.  A foreign  corporation will be treated as qualified with respect to any
dividend  paid, if its stock is readily  tradable on an  established  securities
market. However, a foreign corporation will not be treated as qualified if it is
a Passive Foreign  Investment Company (as discussed below) for the year in which
the dividend was paid or the preceding year.

Distributions  of current or  accumulated  earnings  and profits paid in foreign
currency to a U.S. Holder will be includible in the income of a U.S. Holder in a
U.S.  dollar amount  calculated by reference to the exchange rate on the day the
distribution  is  received.  A U.S.  Holder  that  receives  a foreign  currency
distribution and converts the foreign  currency into U.S. dollars  subsequent to
receipt will have foreign  exchange  gain or loss based on any  appreciation  or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss.

As described above, we will generally be required to withhold Israeli income tax
from any dividends paid to holders who are not resident in Israel.  See "Israeli
Tax  Considerations  -- Taxation of  Non-Resident  Holders of Shares." If a U.S.
Holder   receives  a  dividend  from   Commtouch  that  is  subject  to  Israeli
withholding, the following would apply:

     o    You must include the gross amount of the dividend,  not reduced by the
          amount of Israeli tax withheld, in your U.S. taxable income.

     o    You may be able to claim the  Israeli  tax  withheld  as a foreign tax
          credit against your U.S. income tax liability.

     o    The  foreign  tax  credit  is  subject  to  significant   and  complex
          limitations.  Generally,  the credit can offset  only the part of your
          U.S.  tax  attributable  to your net foreign  source  passive  income.
          Additional special rules apply to taxpayers  predominantly  engaged in
          the  active  conduct  of a banking,  insurance,  financing  or similar
          business. Additionally, if we pay dividends at a time when 50% or more
          of our stock is owned by U.S.  persons,  you may be  required to treat
          the part of the  dividend  attributable  to U.S.  source  earnings and
          profits as U.S. source income, possibly reducing the allowable credit,
          unless you elect to calculate your foreign tax credit  separately with
          respect to Commtouch dividends.

     o    A U.S.  Holder  will be denied a foreign  tax credit  with  respect to
          Israeli  income tax withheld from  dividends  received on the ordinary
          shares to the extent the U.S.  Holder has not held the ordinary shares
          for at least 16 days of the 30-day period  beginning on the date which
          is 15 days  before  the  ex-dividend  date or to the  extent  the U.S.
          Holder is under an obligation to make related payments with respect to
          substantially  similar or related  property.  Any days during  which a
          U.S.  Holder  has  substantially  diminished  its  risk of loss on the
          ordinary  shares are not counted  toward  meeting  the 16-day  holding
          period required by the statute.

     o    If you do not elect to claim  foreign  taxes as a credit,  you will be
          entitled to deduct the Israeli income tax withheld from your Commtouch
          dividends in determining  your taxable income.  Individuals who do not
          claim itemized deductions, but instead utilize the standard deduction,
          may not claim a deduction  for the amount of the Israeli  income taxes
          withheld.

     o    If you are a U.S.  corporation holding our stock, you cannot claim the
          dividends-received deduction with respect to our dividends.

Special  rules,  described  below,  apply  if  Commtouch  is a  passive  foreign
investment company.

                                       45
<PAGE>
Information Reporting and Backup Withholding

U.S. Holders  generally are subject to information  reporting  requirements with
respect to  dividends  paid in the United  States on ordinary  shares.  Existing
regulations impose back-up withholding on dividends paid in the United States on
ordinary  shares  unless  the U.S.  Holder  provides  IRS Form W-9 or  otherwise
establishes an exemption.  U.S. Holders are subject to information reporting and
back-up  withholding  at a rate of 28% on proceeds paid from the  disposition of
ordinary  shares  unless  the U.S.  Holder  provides  IRS Form W-9 or  otherwise
establishes an exemption.

Non-U.S.  Holders generally are not subject to information  reporting or back-up
withholding  with  respect to  dividends  paid on, or upon the  disposition  of,
ordinary  shares,   provided  that  the  non-U.S.  Holder  provides  a  taxpayer
identification number, certifies to its foreign status, or otherwise establishes
an exemption.

Prospective  investors should consult their tax advisors  concerning the effect,
if any, of these Treasury  regulations on an investment in ordinary shares.  The
amount of any back-up  withholding will be allowed as a credit against a U.S. or
Non-U.S. Holder's United States federal income tax liability and may entitle the
Holder to a refund, provided that specified required information is furnished to
the IRS.

Tax Consequences If We Are a Passive Foreign Investment Company

Generally,  a foreign  corporation  is treated as a passive  foreign  investment
company  ("PFIC") for United States federal income tax purposes for any tax year
if, in such tax year,  either (i) 75% or more of its gross  income is passive in
nature (the "Income Test"), or (ii) the average  percentage of its assets during
such tax year that produce,  or are held for the  production  of, passive income
(determined  by averaging  the  percentage of the fair market value of its total
assets  which are passive  assets as of the end of each quarter of such year) is
50% or more (the "Asset Test").

Because less than 75% of our gross income in 2003 and in prior years constituted
passive  income,  as defined for purposes of the Income Test,  we do not believe
that application of the Income Test would have resulted in our classification as
a PFIC for any of such years.

For 2001, 2002 and 2003,  however, it is possible that we could be classified as
a PFIC under the Asset Test  principally  because a  significant  portion of our
assets  continued to consist of the cash raised in connection with both a public
offering and a private offering of our ordinary shares in 2000, coupled with the
decline in the public market value of our ordinary  shares during 2001, 2002 and
through  the  beginning  of 2003  and the  timing  of the  required  valuations,
although  there is no definitive  method  prescribed in the Code,  United States
Treasury Regulations or administrative or judicial  interpretations  thereof for
determining  the value of a foreign  corporation's  assets for  purposes  of the
Asset Test.  While the legislative  history of the United States Taxpayer Relief
Act of 1997  indicates  that  "the  total  value  of a  publicly-traded  foreign
corporation's  assets  generally  will be  treated  as  equal  to the sum of the
aggregate value of its outstanding  stock plus its  liabilities",  there remains
substantial  uncertainty  regarding the valuation of a  publicly-traded  foreign
corporation's  assets for  purposes of the Asset Test,  and it is arguable  that
under alternative valuation  methodologies,  the value of our total assets as of
the relevant  valuation  dates in 2001, 2002 and/or 2003 would not result in our
classification as a PFIC during any or all of such years.

In view of the uncertainty regarding the valuation of our assets for purposes of
the Asset Test and the  complexity  of the issues  regarding  our treatment as a
PFIC, U.S. Shareholders are urged to consult their own tax advisors for guidance
as to our status as a PFIC.  For those U.S.  Shareholders  who determine that we
were a PFIC and  notify  us in  writing  of their  request  for the  information
required  in order to  effectuate  the QEF  Election  described  below,  we will
promptly make such information available to them.

If we are treated as a PFIC for United  States  federal  income tax purposes for
any year during a U.S.  Shareholder's  holding period of ordinary shares and the
U.S.  Shareholder  does not make a QEF Election or a  "mark-to-market"  election
(both as described below), any gain recognized by the U.S.  Shareholder upon the
sale of  ordinary  shares (or the  receipt of  certain  distributions)  would be
treated  as  ordinary  income.  This  income  would be  allocated  over the U.S.
Shareholder's holding period with respect to his ordinary shares and an interest
charge would be imposed on the amount of deferred tax on the income allocated to
prior taxable years.

                                       46
<PAGE>
Although we generally will be treated as a PFIC as to any U.S. Shareholder if we
are a PFIC for any year  during the U.S.  Shareholder's  holding  period,  if we
cease to  satisfy  the  requirements  for PFIC  classification,  then under such
circumstances,   the  U.S.  Shareholder  may  avoid  the  consequences  of  PFIC
classification  for subsequent years if he elects to recognize gain based on the
unrealized appreciation in the ordinary shares through the close of the tax year
in which we cease to be a PFIC.  Additionally,  if we are  treated as a PFIC,  a
U.S.  Shareholder  who acquires  ordinary shares from a decedent would be denied
the normally  available  step-up in tax basis for these ordinary  shares to fair
market  value at the date of death and  instead  would have a tax basis equal to
the decedent's tax basis in these ordinary shares.

For any tax year in which we are treated as a PFIC, a U.S. Shareholder may elect
to treat his ordinary shares as an interest in a qualified electing fund (a "QEF
Election"),  in which case, the U.S. Shareholder would be required to include in
income currently his proportionate share of our earnings and profits in years in
which we are a PFIC  regardless  of whether  distributions  of our  earnings and
profits are actually distributed to the U.S. Shareholder.  Any gain subsequently
recognized  upon  the  sale by the  U.S.  Shareholder  of his  ordinary  shares,
however, generally would be taxed as capital gain.

As an alternative to a QEF Election,  a U.S.  Shareholder  may elect to mark his
ordinary shares to market annually, recognizing ordinary income or loss (subject
to certain limitations) equal to the difference between the fair market value of
his ordinary  shares and the adjusted tax basis of his ordinary  shares.  Losses
would be allowed only to the extent of net mark-to-market gain accrued under the
election.

We cannot assure you that we will avoid becoming a PFIC.  U.S.  holders who hold
ordinary  shares  during  a period  when we are a PFIC  will be  subject  to the
foregoing  rules,  even if we  cease to be a PFIC.  U.S.  Holders  are  urged to
consult their tax advisors about the PFIC rules, including QEF elections.


                              CONDITIONS IN ISRAEL

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


Political Conditions

Since  the  establishment  of the  State of  Israel  in 1948,  a number of armed
conflicts  have taken place between  Israel and its Arab  neighbors.  A state of
hostility,  varying  from  time to  time in  intensity  and  degree,  has led to
security and economic  problems for Israel.  Despite a peace  agreement  between
Israel and Egypt signed in 1979,  a peace  agreement  between  Israel and Jordan
signed  in  1994  and,  since  1993,   several  agreements  between  Israel  and
Palestinian Authority, Israel continues to face hostile actions and threats from
various elements in the region.  Further,  Israel has not entered into any peace
agreement  with  Syria or  Lebanon,  and  there  have  been  major  difficulties
accompanied by violence in the negotiations with the Palestinians.  We cannot be
certain as to how the current  hostilities  affecting the region will develop or
what effect they may have upon Commtouch.

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

Generally,  all male adult citizens and permanent  residents of Israel under the
age of 51 are  obligated  to perform  annual  military  reserve duty of up to 39
days, or longer under certain  circumstances.  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.

                                       47
<PAGE>
Economic Conditions

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

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


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.  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 are eliminated or reduced  significantly,  the
Israeli economy could suffer material adverse consequences.


Item 11. Qualitative and Quantitative Disclosure about Market Risk.

We develop our  technology  in Israel and seek to provide our software  products
worldwide.  As a result, our financial results could be affected by factors such
as changes in foreign  currency  exchange  rates or weak economic  conditions in
foreign  markets.  As most of our sales are currently  made in U.S.  dollars,  a
strengthening of the dollar could make our anti-spam  solutions 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.


Interest Rate Risks

Our  exposure to market risk for changes in interest  rates in the U.S.  relates
primarily to our  long-term  convertible  loan.  The fair value of our long-term
convertible  loan is based upon their market  values.  Changes in U.S.  interest
rates, could affect our financial results.


Item 12. Description of Securities Other than Equity Securities.

Not applicable.


                                       48
<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. Controls and Procedures

(a)  Under  the  supervision  and  with  the  participation  of our  management,
including our principal  executive officer and principal  financial officer,  we
conducted an  evaluation of the  effectiveness  of our  disclosure  controls and
procedures,  as such term is defined under Rule 13a-15(e)  promulgated under the
Exchange Act, as of the end of 2003.  Based on their  evaluation,  our principal
executive  officer and principal  financial officer concluded that the Company's
disclosure controls and procedures are effective.

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


Item 16. Reserved

Item 16A. Audit Committee Financial Expert

The Board of  Directors of the Company has  determined  that Mr. Ofer Segev is a
financial expert serving on the Audit Committee, and Mr. Segev is independent of
management   pursuant  to  the  independence   standards  set  forth  in  Nasdaq
Marketplace Rule 4200(a)(15) and SEC Rule 10A-3(b)(1).


Item 16B. Code of Ethics

The  Company,  by way of Board of  Director  resolution,  has  adopted a Code of
Ethics  applicable  to its senior  financial  officers,  including its principal
executive,  financial and accounting  officers.  The Code of Ethics is posted on
the  Company's  website  at  www.commtouch.com,  under  the  link  to  "investor
relations".


Item 16C. Fees to Auditors

Kost, Forer, Gabbay & Kasierer,  a member of Ernst & Young International Ltd. or
Ernst & Young, has served as our Independent  Public Accountants for each of the
fiscal years in the three-year period ended December 31, 2003, for which audited
financial  statements  appear in this annual report on Form 20-F.  The following
table presents the aggregate fees for professional  and  other services rendered
by Kost, Forer , Gabbay & Kasierer for 2003 and 2002:

                                                       Year ended December 31,
                                                     ---------------------------
                                                        2003              2002
                                                     --------           --------
Audit fees (1)                                       $ 59,500           $137,352
Tax (2)                                                 3,000              7,500
All other fees (3)                                      4,080             22,268
                                                     --------           --------
Total                                                $ 66,580           $167,120
                                                     ========           ========

                                       49
<PAGE>
(1)  Audit fees consist of fees billed for the annual audit services  engagement
     and other audit  services,  which are those services that only the external
     auditor can  reasonably  provide,  and include the group  audit;  statutory
     audits;  consents;  attest  services;  and  assistance  with and  review of
     documents filed with the SEC.

(2)  Tax fees include fees billed for tax  compliance  services,  including  the
     preparation of original and amended tax returns and claims for refund;  tax
     consultations, such as assistance and representation in connection with tax
     audits and  appeals,  tax  advice  related  to  mergers  and  acquisitions,
     transfer pricing,  and requests for rulings or technical advice from taxing
     authority; tax planning services; and expatriate tax planning and services.

(3)  All other fees include fees billed for training;  advisory services related
     to government applications and process improvement and advice.


Audit Committee Pre-approval Policies and Procedures

Below is a summary of the current Policies and Procedures:

The main  role of the  Company's  audit  committee  is to  assist  the  Board of
Directors in  fulfilling  its  responsibility  for  oversight of the quality and
integrity of the  accounting,  auditing and reporting  practices of the Company.
The Audit Committee oversees the appointment, compensation, and oversight of the
public  accounting  firm  engaged  to  prepare  or issue an audit  report on the
financial   statements   of  the  Company.   The  audit   committee's   specific
responsibilities  in carrying out its oversight role include the approval of all
audit and  non-audit  services to be provided  by the  external  auditor and the
quarterly  review of the firm's  non-audit  services  and  related  fees.  These
services may include audit services,  audit-related  services,  tax services and
other services,  as described  above. It is the policy of the audit committee to
approve in advance  the  particular  services  or  categories  of services to be
provided to the Company periodically. Additional services may be pre-approved by
the audit committee on an individual basis during the year.


                                    PART III

Item 17. Financial Statements.

The Company has responded to Item 18.


Item 18. Financial Statements

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

      (b) Financial Statement Schedule:

The following  financial  statement schedule of Commtouch Software Ltd. for each
of the three years in the period ended December 31, 2003 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.

                                       50
<PAGE>
Item 19 Exhibits

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






                                       51
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders of COMMTOUCH SOFTWARE LTD.

We have  audited  the  accompanying  consolidated  balance  sheets of  Commtouch
Software Ltd. ("the Company") and subsidiaries as of December 31, 2002 and 2003,
and the related consolidated statements of operations,  changes in shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 2003. Our audits also included the financial  statement  schedule  listed in
the  Index at item  18(b).  These  financial  statements  and  schedule  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above, present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Commtouch  Software Ltd. and  subsidiaries as of December 31, 2002 and 2003, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period ended  December 31, 2003, in conformity  with U.S.
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken  as a  whole,  present  fairly  in all  material  respect  the
information set forth therein.

Tel-Aviv, Israel
February 20, 2004

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


                                      F-1
<PAGE>
                            COMMTOUCH SOFTWARE LTD.


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

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                   --------------------------------
                                                                                                     2002*                  2003
                                                                                                   ---------              ---------
<S>                                                                                                <C>                    <C>
Assets
Current Assets:
       Cash and cash equivalents .....................................................             $   1,388              $   4,125
       Trade receivables, net ........................................................                    64                     92
       Receivables on account of shares ..............................................                  --                      955
       Prepaid expenses ..............................................................                   139                    156
       Other accounts receivable .....................................................                    92                    132
                                                                                                   ---------              ---------
       Total current assets ..........................................................                 1,683                  5,460
                                                                                                   ---------              ---------
       Long-term lease deposits ......................................................                     5                      5
       Severance pay fund ............................................................                   264                    391
       Deferred expenses .............................................................                  --                      236
       Property and equipment, net ...................................................                 1,029                    452
       Investment in affiliate .......................................................                     3                    339
                                                                                                   ---------              ---------
                                                                                                   $   2,984              $   6,883
                                                                                                   ---------              ---------

Liabilities and Shareholders' Equity
Current Liabilities:
       Accounts payable ..............................................................             $     338              $     479
       Employees and payroll accruals ................................................                   424                    418
       Deferred revenues .............................................................                  --                      222
       Accrued expenses and other liabilities ........................................                   372                    376
                                                                                                   ---------              ---------
       Total current liabilities .....................................................                 1,134                  1,495
                                                                                                   ---------              ---------
       Other liabilities .............................................................                   135                   --
       Convertible loan, net .........................................................                  --                    2,134
       Accrued severance pay .........................................................                   278                    425
       Shares to be registered upon exercise of warrants .............................                  --                      372
                                                                                                   ---------              ---------
                                                                                                         413                  2,931
                                                                                                   ---------              ---------

Commitments and Contingencies
Shareholders' Equity
       Ordinary Shares, nominal value NIS 0.05 par value-
       Authorized: 40,000,000 and 75,000,000 shares as of
       December 31, 2002 and 2003; Issued and
       outstanding: 22,219,696 and 37,104,615 shares
       as of December 31, 2002 and 2003, respectively ................................                   290                    456
       Additional paid-in capital ....................................................               153,460                160,592
       Accumulated other comprehensive income ........................................                  --                       46
       Deferred stock compensation ...................................................                  (277)                   (30)
       Notes receivable from shareholders, net .......................................                  (365)                  (102)
       Accumulated deficit ...........................................................              (151,671)              (158,505)
                                                                                                   ---------              ---------
       Total shareholders' equity ....................................................                 1,437                  2,457
                                                                                                   ---------              ---------
                                                                                                   $   2,984              $   6,883
                                                                                                   =========              =========
<FN>
* - reclassified to conform to current year presentation

                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                       F-2
<PAGE>
                            COMMTOUCH SOFTWARE LTD.


                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (USD in thousands, except share and per share data)
<TABLE>
<CAPTION>

                                                                                                        Year ended
                                                                                                        December 31,
                                                                                         ------------------------------------------
                                                                                           2001             2002             2003
                                                                                         --------         --------         --------
<S>                                                                                      <C>              <C>              <C>
Revenues:
     Email services .............................................................        $ 13,318         $  3,238         $    329
     Software licenses ..........................................................             270              200             --
                                                                                         --------         --------         --------
     Total revenues .............................................................          13,588            3,438              329
Cost of revenues ................................................................          13,962            1,675              581
                                                                                         --------         --------         --------
Gross profit (loss) .............................................................            (374)           1,763             (252)
                                                                                         --------         --------         --------
Operating expenses:
     Research and development, net ..............................................           5,884            2,246            1,476
     Sales and marketing ........................................................          12,894            1,176            1,875
     General and administrative .................................................          10,337            2,588            1,308
     Amortization of stock-based employee deferred compensation (1) .............           2,204              551              247
     Write-off of property and equipment and other ..............................          10,166              750             --
                                                                                         --------         --------         --------
     Total operating expenses ...................................................          41,485            7,311            4,906
                                                                                         --------         --------         --------
Operating loss ..................................................................         (41,859)          (5,548)          (5,158)
     Interest and other income (expense), net ...................................             583              (60)          (1,967)
     Equity in earnings (losses) of affiliate ...................................            --                (56)             291
     Write-off of impaired long-term investments ................................          (2,000)            --               --
     Minority interest ..........................................................             285               74             --
                                                                                         --------         --------         --------
Loss from continuing operations .................................................         (42,991)          (5,590)          (6,834)
                                                                                         --------         --------         --------
Discontinued operations
     Gain from disposal of Wingra ...............................................            --              1,014             --
     Discontinued operations - Wingra ...........................................         (18,016)            (335)            --
                                                                                         --------         --------         --------
Income (Loss) from discontinued operations ......................................         (18,016)             679             --
                                                                                         --------         --------         --------
Net loss ........................................................................        $(61,007)        $ (4,911)        $ (6,834)
                                                                                         ========         ========         ========
Basic and diluted net loss per share
     Loss from continuing operations ............................................        $  (2.51)        $  (0.27)        $  (0.28)
     Income (Loss) from discontinued operations .................................           (1.05)        $   0.03         $   --
                                                                                         --------         --------         --------
Net loss ........................................................................        $  (3.56)        $  (0.24)        $  (0.28)
                                                                                         ========         ========         ========
Weighted average number of shares used in computing
     basic and diluted net loss per share .......................................          17,152           20,854           24,573
                                                                                         ========         ========         ========


                                                                                                        Year ended
                                                                                                        December 31,
                                                                                         ------------------------------------------
                                                                                           2001             2002             2003
                                                                                         --------         --------         --------
(1) Stock-based Employee Compensation Relates to the following:
     Cost of revenues ...........................................................        $     82         $     20         $      9
     Research and development, net ..............................................             226               56               25
     Sales and marketing ........................................................             554              139               62
     General and administrative .................................................           1,342              336              151
                                                                                         --------         --------         --------
     Total ......................................................................        $  2,204         $    551         $    247
                                                                                         ========         ========         ========

<FN>
                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                      F-3
<PAGE>
                            COMMTOUCH SOFTWARE LTD.


                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
               (USD in thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                                                                         Stock-based
                                                                                                                          employee
                                                                  Ordinary share      Ordinary         Additional         deferred
                                                                     Shares         share Amount     paid-in capital    compensation
                                                                   ----------        ----------      ---------------    ------------
<S>                                                                   <C>              <C>              <C>                  <C>
Balance as of January 1, 2001 .................................       16,925,022       $      236       $  150,994           (2,729)
   Issuance of shares, net ....................................          315,789                2              256             --
   Issuance of shares upon exercise of options ................          256,008                1              116             --
   Stock based compensation related to warrants
     granted to a service provider ............................             --               --                 53             --
   Amortization of deferred stock compensation ................             --               --               --              2,204
   Deferred stock based compensation ..........................             --               --                303             (303)
   Repayment of notes receivable ..............................             --               --               --               --
   Forgiveness of notes receivable ............................             --               --               --               --
   Other comprehensive income-unrealized
     holding losses on marketable securities ..................             --               --               --               --
   Issuance of shares to minority interest in
     Japan - Note 2j ..........................................             --               --                440             --
   Net loss ...................................................             --               --               --               --
                                                                      ----------       ----------       ----------       ----------
   Total comprehensive loss ...................................             --               --               --               --
Balance as of December 31, 2001 ...............................       17,496,819              239          152,162             (828)
   Issuance of shares, net ....................................        4,434,932               48            1,295             --
   Issuance of shares upon exercise of options ................          287,945                3                3             --
   Amortization of deferred stock based
     compensation .............................................             --               --               --                551
   Repayment of notes receivable ..............................             --               --               --               --
   Valuation allowance for notes receivable ...................             --               --               --               --
   Net loss ...................................................             --               --               --               --
                                                                      ----------       ----------       ----------       ----------
   Total comprehensive loss ...................................             --               --               --               --
Balance as of December 31, 2002 ...............................       22,219,696              290          153,460             (277)
   Issuance of shares, net ....................................        5,546,667               60            2,949             --
   Issuance of shares upon exercise of options ................          287,087                3               33             --
   Issuance of shares due to conversion of
     convertible loan .........................................        5,693,142               64            1,836             --
   Issuance of shares to shareholders upon
     exercise of warrants .....................................        3,151,126               36            1,230             --
   Issuance of shares to consultants upon
     exercise of warrants .....................................          206,897                3             --               --
   Beneficial conversion feature of notes and
     fair value of warrants ...................................             --               --              1,084             --
   Amortization of deferred stock based
     compensation .............................................             --               --               --                247
   Repayment of notes receivable ..............................             --               --               --               --
   Forgiveness of notes receivable ............................             --               --               --               --
   Valuation allowance for notes receivable ...................             --               --               --               --
   Accumulated other comprehensive income
     -Foreign currency translation adjustment .................             --               --               --               --
   Net loss ...................................................             --               --               --               --
   Total comprehensive loss ...................................             --               --               --               --
                                                                      ----------       ----------       ----------       ----------
Balance as of December 31, 2003 ...............................       37,104,615       $      456       $  160,592       $      (30)
                                                                      ==========       ==========       ==========       ==========
<FN>
                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>


                                      F-4
<PAGE>
                            COMMTOUCH SOFTWARE LTD.

<TABLE>
<CAPTION>
                                                                     Notes       Accumulated
                                                                  receivable       other                      Total
                                                                     from      comprehensive  Accumulated Comprehensive
                                                                 shareholders     income        deficit       Loss          Total
                                                                  ---------     ---------     ---------     ---------     ---------
<S>                                                               <C>           <C>           <C>            <C>          <C>
Balance as of January 1, 2001 ................................       (1,041)           21       (85,753)         --          61,728
   Issuance of shares, net ...................................         --            --            --            --             258
   Issuance of shares upon exercise of options ...............         --            --            --            --             117
   Stock based compensation related to warrants
     granted to a service provider ...........................         --            --            --            --              53
   Amortization of deferred stock based compensation .........         --            --            --            --           2,204
   Deferred stock compensation ...............................         --            --            --            --            --
   Repayment of notes receivable .............................          144          --            --            --             144
   Forgiveness of notes receivable ...........................          143          --            --            --             143
   Other comprehensive income--unrealized
     holding losses on marketable securities .................         --             (21)         --             (21)          (21)
   Issuance of shares to minority interest in
     Japan-Note 2j ...........................................         --            --            --            --             440
   Net loss ..................................................         --            --         (61,007)      (61,007)      (61,007)
                                                                  ---------     ---------     ---------     =========     ---------
   Total comprehensive loss ..................................         --            --            --         (61,028)
                                                                                                            =========

Balance as of December 31, 2001 ..............................         (754)         --        (146,760)         --           4,059
   Issuance of shares, net ...................................         --            --            --            --           1,343
   Issuance of shares upon exercise of options ...............         --            --            --            --               6
   Amortization of deferred stock based compensation .........         --            --            --            --             551
   Repayment of notes receivable .............................            4          --            --            --               4
   Valuation allowance for notes receivable ..................          385          --            --            --             385
   Net loss ..................................................         --            --          (4,911)       (4,911)       (4,911)
                                                                  ---------     ---------     ---------     =========     ---------
   Total comprehensive loss ..................................         --            --            --          (4,911)
                                                                                                            =========

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

   Issuance of shares, net ...................................         --            --            --            --           3,009
   Issuance of shares upon exercise of options ...............         --            --            --            --              36
   Issuance of shares due to conversion of convertible .......         --            --            --            --           1,900
      loan
   Issuance of shares to shareholders upon exercise
      of warrants ............................................         --            --            --            --           1,266
   Issuance of shares to consultants upon
      exercise  of warrants ..................................         --            --            --            --               3
   Beneficial conversion feature of notes and
      fair value of warrants .................................         --            --            --            --           1,084
   Amortization of deferred stock based compensation .........         --            --            --            --             247
   Repayment of notes receivable .............................          581          --            --            --             581
   Forgiveness of notes receivable ...........................           67          --            --            --              67
   Valuation allowance for notes receivable ..................         (385)         --            --            --            (385)
   Accumulated other comprehensive income -
   Foreign currency translation adjustment ...................         --            --            --              46            46

   Net loss ..................................................         --            --          (6,834)       (6,834)       (6,834)
                                                                  ---------     ---------     ---------     =========     ---------
   Total comprehensive loss ..................................         --            --            --          (6,788)
                                                                                                            =========


Balance as of December 31, 2003 ..............................    $    (102)    $    --       $(158,505)         --       $   2,457
                                                                  =========     =========     =========     ==========    =========

<FN>
                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                      F-5
<PAGE>
                            COMMTOUCH SOFTWARE LTD.


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (USD in thousands)
<TABLE>
<CAPTION>
                                                                                                           Year Ended
                                                                                                           December 31,
                                                                                             --------------------------------------
                                                                                               2001           2002          2003
                                                                                             --------       --------       --------
<S>                                                                                          <C>            <C>            <C>
Cash flows from operating activities:
   Net loss ...........................................................................      $(61,007)      $ (4,911)      $ (6,834)
   Less loss for the period from discontinued operations ..............................        18,016            335           --
   Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization ......................................................         7,432          1,988            608
   Amortization of deferred stock-based compensation and warrants
   issued for services received .......................................................         2,204            551            247
   Amortization of convertible loan discount, beneficial conversion
   feature and fair value of warrants .................................................          --             --            1,084
   Inducement relating to early conversion of convertible loan ........................          --             --              752
   Write-off of impaired long-term investments ........................................         2,000           --             --
   Write-off of property, equipment and other .........................................        10,166            750           --
   Loss from sale of property and equipment ...........................................           751            247           --
   Gain from sale of discontinued operations ..........................................          --           (1,014)          --
   Loss from sale of shares in consolidated subsidiary ................................          --              153           --
   Equity in earnings (losses) of affiliate ...........................................          --              (56)          (291)
   Changes in assets and liabilities:
   Trade receivables, net .............................................................         3,712            114            (28)
   Prepaid expenses and other accounts receivable .....................................         2,932            379             60
   Accounts payable ...................................................................        (3,052)          (981)           141
   Employee and payroll accruals, accrued expenses and other liabilities ..............        (5,164)          (496)          (137)
   Deferred revenues ..................................................................          (739)          (445)           222
   Accrued severance pay, net .........................................................           216            (91)            20
   Valuation allowance of notes receivable ............................................          --              385           (385)
   Forgiveness of notes receivable ....................................................           143           --               67
   Minority interest in losses of a consolidated subsidiary ...........................          (285)           (74)          --
   Other ..............................................................................        (1,969)           366              7
                                                                                             --------       --------       --------
Net cash used in operating activities .................................................       (24,644)        (2,800)        (4,467)
                                                                                             --------       --------       --------
Cash flows from investing activities:
   Proceeds from sales of marketable securities .......................................         8,586           --             --
   Long-term lease deposits ...........................................................           202            100           --
   Proceeds from sale of Wingra .......................................................          --             (193)          --
   Proceeds from sale of consolidated subsidiary ......................................          --                1           --
   Proceeds from sale of property and equipment .......................................           160            719           --
   Purchase of property and equipment .................................................        (3,265)          --              (31)
                                                                                             --------       --------       --------
Net cash (used) provided in investing activities ......................................         5,683            627            (31)
                                                                                             --------       --------       --------
Cash flows from financing activities:
   Repayment of note receivable by shareholder ........................................           144              4            581
   Repayment of bank loans and notes payable ..........................................          (946)           (40)          --
   Principal payment of capital lease .................................................           (24)          --             --
   Proceeds from issuance of shares, net ..............................................           428          1,349          3,273
   Proceeds from issuance of convertible loan .........................................          --             --            2,500
   Proceeds from conversion of loan, net ..............................................          --             --            1,234
   Deferred expenses regarding convertible loan .......................................          --             --             (353)

   Proceeds from minority interest in consolidated subsidiary .........................           440           --             --
   Contribution from minority interest of consolidated subsidiary .....................           336           --             --
                                                                                             --------       --------       --------
Net cash provided by financing activities .............................................           378          1,313          7,235
                                                                                             --------       --------       --------
Decrease in cash and cash equivalents .................................................       (18,583)          (860)         2,737
Cash and cash equivalents at the beginning of the year ................................        20,831          2,248          1,388
                                                                                             --------       --------       --------
Cash and cash equivalents at the end of the year ......................................      $  2,248       $  1,388       $  4,125
                                                                                             ========       ========       ========
<FN>
                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
                                      F-6
<PAGE>
                            COMMTOUCH SOFTWARE LTD.

<TABLE>
<CAPTION>
<S>                                                                                          <C>            <C>            <C>
Supplemental disclosure of cash flows activity:

Cash paid during the year:
   Interest ...........................................................................      $    161       $      3            $--

Non-cash transaction

Receivables on account of shares ......................................................           $--            $--       $    955
Discount due to fair value of warrants ................................................           $--            $--       $    366
Conversion of loan ....................................................................           $--            $--       $  1,234

</TABLE>



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

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

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


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

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

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



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

                                      F-7
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


NOTE 1: GENERAL

a. Commtouch Software Ltd.  ("Commtouch",  "the Company") was incorporated under
the laws of Israel in 1991.  The Company  and its  subsidiary  (Commtouch  Inc.)
develop and provide email anti-spam  solutions to enterprises.  During 2002, the
Company's main business was providing outsourced  integrated Web-based email and
messaging solutions to a few businesses that remained as customers following the
transfer of  theconsumer  outsource  web-based  email  business  and sale of the
Hosted  Exchange  email business  during late 2001 and early 2002.  During early
2002, concurrent with the divestiture of the Company's above-stated  businesses,
the Company began marketing to service providers its messaging software platform
("CMP"),  which  had been in  development  by the  Company  prior to that  time.
Following  a  concerted  effort to  penetrate  the  email  server  market  and a
determination that the continuing  unfavorable  economic conditions would hamper
potential sales of CMP, and given the Company's  inherent knowledge of anti-spam
solutions  based on its many years as an ASP in the outsourced  email market and
the growing worldwide attention was directed to the problem of spam, the Company
transitioned  its focus to the  anti-spam  market in mid-2002.  While no uniform
definition of spam exists,  the Company  generally defines "spam" as the sending
of unsolicited  bulk email for commercial and  non-commercial  purposes.  During
2003,  approximately  70% of the revenues were derived from three customers (33%
from  customer A, 25% from  customer B, and 12% from  customer C).  During 2002,
approximately  57% of the revenues  were derived  from two  customers  (39% from
customer D and 18% from customer E). During 2001, no single  customer  accounted
for more than 10% of the revenues.

The Company  expects that it will continue to be dependent  upon resellers for a
significant  portion  of its  revenues,  which  will  derived  from sales of the
Company's  anti-spam  solutions.  Also,  the  Company  is still  developing  its
distribution channels and is currently dependent on a relatively small number of
its  global  resellers/channel  partners  to  generate  the  majority  of  sales
transactions. If anticipated orders from these resellers fail to materialize, or
one of the key  resellers/distribution  channels  ceases  the  promotion  of the
Company's business, operating results and financial condition will be materially
adversely affected.

b. Discontinued operations

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

In February 2002, the Company sold off its migration service  business,  Wingra,
to Wingra's senior management. The operations of Wingra were eliminated from the
operations  of the entity as a result of this  transaction.  The  Company has no
intent to  continue  its  activity  in the  migration  service.  The  results of
operations,  including revenue,  operating expenses and other income and expense
of  Wingra  for  2001 and  2002,  have  been  reclassified  in the  accompanying
statements of operations as discontinued operations.


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

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

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

                                      F-8
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


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

                                                               Year Ended
                                                               December 31,
                                                        -----------------------
                                                           2001          2002
                                                         --------      --------
Revenues ...........................................     $  1,730      $    157
Cost of revenues ...................................          643            76
                                                         --------      --------
Gross profit .......................................        1,087            81
Operating expenses .................................        3,029           416
Amortization and impairment of goodwill and
  other intangible assets ..........................       16,074          --
                                                         --------      --------
Operating loss .....................................     $(18,016)     $   (335)
                                                         ========      ========


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of Estimates:

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

b. Financial Statements in U. S. Dollars:

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

The  financial  statements  of the  Company's  affiliate,  Imatrix  ("Imatrix"),
reported using the equity method of accounting, whose functional currency is not
the dollar,  have been translated into dollars,  in accordance with SFAS No. 52.
All balance sheet  accounts  have been  translated  using the exchange  rates in
effect  at the  balance  sheet  date.  Statement  of  income  amounts  have been
translated using the average exchange rate for the year. The resulting aggregate
translation  adjustments are reported as Foreign currency translation adjustment
under accumulated other comprehensive income in shareholders' equity.

c. Principles of Consolidation:

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

d. Cash and Cash Equivalents:

Cash  equivalents  are  short-term  highly liquid  investments  that are readily
convertible to cash with original maturities of three months or less.

e. Investment in affiliate:

For the  purposes of these  financial  statements,  an  affiliated  company is a
company  held to the  extent of 20% or more,  or a  company  less than 20% held,
which  the  Company  can  exercise  significant  influence  over  operating  and
financial  policy of the affiliate.  The investment in an affiliated  company is
accounted  for under the  equity  method.  Profits  on  inter-company  sales not
realized outside the group were eliminated.

                                      F-9
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


The Company's  investment is reviewed for impairment  whenever events or changes
in  circumstances  indicate that the carrying  amount of  investment  may not be
recoverable.  During 2003,  the Company  recognized  $291 as "Equity in earnings
(losses) of affiliate."

As of December 31, 2003, no impairment losses have been identified.

f. Property and Equipment:

Property  and  equipment  are  stated at cost net of  accumulated  depreciation.
Depreciation  is  calculated  using the straight  line method over the estimated
useful lives of the assets at the following annual rates:

                                                           %
                                         ---------------------------------------
Computers and peripheral equipment                       33.33
Office furniture and equipment                           7 - 20
Motor vehicles                                          15 - 25
Leasehold improvements                     Over the term of the lease or the
                                         life of the assets, by the shorter of


The Company and its subsidiary's  long-lived  assets are reviewed for impairment
in accordance with Statement of Financial Accounting Standard No.144 "Accounting
for the Impairment or Disposal of Long-Lived  Assets" ("SFAS  No.144")  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison  of the carrying  amount of an asset to the future  undiscounted
cash flows expected to be generated by the assets. If such assets are considered
to be impaired,  the  impairment  to be  recognized is measured by the amount by
which the  carrying  amount of the assets  exceeds the fair value of the assets.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair value less costs to sell.  For the year ended December 31, 2002 the Company
had impairment losses totaling $ 750, which were recorded as operating expenses.
No impairment losses were recorded in 2003.

During  2001,  due to the  economic  slowdown,  the  reduction  of the  employee
headcount  and the  transfer  into new  facilities,  the  Company  assesses  the
recoverability of the carrying amount of property and equipment and provides for
any  possible  impairment  loss based upon the  difference  between the carrying
amount and fair value of such assets in accordance  with  Statement of Financial
Accounting  Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". As a result of the evaluation, the
Company  recordedimpairment  losses  totaling  $10,166,  which were  recorded as
operating expenses.

g. Investments in other companies:

The  investment in other  companies is stated at lower of cost or estimated fair
value according to Accounting  Principle Board Opinion No. 18 "The Equity Method
of Accounting for Investments in Common Stocks", since the Company does not have
the ability to exercise  significant  influence  over  operating  and  financial
policies of the  investee.  The  Company's  investments  in other  companies are
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that  the  carrying   amount  of  such   investments  may  not  be  recoverable.
Measurements  of an impairment  loss for  investments  in other  companies  that
management expects to hold are based on the fair value of the investment.

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

Due to the economic slowdown and the significant decline in capital available to
and in  valuations  of its  investment  in  privately  funded  Internet  centric
companies,  the Company believes all of these  investments are impaired.  During
2000 and 2001, based on a comprehensive review of the Company's investments, the
Company  recorded  a  non-cash  charge of $5,000 and  $1,700,  respectively,  to
write-down the recorded investment values.

h. Revenue Recognition:

During 2001 and through the first half of 2003, the Company derived its revenues
from providing hosted email services, royalties for the sale of its hosted Email
services and from software license agreements.

                                      F-10
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


During  the  second  half of 2003,  the  Company  launched  its first  anti-spam
solution and began generating revenues therefrom.

Revenues from  anti-spam and email services were  recognized in accordance  with
Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial  Statements"
("SAB No.  104") when  delivery  occurred,  persuasive  evidence of an agreement
existed,  the vendor's fee was fixed and  determinable  and  collectibility  was
probable.  Revenues from  contracts  that were not dependent  upon the number of
mailboxes and provided  non-refundable  fixed payments were  recognized  ratably
over the contract term.  Revenues from contracts  specifying a contractual  rate
per mailbox per month were  recognized on a monthly basis for mailboxes  covered
by the  respective  contracts.  Revenues  from  contracts  based  on a share  of
advertising  revenues  earned by business  partners  were  recognized  when such
revenues were earned.  Deferred revenue includes unearned amounts received under
anti-spam and email service contracts, and amounts received by customers but not
recognized as revenues.

Royalties  for the  sale of the  hosted  email  services  were  recognized  when
persuasive  evidence of an  arrangement  existed,  services  were  provided,  no
significant  obligation with regard to the implementation  remained, the fee was
fixed and determinable and collectibility was probable.

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

i. Research and Development Costs:

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

Based on the Company's product development process, technological feasibility is
established  upon  completion of a working model.  The Company did not incur any
material  costs between the  completion of its working  models and the points at
which its products were ready for general release.  Therefore,  through December
31, 2003,  the Company  charged all software  development  costs to research and
development expense in the period incurred.

j. Minority Interest:

Minority  interest  represents other  shareholders'  proportionate  ownership of
Commtouch, K.K. (Japan) (now known as Imatrix). At December 31, 2001 the Company
owned  70.6%,  and at December 31, 2002 and 2003,  the Company  owned 32% of the
equity and voting rights of Commtouch, K.K. (Japan).

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

k. Concentrations of Credit Risk:

SFAS No. 105,  "Disclosure  of  Information  About  Financial  Instruments  with
off-Balance-Sheet  Risk and Financial  Instruments with  Concentration of Credit
Risk" requires disclosure of any significant  off-balance-sheet  and credit risk


                                      F-11
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


concentrations.   The  Company  and  its   subsidiaries   have  no   significant
off-balance-sheet   concentration  of  credit  risk  such  as  foreign  exchange
contracts, option contracts or other foreign hedging arrangements.

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables,  receivables on account of
shares and cash and cash  equivalents.  The majority of the  Company's  cash and
cash  equivalents are invested in dollar and dollars linked  investments and are
deposited in major banks in the United States and Israel.  Such  investments  in
the  United  States may be in excess of  insured  limits and are not  insured in
other  jurisdictions.  Management believes that the financial  institutions that
hold the Company's investments are financially sound and,  accordingly,  minimal
credit risk exists with respect to these investments.

The  trade  receivables  of the  Company  are  derived  from  transactions  with
companies located primarily in North America,  Europe,  Israel and the Far East.
An allowance for doubtful  accounts is determined  with respect to those amounts
that  the  Company  and its  subsidiaries  have  determined  to be  doubtful  of
collection.  The allowance for doubtful  accounts is composed of specific  debts
that are doubtful of collection amounting to $41 and $0 at December 31, 2002 and
2003, respectively. Bad debt expense (recovery) for the years-ended December 31,
2001, 2002 and 2003 was $260, $(40) and zero, respectively.

l. Accounting for Stock-Based Compensation:

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

The Company  has  adopted the  disclosure  provisions  of  Financial  Accounting
Standards  Board  Statement no. 148,  "Accounting  for Stock Based  Compensation
Transition and Disclosure" ("SFAS 148") which amended certain provisions of SFAS
123 to provide alternative methods of translation for an entity that voluntarily
changes to the fair value based method of accounting  for  stock-based  employee
compensation,  effective as the beginning of the year. The Company  continues to
apply the provisions of APB No. 25, in accounting for stock based compensation.

Pro forma information regarding the Company's net loss and net loss per share is
required by SFAS No. 123 and has been determined as if the Company has accounted
for its employee  stock options  under the fair value method  prescribed by SFAS
No. 123.

Pro forma information under SFAS 123 is as follows:

<TABLE>
<CAPTION>
                                                                                         2001              2002              2003
                                                                                       --------          --------          --------
<S>                                                                                    <C>               <C>               <C>
Net loss as reported .........................................................         $(61,007)         $ (4,911)         $ (6,834)

   Add - stock-based employee compensation - intrinsic value .................            2,204               551               247

   Deduct - stock-based employee compensation - fair value ...................           (6,931)           (4,267)           (4,172)
                                                                                       --------          --------          --------
Pro forma net loss ...........................................................         $(65,734)         $ (8,627)         $(10,759)
                                                                                       ========          ========          ========

Basic and diluted net loss per share - as reported ...........................         $  (3.56)         $  (0.24)         $  (0.28)
                                                                                       ========          ========          ========

Basic and diluted net loss per share - pro forma .............................         $  (3.83)         $  (0.41)         $  (0.44)
                                                                                       --------          --------          --------
</TABLE>

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

                                      F-12
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


m. Royalty-bearing Grants;

Royalty-bearing  grants  from the  Government  of Israel  for  funding  approved
research  and  development  projects are  recognized  at the time the Company is
entitled to such grants,  on the basis of the costs incurred and such grants are
included  as a  deduction  of  research  and  development  costs.  Research  and
development  grants  amounted  to $600,  $200 and zero in 2001,  2002 and  2003,
respectively.

n. Basic and Diluted Net Loss Per Share:

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

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

All  outstanding  stock  options  and  warrants  have  been  excluded  from  the
calculation  of the  diluted  loss per share  because  all such  securities  are
anti-dilutive for all periods  presented.  The total number of shares related to
outstanding  options and warrants  excluded from the calculations of diluted net
loss per share were 4,990,673, 8,525,460 and 12,266,874 for 2001, 2002 and 2003,
respectively.

o. Severance Pay:

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

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

Severance expenses for 2001, 2002 and 2003 were approximately $754, $58 and $20,
respectively.

p. Fair Value of Financial Instruments:

The  carrying  amounts  of  cash  and  cash  equivalents,   trade   receivables,
receivables on account of shares,  prepaid expenses,  other accounts  receivable
and  accounts  payable,  approximate  their fair  values  due to the  short-term
maturities of financial instruments.

The carrying  amount of the Company's  convertible  loan  approximates  its fair
value. The fair value was estimated using discounted cash flow analysis based on
the current interest rate of similar terms and maturities.

q. Reclassification:

Certain  amounts from prior years have been  reclassified to conform to the 2003
presentation.  The  reclassification  had no effect on  previously  reported net
loss, shareholder's equity or cash flows.

r. Recently Issued Accounting Pronouncements:

In January 2003, the FASB issued FASB  Interpretation No. 46,  "Consolidation of
Variable Interest Entities" (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation of
variable interest  entities.  FIN 46 requires certain variable interest entities
("VIE's") to be consolidated  by the primary  beneficiary if the entity does not
effectively disperse risks among the parties involved.  The provisions of FIN 46
are effective  immediately for those variable  interest  entities  created after
January 31,  2003.  The  provisions,  as amended,  are  effective  for the first
interim  or  annual  period  ending  after  March 15,  2004 for  those  variable
interests  held prior to  February  1, 2003.  While the  Company  believes  this
Interpretation  will not have a material  effect on its  financial  position  or
results of  operations,  it is  continuing to evaluate the effect of adoption of
this Interpretation. The effective date for SPE is December 31, 2003.

                                      F-13
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


In May 2003,  the FASB issued  SFAS No. 150  "Accounting  for Certain  Financial
Instruments  which   Characteristics  as  both  Liabilities  and  Equity"  which
establishes standards for how an issuer of financial instruments  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  It requires that an issuer classify a financial  instrument that is
within  its  scope as a  liability  (or an asset in some  circumstances)  if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variation in something other than
the fair value of the issuer's equity shares or variations  inversely related to
changes in the fair value of the  issuer's  equity  shares.  This  statement  is
effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning  after June 30, 2003.  The adoption of SFAS No. 150 is not expected to
have a  material  impact on the  Company's  financial  position  of  results  of
operations.


NOTE 3: RECEIVABLES ON ACCOUNT OF SHARES

According to EITF 85-1  "Classifying  Notes  Received for Capital  Stock" ("EITF
85-1"), in the event that an enterprise  receives a note, rather than cash, as a
contribution  to its equity,  such note may be recorded as an asset if collected
in cash prior to issuance of the financial statements.

As of December 31, 2003,  in  accordance  with EITF 85-1,  the Company  recorded
receivables on account  shares,  which were  classified as an asset,  at a total
amount of $955 related to the exercise of the warrants (see note 7a), due to the
fact the amount has not yet been  received as of December 31, 2003.  The Company
received the total amount in January 2004.


NOTE 4: DEFERRED EXPENSES

During the last quarter of 2003,  the Company paid  issuance  costs  relating to
Convertible Notes (see note 7b), at a total amount of $353, consisting mainly of
legal costs.  In  Accordance  with APB 21, these costs were recorded as deferred
expenses and are recognized over 36 months, the contractual term of the Notes.


NOTE 5: PROPERTY AND EQUIPMENT, NET

                                                              December 31,
                                                        -----------------------
                                                          2002            2003
                                                        -------         -------
Cost:
Computers and peripheral equipment .............        $ 5,222         $ 5,243
Office furniture and equipment .................            477             477
Motor vehicles .................................             88              88
Leasehold improvements .........................            694             704
                                                        -------         -------
                                                          6,481           6,512
Less accumulated depreciation ..................         (5,452)         (6,060)
                                                        -------         -------
Property and equipment, net ....................        $ 1,029         $   452
                                                        =======         =======

Depreciation  expenses  amounted to  approximately  $7,432,  $1,988 and $608 for
2001, 2002 and 2003, respectively.

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


NOTE 6: COMMITMENTS AND CONTINGENCIES

a. Operating Leases:

The Company  leases its facility in Israel under an  operating  lease  agreement
expiring  on  November  30,  2004.   2004  minimum  lease  payments  under  this
non-cancelable lease are $147.

The  Company  leases its  facility  in the US under  operating  lease  agreement
expiring  on  October  31,  2004.   2004  minimum  lease   payments  under  this
non-cancelable lease are $38.

                                      F-14
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


Rent expenses for 2001, 2002 and 2003 were approximately  $2,800, $400 and $199,
respectively.  The above rent expense is net of sub-lease rental income from the
Company's unused premises  totaling  approximately  $54, $700, and $100 in 2003,
2002 and 2001, respectively.

b. Royalties:

The Company is  committed  to pay  royalties  of 3% to 5% to the  government  of
Israel on proceeds from sales of products  resulting from the government  funded
research and development  projects,  up to an amount equal to 100% of the grants
received by the Company,  linked to the dollar and bearing interest at an annual
rate of LIBOR.  As of December 31, 2003, the Company had a contingent  liability
to pay royalties of approximately $800.

c. November 2003 Notes Agreement

Under the November  Notes  Agreement  (see note 7b), the  occurrence  of certain
defined events of default,  may result,  among other things, in the acceleration
of repayment of the $3,000 loan (plus accrued interest), penalties to be paid in
cash, and the lenders will be entitled to exercise their first priority  secured
rights in assets of the Company.

According to the Nasdaq Listing  Qualification Staff, the Company is required to
comply with certain minimum terms in order to remain as a listed security in the
Nasdaq  SmallCap  Market.  Should the Company's  securities  be  de-listed,  the
effectiveness  of all  registered  shares would  become  null.  According to the
November Notes Agreement,  the Company is required to maintain the effectiveness
of the  registered  shares for the  forthcoming  periods.  Not  maintaining  the
effectiveness,  can cause the occurrence of an event of default and consequently
redemption of the notes by the lenders, and/or penalties to be paid in cash.

d. Class Action Litigation

Following  the  restatement  of revenues  for the first three  quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the  Northern  District  of  California  against  the Company and certain of its
officers and a director,  alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
These lawsuits were consolidated into one action in late 2001.  Thereafter,  the
Company filed a Motion to Dismiss,  which was granted. The plaintiffs then filed
a second amended and consolidated complaint,  and the Company's second motion to
dismiss  was  only  partially  accepted,  with  the end  result  being  that the
plaintiff's filed a third amended and consolidated complaint.

In May 2003,  Commtouch  settled the  shareholder  class action lawsuit filed on
behalf of  shareholders  against the company in early 2001.  The  litigation was
initiated  against the company and two members of  management in response to the
company's announcement that it had decided to restate unaudited earnings for the
first three quarters of 2000, alleging violations of the antifraud provisions of
the Securities Exchange Act of 1934.

The  settlement  is being fully funded by the  Company's  Directors and Officers
insurance policy.


NOTE 7: CONVERTIBLE LOAN

a. On January 29, 2003,  Commtouch  entered into a  Convertible  Loan  Agreement
("the January 2003 Loan"), with certain lenders.  The Company received the total
loan amount of $1,250  from the  lenders,  which bore  interest at a rate of ten
percent per annum,  and  convertible  into ordinary shares of the Company at the
price of $0.25 per share.  In connection with the January Loan, the Company also
issued warrants (the "January 2003 warrants")  exercisable for purchase of up to
5,000,000  of the  Company's  ordinary  shares,  each  one-third of the warrants
exercisable  within five years at prices per ordinary share of $0.25,  $0.33 and
$0.50 respectively.

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

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

                                      F-15
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


In  accordance  with EITF 98-5,  "Accounting  for  Convertible  Securities  with
Beneficial  Conversion  Features or Contingent  Adjustable  Conversion  Rations"
("EITF  98-5"),  the Company  recorded as additional  paid in capital $39 as the
beneficial conversation feature of the January 2003 Loan. Amounts reflecting the
fair value of the warrants  and the  beneficial  conversion  feature of the Loan
have been  recorded  as  discounts  on the Loan.  The  discount  related  to the
warrants  and the  beneficial  conversion  feature are  amortized  as  financial
expenses over the term of the January 2003 Loan.

In November 2003, the Company signed a new agreement (the "New  Agreement") with
the lenders of the January 2003 Loan, to early convert their loan into equity of
the Company,  and to exercise half of the related warrants  previously  granted.
According the New Agreement,  the Company  granted an inducement to the lenders,
of an additional 375,000 shares and 375,000 warrants.

On December 26, 2003, the lenders  converted the loan and accrued  interest into
5,652,216  Ordinary  Shares  of the  Company  and,  in  accordance  with the New
Agreement,  exercised  warrants to purchase 187,518 shares, in consideration for
approximately $1,017, received in full by January 2004.

The Company treats the modification and exchange of its debt as an inducement of
conversion  in accordance  with  Statement of Financial  Accounting  Standard 84
"Induced  Conversions of  Convertible  Debt, an amendment of APB Opinion No. 26"
("FAS 84"). As such, the Company recognized  expenses in a total amount of $526,
upon conversion of an amount equal to the fair value of all securities and other
consideration  transferred  in the  transaction  in excess of the fair  value of
securities issuable pursuant to the original conversion terms.

In  accordance  with EITF 00-27,  upon  conversion  of the January  Loan and the
exercise of January warrants into Ordinary shares of the Company, the beneficial
conversion  features and the discount  related to the fair value of the warrants
measured  upon  issuance and  amortized  through the maturity of the loan,  were
fully amortized and are recorded as financial expenses totaling $1,084.

b. On November 26, 2003,  the Company  signed an agreement  (the  "November 2003
Notes Agreement") for a private placement of $3,000 in senior  convertible notes
(the "November 2003 Notes") and related  warrants (the "November 2003 Warrants")
with a group of  institutional  investors.  The notes  mature in three years and
bear interest at a rate of 8% per annum.  The notes are convertible at any time,
at the lenders' option, into the Company's ordinary shares at a fixed conversion
price of $1.153.  The lenders also received  warrants to purchase 600,000 shares
of the Company, exercisable within three year at an exercise price of $1.153 per
share.  The issuance of the November 2003 Notes was contingent on the conversion
of the January  2003 Loan and the  exercise of the January  2003  warrants  into
equity. The total amount was received in full by January 2004.

According to the New Agreement,  any delay in registration and/or  effectiveness
of the November 2003 Notes according to the registration requirements, can cause
the  occurrence  of an event  of  default  and  redemption  of the  notes by the
lenders,  and/or  penalties  to be paid in  cash.  The  Company  classified  the
warrants  fair value as  liabilities  according  to EITF 00-19  "Accounting  for
Derivative  Financial  Instruments  Indexed  to, and  Potentially  Settled in, a
Company's Own Stock" ("EITF 00-19").


NOTE 8: RESTRUCTURING CHARGES

During 2002, the Company continued  implementing  strategic initiatives intended
to further reduce costs.  In connection with the strategic  initiatives,  and in
accordance with SFAS 121,  "Accounting  for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets  To Be  Disposed  Of",  SAB 100  "Restructuring  and
Impairment Charges" and EITF 94-3,  "Liability  Recognition for Certain Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (Including  Certain
Costs in a Restructuring)"  (EITF 94-3), the Company recorded  restructuring and
other non-recurring  charges of approximately  $1,125. The restructure  included
curtailing  expenses and reducing the number of employees.  The following  table
summarizes the restructuring accruals status as of December 31, 2002:

<TABLE>
<CAPTION>
                                                                                                Utilized                 Balance at
                                                                    Restructuring      ----------------------------     December 31,
                                                                       charge            Cash           Non-cash            2002
                                                                    -------------      --------         ---------       ------------
<S>                                                                    <C>              <C>               <C>               <C>
Lease deposits and termination fees ...........................        $  128           $  128            $  --             $--
Impairment of property and equipment ..........................           750             --                 750             --
Loss on sale of assets ........................................           247             --                 247             --
                                                                       ------           ------            ------            ---
                                                                       $1,125           $  128            $  997            $--
                                                                       ======           ======            ======            ===
</TABLE>

                                      F-16
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


NOTE 9: INCOME TAXES

Israeli Income Tax:

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

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

The law and regulations  prescribing the benefits provide for an expiration date
for the grant of new benefits.  The  expiration  date has been extended  several
times in the past.  The  expiration  date  currently  in effect is June 30, 2004
(which may be extended by ministerial  decision until December 31, 2004), and no
new  benefits  will be granted  after that date  unless the  expiration  date is
extended.  We cannot be assured that new benefits  will be available  after June
30, 2004 or that benefits will continue in the future at their current levels or
at  all.  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 (which has yet
to occur) 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 is not  derived  from  "Approved  Enterprise"  during  the
benefits period is taxed at the regular rate of 36%. As currently only a part of
the  Company's  capital  investments  are approved (a "Mixed  Enterprise"),  its
effective  corporate tax rate (once it earns taxable  income) will be determined
by the weighted combination of the various applicable rates.

As of December  31,  2003,  the tax benefits  period for the  outstanding  valid
program had not yet commenced.

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

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

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

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

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

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

                                      F-17
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


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

As of  December  31,  2003,  Israeli  net  operating  loss  and  capital  losses
carry-forwards  amounted  to  $31,525.  Such net  operating  loss may be carried
forward  indefinitely  and offset  against future  taxable  income.  The Company
expects  that during the period these tax losses are utilized its income will be
substantially tax exempted.  Accordingly, there will be no tax benefit from such
losses and no  deferred  income  taxes  have been  included  in these  financial
statements.


U.S. Income Tax:

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

As of December 31, 2003,  Commtouch  Inc. had U.S.  federal net  operating  loss
carry-forwards..  The net operating loss expires in various  amounts between the
years 2009 and 2024.  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:

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,
                                                          ---------------------
                                                            2002         2003
                                                          --------     --------
Deferred tax assets are as follows:
U.S. operating loss carry-forwards ...................    $ 27,699     $ 28,589
Reserves and allowances not currently deductible .....         496        1,320
                                                          --------     --------
Net deferred tax asset before valuation allowance ....      28,195       29,909
Valuation allowance ..................................     (28,195)     (29,909)
                                                          --------     --------
Net deferred tax asset ...............................         $--          $--
                                                          ========     ========

As of December 31, 2003,  the Company has  provided a 100%  valuation  allowance
with  respect to deferred  tax assets  resulting  from tax loss  carry-forwards.
Management  currently  believes that since the Company and Commtouch Inc. have a
history of losses it is more likely than not that the deferred tax regarding the
loss carry-forwards and other temporary  differences will not be realized in the
foreseeable future.


Pretax loss:

Pretax losses from continuing operations are as follows:

                                        2001             2002              2003
                                      -------          -------           -------
Israel .....................          $26,951          $ 4,320           $ 4,214
U.S. .......................           15,403            2,619             2,620
Other ......................              637           (1,349)             --
                                      -------          -------           -------
                                      $42,991          $ 5,590           $ 6,834
                                      =======          =======           =======


NOTE 10: SHAREHOLDERS' EQUITY

The  ordinary  shares of the  Company  have been  traded on the NASDAQ  National
Market and SmallCap Market, since July 1999 and 2002, respectively.

                                      F-18
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


As of December 31, 2003, Commtouch outstanding warrants issued to various
parties, were as follows:

<TABLE>
<CAPTION>
                             Warrants for          Exercise
Issuance                     ordinary              price               Warrants
Date                         shares                per share           exercisable        Exercisable through
------------------           --------------        ------------        ------------       ------------------
<S>                            <C>                 <C>                   <C>              <C>
July 1999                      1,136,000           $ 12.80*              1,136,000        July 2004
December 2001                    175,000           $ 0.26                  175,000        December 2006
January 2002                     200,000           $ 0.29                  200,000        January 2007
October 2002                      26,754           $ 0.01                   26,754        October 2007
February 2002                  2,660,955           $ 0.37 - $2.00        2,335,955        April 2007
January 2003                   5,652,216           $ 0.25 - $0.50        2,826,126        January 2008
July 2003                      1,440,000           $ 0.50                1,115,000        August 2008
July 2003                      1,600,000           $ 0.65                1,600,000        August 2008
December 2003                    600,000           $ 1.153                 600,000        December 2006

                              ----------                                ----------
Total                         13,490,925                                10,014,835
                              ==========                                ==========
<FN>
* Subject  to  adjustments  (see  "Warrants  Issued to  Strategic  Partners  and
Consultants" below).
</FN>
</TABLE>


Warrants to Private Placement Investors and lenders.

On February 27, 2002,  Commtouch  entered  into a private  placement  agreement,
whereby  Commtouch issued  approximately  4,400,000  ordinary shares against the
investment of approximately  $1,343 in a private placement to private investors.
The  purchasers in the private  placement  also received  five-year  warrants to
purchase up to an additional  2,660,955  ordinary shares. The exercise price for
one-third  of the  warrants  is $0.37  per  share,  the  exercise  price  for an
additional  one-third of the warrants is $1.00 per share and the exercise  price
for the final  one-third  of the  warrants  is $2.00 per share.  These  warrants
remain exercisable and expire on April 15, 2007.

For January 29, 2003 details refer to Note 7a herein.

On July 10,  2003,  Commtouch  entered  into an  ordinary  shares  and  Warrants
Purchase  Agreement with certain  investors.  Under this agreement,  the Company
received an investment of $1,440, and issued to the investors 2,880,000 ordinary
shares and warrants to purchase within five years  1,440,000  ordinary shares at
an exercise price of $0.50.  Warrants  totaling 325,000 shares were exercised in
2003,  leaving  1,115,000  warrants  outstanding as at December 31, 2003.  These
warrants remain exercisable and expire on August 11, 2008.

On July 29, 2003,  Commtouch  entered  into two  identical  ordinary  shares and
Warrants Purchase Agreements with certain investors. Under these agreements, the
company  received  investments  totaling  $1,600,  and  issued to the  investors
2,666,667  ordinary  shares and warrants to purchase within five years 1,600,000
ordinary shares at an exercise price of $0.65. These warrants remain exercisable
and expire on August 11, 2008.

For November 26, 2003 details refer to Note 7b herein.


Warrants Issued to Strategic Partners and Consultants.

Concurrent  with the closing of the IPO,  the Company  entered  into a customary
commercial email service agreement with InfoSpace (Formerly,  Go2Net), a related
party.  Under this  agreement,  the Company  provided  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 (subject to
adjustment as described  below).  As of December 31, 2003,  this warrant had not
been  exercised.  The warrant is  non-forfeitable,  fully vested and immediately
exercisable,  and will  expire  five years from the date of the  original  email
service  agreement  (July 16, 2004). If Infospace does not exercise this warrant
and  continue  to hold an  amount of  warrant  shares  representing  twenty-five
percent of its and Vulcan  Ventures  original  shareholdings  purchased in 1999,
they will lose the right to appoint one director to the Board of the Company. At
InfoSpace's  option, the warrant is exercisable  pursuant to a cashless exercise
based on the  average  closing  price of the  ordinary  shares for the five days
preceding the exercise.  The holder of the warrant is required to avoid becoming
a 10% or greater  shareholder  of the Company as a result of any exercise of the
warrant.  The holder of the  warrant is given the  opportunity  to profit from a


                                      F-19
<PAGE>
rise in the market  price of the ordinary  shares and the  warrant.  The warrant
includes  provisions  which adjust the  exercise  price upon the  occurrence  of
certain events which might  otherwise  dilute the value of the warrant,  and the
Company  believes that  following  certain of the Company's  recent and upcoming
financing activities, the exercise price is projected to be approximately $4.91.
At the grant date,  the fair value of this  warrant was  estimated as $5,800 and
was  amortized  to  operating  expenses  over the minimum  term of the  contract
(twelve months through July 2000).


Warrants to service providers in connection with Settlement Agreements.

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

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


Warrants to AxcessNet Resources LLC.

As  consideration  for  consulting  services,  on  September 1, 2002 the Company
issued a fully vested  warrant to AxcessNet  Resources LLC for purchase of up to
206,897 of the  Company's  ordinary  shares at a price of $0.01 per  share.  The
warrant was exercised in 2003.

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


Warrants to service provider.

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

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

c. Issuance of Ordinary Shares Against Promissory Notes:

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

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

                                      F-20
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


As of December 31, 2003, only one note pertaining to a current executive officer
remains  outstanding.  Under this note, $263 was repaid in 2003, and the Company
believes  that the loan will be fully  repaid  during  2004.  During  2003,  the
Company collected additional $318 from two former employees covering most of the
principal  amounts due under the  applicable  notes,  and the balance of $67 was
forgiven.  Consequently  based  on the  collection  of the  notes,  the  Company
reversed the  valuation  allowance  originally  recorded in 2002 at an amount of
$385.  Accordingly,  the  Company  recorded  a  recovery  in  the  statement  of
operations for $318.

d. Employee Stock Purchase Plan:

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

e. Repricing

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

     o    The exercise price of the original options exceeds $10

     o    The option is issued but not exercised

The  repriced  stock  options vest over three years with 1/3 vesting on February
15, 2002 and the  remaining  2/3 vesting  every six months for the following two
years. In connection with this repricing, the Company charged approximately $300
as compensation  expense in 2001 and approximately $234 as compensation  expense
in 2002 and 2003, respectively.

During  October  2001,  the Company  decided that 1/3 of the options  granted on
September 14, 2001 to employees  dismissed  during  October 2001 will not expire
upon  termination  of employment.  The Company  decided that this portion of the
options will vest according to the original grant terms on February 15, 2002 and
will be exercisable  until August 15, 2002.  This  modification  of the terms of
vesting  was  accounted  for  under  APB 25 and FIN 44 and had no  effect on the
Company's statement of operations.

f. Stock Options:

In 1996, the Company adopted the 1996 CI Stock Option Plan for granting  options
to its U.S.  employees  and  consultants  to  purchase  ordinary  shares  of the
Company.  Until 1999, the Company issued options to purchase  ordinary shares to
its Israeli  employees  pursuant to individual  agreements.  In 1999 the Company
approved the 1999 Section 3(i) Share Option Plan for its Israeli  employees  and
consultants, which was amended in 2001 to include Section 102 applicability (the
sections  relate to code  sections  under  the  Israel  tax law).  This plan was
further  amended  in 2003 to  take  advantage  of  changes  made by the  Israeli
legislature under Section 102 of the Israeli tax code.

The Company has reserved  11,460,000 ordinary shares for issuance under employee
stock option  plans and  agreements.  As of December  31, 2003,  an aggregate of
5,110,633  ordinary  shares of the Company are still available for future grant.
Options granted under such plans and agreements  expire generally after 10 years
from  the  date of  grant  and  terminate  upon  termination  of the  optionee's
employment or other  relationship  with the Company.  The options generally vest
ratably  over a  4-year  period.  Certain  repriced  stock  options  offered  to
employees in a Tender Offer Statement of July 20, 2001, as amended,  vest over a
three  year  period.  The  exercise  price  of the  options  granted  under  the
individual  agreements may not be less than the nominal value of the shares into
which such  options  are  exercisable.  Any  options  that are  canceled  or not
exercised within the options period become available for future grant.

                                      F-21
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


A summary of the Company's share option activity under the plans is as follows:
<TABLE>
<CAPTION>
                                                                                                           Weighted Average
                                                              Number of Shares                              Exercise Price
                                             ---------------------------------------------       -----------------------------------
                                                 2001             2002             2003            2001          2002          2003
                                             ----------        ----------       ----------       ---------     --------     --------
<S>                                          <C>               <C>                <C>            <C>           <C>          <C>
Outstanding at beginning of period ......     2,650,455         2,915,689        2,733,545       $   19.91     $   0.46     $   0.17
Granted .................................     3,009,388*        2,058,521        2,093,948            0.2          0.16         0.39
Exercised ...............................      (119,268)         (261,490)        (253,605)           0.39         0.02         0.14
Canceled ................................    (2,624,886)       (1,979,175)        (203,380)          19.68         0.60         0.15
                                             ----------        ----------       ----------       ---------     --------     --------
Outstanding at end of period ............     2,915,689         2,733,545        4,370,508       $    0.46     $   0.17     $   0.29
                                             ==========        ==========       ==========       =========     ========     ========
Exercisable at end of period ............       281,830           716,407        1,675,734       $    2.70     $   0.21     $   0.18
                                             ==========        ==========       ==========       =========     ========     ========
<FN>

* - Includes 1,273,513 options repriced to par value during 2001.
</FN>
</TABLE>

The options outstanding as of December 31, 2003, have been separated into ranges
of exercise price, as follows:

<TABLE>
<CAPTION>
                                               Weighted
                            Options             Average           Weighted            Options         Weighted Average
                       Outstanding as of       Remaining           Average       Exercisable as of        Price of
                         December 31,      Contractual Life       Exercise         December 31,          Exercisable
  Exercise Price             2003               (years)             Price              2003                Options
  --------------       -----------------   ----------------       --------       ------------------     --------------
<S>                        <C>                   <C>              <C>               <C>                    <C>
   $0.01-$0.11             1,688,423             7.80             $ 0.06            1,080,922              $  0.06
   $0.12-$1.45             2,681,085             8.08             $ 0.42              593,937              $  0.34
   $35                         1,000             6.48             $ 35                    875              $ 35.00
                           ---------             ----             ------            ---------              -------
   $ 0.01-$35              4,370,508             7.92             $ 0.29            1,675,734              $  0.18
                           =========             ====             ======            =========              =======
</TABLE>

Weighted  average fair values and weighted  average  exercise  prices of options
whose  exercise  price is less or equals  market  price of the shares at date of
grant are as follows:
<TABLE>
<CAPTION>

                                                                            For exercise prices on the date of grant that:
                                                                --------------------------------------------------------------------
                                                                      Equals market price              Are less than market price
                                                                     Year ended December 31,             Year ended December 31,
                                                                --------------------------------    --------------------------------
                                                                  2001        2002        2003        2001        2002        2003
                                                                --------    --------    --------    --------    --------    --------
<S>                                                             <C>         <C>         <C>         <C>         <C>         <C>
Weighted average exercise prices ........................       $   0.27    $   0.16    $   0.40    $   0.01    $   0.01    $   0.19
Weighted average fair values on date of grant ...........       $   0.10    $   0.16    $   0.40    $   0.44    $   0.16    $   0.40
</TABLE>

Under SFAS 123, pro forma  information  regarding net income (loss) and earnings
(loss) per share is  required  and has been  determined  as if the  Company  had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes option valuation model with the following weighted-average
assumptions for 2001, 2002 and 2003:  risk-free interest rates of 4.0% for 2001,
3.7% for 2002, and 3.7% for 2003,  dividend yields of 0%, volatility  factors of
the expected  market price of the Company's  ordinary  shares of 1.482 for 2001,
1.416 for 2002,  and 1.384 for 2003 and a  contractual  life of the  option of 6
months after the option is vested for 2001, 2002 and 2003.

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

    Deferred stock based compensation is as follows:
    Balance as of January 1, 2003.....................................    $ 277
    Less amortization of deferred stock based compensation............     (247)
                                                                          -----
    Balance as of December 31, 2003...................................     $ 30
                                                                          =====

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

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

                                      F-22
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


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

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

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

     d.   In 2003, an increase was approved  bringing the plan's total allotment
          to 2,290,000.

Prior to August 2001,  directors  who were  reelected at each annual  meeting of
shareholders  were  generally  entitled to additional  grants of 10,000  shares.
However,  this  amount has been  increased  over the past few years  pursuant to
shareholder approvals, such that:

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

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

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

     d.   Directors  reelected  at  the  annual  general  meeting  in  2003  and
          thereafter are entitled to an option grant of 50,000 ordinary shares.

As from the annual meeting of  shareholders  in 2003, new directors  joining the
board are entitled to an option grant of 150,000 ordinary shares.

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

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

During 2003, the Company granted 425,000 options to non-employee  directors at a
weighted  average  exercise  price of $0.82 per share.  As of December 31, 2003,
636,249 options were vested and 1,769,850 were outstanding under the Amended and
Restated 1999 Non-Employee Directors Stock Option Plan.

Due to changes in the Israeli tax code, grants to Israeli resident  directors as
from the annual  general  meeting of  shareholders  will be made pursuant to the
Amended and Restated  Israeli  Share Option Plan,  though the grant  amounts and
vesting schedule will remain in accordance with the Non-Employee Directors Plan.


NOTE 10: GEOGRAPHIC INFORMATION

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

                                      F-23
<PAGE>
                                                         Commtouch Software Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)


Revenues from external customers:

                                                              Revenues
                                                     ---------------------------
                                                       2001      2002      2003
                                                     -------   -------   -------
Israel ...........................................   $   451   $   416   $    27
U.S.A ............................................     5,806     1,207       275
Europe ...........................................     2,500     1,436      --
Japan ............................................       656       356        27
Latin America ....................................     2,910        23      --
Other ............................................     1,265      --        --
                                                     -------   -------   -------
                                                     $13,588   $ 3,438   $   329
                                                     =======   =======   =======

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

                                                       2002      2003
                                                     -------   -------
Israel ...........................................   $   441   $   294
U.S.A ............................................       588       158
                                                     -------   -------
                                                     $ 1,029   $   452
                                                     =======   =======

NOTE 11: SUBSEQUENT EVENT (Unaudited)

On May 18, 2004, the Company entered into a definitive agreement for the private
placement of  5,131,580  ordinary  shares of the Company at a purchase  price of
$0.76 per share to existing  institutional  investors for gross  proceeds to the
Company of approximately $3.9 million.

The  investors  also received five year warrants to purchase up to an additional
2,565,790  ordinary  shares,  with an  exercise  price of $0.83  per  share.  In
addition,  the Company had granted the investors additional investment rights to
purchase  up to an  additional  5,131,580  ordinary  shares at $0.83 per  share,
together  with  additional  warrants to purchase up to an  additional  2,565,790
ordinary  shares with an exercise price of $0.83 per share,  for a period of one
year following the  effectiveness  of the  registration  statement  covering the
resale of the ordinary shares underlying these rights.

The Company agreed to reduce the conversion and exercise prices of the notes and
warrants  issued to the investors in the November 26, 2003  transaction  between
those investors and the Company.  The conversion  price previously set at $1.153
shall be reduced so that the initial notes in the aggregate amount of $3,000,000
shall have a conversion  price of $0.83 and the initial  warrants issued in that
transaction  shall have an  exercise  price of $0.83 per share.  The  conversion
price of the  additional  notes and exercise  price of the  additional  warrants
issuable in connection with that transaction [if and when the investors'  option
to loan additional  funds is exercised]  shall be reduced to $0.90. In addition,
the exercise  period for the  additional  loan shall be extended for a period 18
months from the effectiveness of the registration  statement  (January 20, 2004)
covering  the resale of the ordinary  shares  relating to the initial loan under
the November 2003 transaction.

The closing of the financing is subject to certain closing conditions, including
receipt of shareholder  approval of an increase in the authorized  share capital
of the Company and the terms of this  transaction.  The Company is  scheduled to
hold an extraordinary meeting of its shareholders on June 28, 2004.


                                      F-24
<PAGE>
                                   SIGNATURES

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



                                       COMMTOUCH SOFTWARE LTD.

                                       By: /s/ Devyani Patel
                                           -------------------------------------
                                           Devyani Patel
                                           V.P. Finance
                                           June 18, 2004


<PAGE>




                             COMMTOUCH SOFTWARE LTD.


                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                            U.S. Dollars in thousands
<TABLE>
<CAPTION>

                                                                   Balance at
                                                                      the             Charged to                         Balance at
                                                                  beginning of         cost and           end of             the
                                                                   the period          expenses         Deductions         period
                                                                   ----------          --------         ----------         ------
<S>                                                                  <C>                <C>                <C>             <C>
Year ended December 31, 2001:
     Bad debt .........................................              $ 862              $ 259              $(551)          $ 570
                                                                     =====              =====              =====           =====
Year ended December 31, 2002:
     Bad debt .........................................              $ 570              $  40              $(569)          $  41
                                                                     =====              =====              =====           =====
Year ended December 31, 2003:
     Bad debt .........................................              $  41              $--                $ (41)          $--
                                                                     =====              =====              =====           =====
</TABLE>



<PAGE>



Item 19. Exhibits

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

1.1               Memorandum of Association of the Company.(1)

1.2               Amended and Restated  Articles of  Association of the Company,
                  as amended on December 26, 2003.

2.1               Specimen Certificate of Ordinary Shares.(1)

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

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

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

2.3               Reserved.

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

2.5               Reserved.

2.6               Reserved.

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

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

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

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

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

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

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

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

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

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

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

2.9.9             Addendum 1 to Convertible Loan Agreement.(30)

2.9.10            Addendum 2 to Convertible Loan Agreement.(11)

2.9.11            Addendum 3 to Convertible Loan Agreement.

2.10              Text of  Report on Form 6-K  filed by the  Registrant  for the
                  month of November 2003.(34)

<PAGE>

2.10.1            Securities Purchase Agreement dated November 26, 2003.(35)

2.10.2            Exhibit "D" to Securities  Purchase  Agreement  dated November
                  26, 2003 - Form of Registration Rights Agreement.(36)

2.10.3            Exhibit "A" to Securities  Purchase  Agreement  dated November
                  26, 2003 - Form of Convertible Note.(37)

2.10.4            Exhibit "C" to Securities  Purchase  Agreement  dated November
                  26, 2003 - Form of Warrant.(38)

2.10.5            Exhibit "K" to Securities  Purchase  Agreement  dated November
                  26, 2003 - Form of Voting Agreement.(39)

2.10.6            Exhibit "E" to Securities  Purchase  Agreement  dated November
                  26, 2003- Form of Security Agreement.(40)

2.10.7            Exhibit "F" to Securities  Purchase  Agreement  dated November
                  26, 2003 - Form of Guarantee.(41)

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

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

4.3               Commtouch   Software  Ltd.  1999  Section  3(i)  Share  Option
                  Plan.(8)

4.4               Amended and Restated 1996 CSI Stock Option Plan.(18)

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

4.6               Amended and Restated 1999 Non-Employee  Directors Stock Option
                  Plan.(20)

4.7               Amended and Restated  1999 Israeli Share Option Plan [fka 1999
                  Section 3(i) Share Option Plan].(9)

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

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

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

4.10              Text of  Report on Form 6-K  filed by the  Registrant  for the
                  month of July 2003.(13)

4.10.1            Ordinary Shares and Warrants Purchase Agreement dated July 10,
                  2003, inclusive of Exhibits "A" and "B" thereto.(14)

4.11              Text of  Report on Form 6-K  filed by the  Registrant  for the
                  month of August 2003.(15)

4.11.1            Ordinary Shares and Warrants Purchase Agreement dated July 29,
                  2003, inclusive of Exhibits "A" and "B" thereto.(16)

4.11.2            Ordinary Shares and Warrants Purchase Agreement dated July 29,
                  2003, inclusive of Exhibits "A" and "B" thereto.(17)


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

4.13              Surrender   Agreement  between  Omni  South  Beach,  L.P.  and
                  Commtouch Latin America Inc. dated August 31, 2002.(7)

4.14              Agreement  of September  1, 2002  between  AxcessNet  Ltd. and
                  Commtouch   Software   Ltd.   plus  Warrant  for  purchase  of
                  Registrant's ordinary shares.(32)

4.15              Agreement  of September  1, 2002  between  AxcessNet  Ltd. and
                  Commtouch Software Ltd., plus Amendment 1 thereto.(33)

8                 Subsidiaries  of the Company (1.  Commtouch Inc., a California
                  corporation)

12.1              Certification  of  Company's   Principal   Executive   Officer
                  Pursuant to Exchange Act Rule 13a-14a or 15d-14a

12.2              Certification  of  Company's   Principal   Financial   Officer
                  Pursuant to Exchange Act Rule 13a-14a or 15d-14a

13                Certification  of Company's  Principal  Executive  Officer and
                  Principal Financial Officer Pursuant to 18 U.S.C. 1350.

14.1              Consent  of  Kost,  Forer,  Gabbay  &  Kasierer,   independent
                  auditors.

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

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

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

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

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

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

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

(6)      Incorporated by reference to Exhibit 4.22 to Annual Report on Form 20-F
         for the year ended December 31, 2002.

(7)      Incorporated by reference to Exhibit 4.23 to Annual Report on Form 20-F
         for the year ended December 31, 2002.

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

(9)      Incorporated by reference to Exhibit 10.5 to Registration  Statement on
         Form S-8 No. _____________.

(10)     Reserved.

(11)     Incorporated  by reference to Exhibit  2.9.10 to Annual  Report on Form
         20-F for the year ended December 31, 2002.

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

(13)     Incorporated  by  reference to Report on Form 6-K for the month of July
         2003, filed July 28, 2003.

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

(15)     Incorporated by reference to Report on Form 6-K for the month of August
         2003, filed August 15, 2003.

(16)     Incorporated  by  reference  to Exhibit 2 to Report on Form 6-K for the
         month of August 2003, filed August 15, 2003.

(17)     Incorporated  by  reference  to Exhibit 3 to Report on Form 6-K for the
         month of August 2003, filed August 15, 2003.

(18)     Incorporated by reference to Exhibit 10.4 to Registration  Statement on
         Form S-8 No. _____________.

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

(20)     Incorporated by reference to Exhibit 10.3 to Registration  Statement on
         Form S-8 No. _____________.

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

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

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

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

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

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

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

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

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

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

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

(32)     Incorporated by reference to Exhibit 4.24 to Annual Report on Form 20-F
         for the year ended December 31, 2002.

(33)     Incorporated by reference to Exhibit 4.25 to Annual Report on Form 20-F
         for the year ended December 31, 2002.

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

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

<PAGE>
(36)     Incorporated  by  reference  to Exhibit 2 to Report on Form 6-K for the
         month of November 2003, filed December 2, 2003.

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

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

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

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

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