Document:

3,000,000 Shares(1)

                             Commtouch Software Ltd.

                                 Ordinary Shares

                               PURCHASE AGREEMENT

                                                                 March ___, 2000

U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ LLC,
A subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
As Representatives of the several
Underwriters named in Schedule I hereto
c/o U.S. Bancorp Piper Jaffray
222 South Ninth Street
Minneapolis, Minnesota 55402

Gentlemen:

     Commtouch  Software  Ltd.,  an Israeli  company  (the  "Company"),  and the
stockholders   of  the  Company  listed  in  Schedule  I  hereto  (the  "Selling
Stockholders")  severally propose to sell to the several  Underwriters  named in
Schedule II hereto (the  "Underwriters")  an aggregate of 3,000,000  shares (the
"Firm  Shares") of ordinary  shares,  nominal  value NIS 0.05 per share  (herein
called "Ordinary Shares"),  of the Company. The Firm Shares consist of 1,669,000
authorized but unissued Ordinary Shares to be issued and sold by the Company and
1,331,000  outstanding  Ordinary Shares to be sold by the Selling  Shareholders.
The Company has also granted to the several  Underwriters  an option to purchase
up to 450,000  additional  Ordinary Shares on the terms and for the purposes set
forth in Section 3 hereof (the "Option Shares").  The Firm Shares and any Option
Shares  purchased  pursuant to this Purchase  Agreement are herein  collectively
called the "Securities."

     The Company and the Selling  Shareholders  hereby  confirm their  agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives").

     Registration Statement and Prospectus. A registration statement on Form F-1
(File No. 333-________) with respect to the Securities,  including a preliminary
form of  prospectus,  has been  prepared by the Company in  conformity  with the
requirements  of the  Securities  Act of 1933,  as amended (the "Act"),  and the
rules and regulations  ("Rules and  Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder and has been filed with the Commission;
one or more amendments to such registration statement have also been so prepared
and have been,  or will be, so filed;  and,  if the  Company has elected to rely
upon  Rule  462(b)  of the Rules and  Regulations  to  increase  the size of the
offering  registered  under the Act,  the Company will prepare and file with the
Commission a registration  statement  with respect to such increase  pursuant to
Rule 462(b).  Copies of such  registration  statement(s) and amendments and each
related preliminary prospectus have been delivered to you.

     If the  Company  has  elected  not to rely  upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus (including a term sheet meeting
the requirements of Rule 434 of the Rules and  Regulations).  If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and
file a  prospectus  (or a term  sheet  meeting  the  requirements  of Rule  434)
pursuant to Rule 424(b) that discloses the information  previously  omitted from
the  prospectus  in reliance  upon Rule 430A.  Such  registration  statement  as
amended at the time it is or was declared  effective by the Commission,  and, in
the event of any amendment  thereto  after the  effective  date and prior to the
First Closing Date (as hereinafter defined),  such registration  statement as so
amended (but only from and after the effectiveness of such amendment), including
a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and

----------
(1)  Plus an option to purchase up to 450,000 additional shares from the Company
     to cover over-allotments.
<PAGE>
Regulations  increasing  the size of the offering  registered  under the Act and
information (if any) deemed to be part of the registration statement at the time
of  effectiveness  pursuant  to  Rules  430A(b)  and  434(d)  of the  Rules  and
Regulations,  is hereinafter called the "Registration Statement." The prospectus
included  in the  Registration  Statement  at  the  time  it is or was  declared
effective by the Commission is hereinafter called the "Prospectus,"  except that
if any prospectus (including any term sheet meeting the requirements of Rule 434
of the Rules and  Regulations  provided by the Company for use with a prospectus
subject  to  completion  within  the  meaning  of Rule  434 in order to meet the
requirements of Section 10(a) of the Rules and Regulations) filed by the Company
with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the
Rules and Regulations or any other such prospectus  provided to the Underwriters
by the  Company  for use in  connection  with  the  offering  of the  Securities
(whether or not required to be filed by the Company with the Commission pursuant
to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file
at the time the  Registration  Statement  is or was  declared  effective  by the
Commission,  the term  "Prospectus"  shall  refer to such  differing  prospectus
(including  any term  sheet  within  the  meaning  of Rule 434 of the  Rules and
Regulations)  from  and  after  the  time  such  prospectus  is  filed  with the
Commission or transmitted  to the  Commission  for filing  pursuant to such Rule
424(b)  (and Rule  434,  if  applicable)  or from and after the time it is first
provided to the Underwriters by the Company for such use. The term  "Preliminary
Prospectus"  as used herein  means any  preliminary  prospectus  included in the
Registration  Statement  prior to the time it becomes or became  effective under
the Act and any  prospectus  subject to  completion as described in Rule 430A or
434 of the Rules and Regulations.

     Representations and Warranties of the Company and the Selling Shareholders.

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

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

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<PAGE>
in conformity with, written  information  furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof.

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

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

               (iv)  Each  of  the  Company  and  Commtouch   Software  Inc.,  a
California corporation, and Commtouch Software (UK) Ltd., an English corporation
(the  "Subsidiaries"),  has been duly  organized  and is validly  existing  as a
corporation  under the laws of its jurisdiction of  incorporation  and Commtouch
Software  Inc. is in good  standing  under the laws of  California.  Each of the
Company and the  Subsidiaries  has full corporate power and authority to own its
properties  and  conduct  its  business  as  currently  being  carried on and as
described  in the  Registration  Statement  and  the  Prospectus,  and  is  duly
qualified  to do  business  as a foreign  corporation  in good  standing in each

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<PAGE>
jurisdiction in which it owns or leases real property or in which the conduct of
its business makes such  qualification  necessary and in which the failure to so
qualify  would  have a  material  adverse  effect on the  assets or  properties,
business, results of operations, prospects or condition (financial or otherwise)
of the  Company  and the  Subsidiaries,  taken as a whole (a  "Material  Adverse
Effect").

               (v) Except as contemplated in the Registration  Statement and the
Prospectus,  subsequent to the respective dates as of which information is given
in the  Registration  Statement and the Prospectus,  neither the Company nor the
Subsidiaries  has incurred any material  liabilities or  obligations,  direct or
contingent,  or entered into any material transactions,  or declared or paid any
dividends or made any distribution of any kind with respect to its share capital
stock;  and there has not been any change in the share capital stock (other than
a change in the number of  outstanding  Ordinary  Shares due to the  issuance of
shares upon the exercise of  outstanding  options or warrants),  or any material
change  in the  short-term  or  long-term  debt,  or any  issuance  of  options,
warrants,  convertible  securities or other rights to purchase the share capital
stock,  of the  Company or the  Subsidiaries,  or any change that had a Material
Adverse Effect,  or any  development  involving a prospective  Material  Adverse
Effect.

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

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

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

               (ix) All of the issued and outstanding  equity  securities of the
Company,  including the  outstanding  Ordinary  Shares,  are duly authorized and
validly  issued,  fully paid and  nonassessable,  have been issued in compliance

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<PAGE>
with all Israeli and U.S. federal and state securities laws (including,  without
limitation, applicable Israeli securities laws), were not issued in violation of
or subject to any preemptive rights or other rights to subscribe for or purchase
securities,  and the holders  thereof are not subject to personal  liability  by
reason of being such holders;  and the share  capital of the Company,  including
the Ordinary  Shares,  conforms to the description  thereof in the  Registration
Statement  and  Prospectus.  Except  as  otherwise  stated  in the  Registration
Statement  and  Prospectus,  there are no  preemptive  rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or transfer of,
any Ordinary  Shares  pursuant to the  Company's  Memorandum of  Association  or
Articles  of  Association  or any  agreement  or other  instrument  to which the
Company  is a party or by which the  Company  is bound.  All of the  issued  and
outstanding  shares of capital stock of each of the Subsidiaries  have been duly
and validly  authorized  and issued and are fully paid and  nonassessable,  and,
except as otherwise described in the Registration  Statement and the Prospectus,
the  Company  owns of record and  beneficially,  free and clear of any  security
interests,  claims, liens, proxies,  equities or other encumbrances,  all of the
issued  and  outstanding  shares  of such  stock.  Except  as  described  in the
Registration  Statement and the Prospectus (and except for options granted after
the date of the  Registration  Statement and the  Prospectus to employees of the
Company  pursuant  to the  stock  option  plans  described  in the  Registration
Statement and the  Prospectus,  which option  grants have been  disclosed to the
Representatives), there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company or the  Subsidiaries
any shares of the share capital of the Company or the Subsidiaries.  The Company
has  an  authorized  and  outstanding   capitalization   as  set  forth  in  the
Registration  Statement and the Prospectus (except for options granted after the
date of the  Registration  Statement  and the  Prospectus  to  employees  of the
Company  pursuant  to the  stock  option  plans  described  in the  Registration
Statement and the  Prospectus,  which option  grants have been  disclosed to the
Representatives).

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

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

               (xii) The Company and the Subsidiaries hold, and are operating in
compliance   in  all   material   respects   with,   all   franchises,   grants,
authorizations,  licenses, permits, easements, consents, certificates and orders
of any  governmental or regulatory body required for the conduct of its business
and all such franchises, grants,  authorizations,  licenses, permits, easements,
consents,  certifications and orders are valid and in full force and effect; and
the Company and the Subsidiaries are in compliance in all material respects with
all applicable federal, state, local and foreign (including, without limitation,
Israeli, English and U.S.) laws, regulations, orders and decrees.

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

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

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

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

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

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               (xviii) The  Securities  have been  approved for  quotation  upon
notice of issuance on the NASDAQ National Market.

               (xix) The Company has no  subsidiary or  subsidiaries  other than
the  Subsidiaries  and the  Company  owns no  capital  stock or other  equity or
ownership  or  proprietary  interest in any  corporation,  partnership,  limited
liability company,  joint venture association,  trust or other entity other than
the Subsidiaries.

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

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

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

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

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

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

               (xxvi) There are no affiliations with the National Association of
Securities Dealers,  Inc. (the "NASD") among the Company's  officers,  directors
or,  to  the  best  knowledge  of the  Company,  any  five  percent  or  greater

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shareholder of the Company,  except as set forth in the  Registration  Statement
and the Prospectus or otherwise disclosed in writing to the Representatives.

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

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

               (xxix) The Company has  reviewed its  operations  and that of its
subsidiaries  and  any  third  parties  with  which  the  Company  or any of its
subsidiaries  has a material  relationship  to evaluate  the extent to which the
business  or  operations  of the  Company  or any of its  subsidiaries  will  be
affected by the Year 2000 Problem (defined  below).  As a result of such review,
the Company has no reason to believe,  and does not believe,  that the Year 2000
Problem will have a Material  Adverse Effect,  or result in any material loss or
interference with the Company's business or operations.  The "Year 2000 Problem"
as used herein means any  significant  risk that  computer  hardware or software
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical  systems of any kind will not,  in the case of dates or time  periods
occurring  after  December 31, 1999,  function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.

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

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

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

                                       8
<PAGE>
Israel)  pursuant to the  Prospectus  will be made within the State of Israel by
the Company.

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

               (xxxiv)  Neither the Company  nor any of its  subsidiaries  is in
violation of any  conditions or  requirements  stipulated by the  instruments of
approval  granted  to any of them by the  Office of the Chief  Scientist  in the
Ministry of Industry & Commerce,  with respect to any  research and  development
grants  given to it by such  office,  which  violation,  individually  or in the
aggregate,  would have a Material  Adverse Effect.  The Company  qualifies as an
"Industrial  Company" within the definition of the Law for the  Encouragement of
Industry (Taxes), 1969, of the State of Israel.

               (xxxv) No transfer  tax,  stamp duty or similar tax is payable by
or on behalf of the  Underwriters  in connection  with:  (i) the issuance by the
Company  of  the  Securities;  (ii)  the  purchase  by the  Underwriters  of the
Securities from the Company; (iii) the consummation by the Company of any of its
obligations  under this  Agreement;  or (iv) assuming the  Underwriters  are not
subject to taxation in Israel,  resale of the Securities by the  Underwriters in
connection with the distribution contemplated hereby.

               (xxxvi) The Company has duly and irrevocably  appointed Commtouch
Software  Inc.,  a  corporation  organized  under  the  laws  of  the  State  of
California,  as its agent to receive service of process in any action against it
in any United States federal or state court arising out of or in connection with
the this Agreement or the transactions contemplated hereby.

               (xxxvii)  The   documents   incorporated   by  reference  in  the
Prospectus,  at the time they were or hereafter  are filed with the  Commission,
complied  or when so filed  will  comply,  as the case may be,  in all  material
respects  with the  requirements  of the  Securities  Exchange  Act of 1934,  as
amended, and the rules and regulations  promulgated  thereunder,  and, when read
together and with the other  information in the Prospectus and as such documents
may be modified or superseded by the Prospectus, did not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements  therein,  in the
light of the circumstances under which they were or are made, not misleading.

          (b) Each Selling  Shareholder  represents  and warrants to, and agrees
with, the several Underwriters as follows:

               (i) Such Selling  Shareholder is the record and beneficial  owner
of, and has, and on the First Closing Date will have, valid and marketable title
to the Securities to be sold by such Selling Shareholder,  free and clear of all
security interests,  claims,  liens,  restrictions on transferability,  legends,
proxies,  equities or other  encumbrances;  and upon delivery of and payment for
such  Securities  hereunder,  the several  Underwriters  will acquire  valid and
marketable  title  thereto,  free and clear of any security  interests,  claims,
liens,  restrictions on  transferability,  legends,  proxies,  equities or other
encumbrances.  Such Selling  Shareholder is selling the Securities to be sold by

                                       9
<PAGE>
such Selling  Shareholder for such Selling  Shareholder's own account and is not
selling such Securities, directly or indirectly, for the benefit of the Company,
and no part of the proceeds of such sale  received by such  Selling  Shareholder
will inure,  either directly or indirectly,  to the benefit of the Company other
than as described in the Registration Statement and Prospectus.

               (ii) Such Selling  Shareholder has duly authorized,  executed and
delivered a Custody Agreement ("Custody Agreement"),  which Custody Agreement is
a valid and binding  obligation  of such  Selling  Shareholder,  to Norwest Bank
Minnesota,  N.A.,  as  Custodian  (the  "Custodian");  pursuant  to the  Custody
Agreement the Selling Shareholder has placed in custody with the Custodian,  for
delivery under this Agreement,  the certificates  representing the Securities to
be sold by such Selling Shareholder; such certificates represent validly issued,
outstanding, fully paid and nonassessable Ordinary Shares; and such certificates
were duly and properly  endorsed in blank for transfer,  or were  accompanied by
all  documents  duly and properly  executed  that are  necessary to validate the
transfer of title thereto, to the Underwriters,  free of any legend, restriction
on transferability, proxy, lien or claim, whatsoever.

               (iii) Such  Selling  Shareholder  has the power and  authority to
enter into this Agreement and to sell, transfer and deliver the Securities to be
sold  by such  Selling  Shareholder;  and  such  Selling  Shareholder  has  duly
authorized,  executed and delivered to Allan Barkat,  as  attorney-in-fact  (the
"Attorney-in-Fact"),  an  irrevocable  power of attorney (a "Power of Attorney")
authorizing and directing the  Attorney-in-Fact  to effect the sale and delivery
of the  Securities  being sold by such Selling  Shareholder,  to enter into this
Agreement and to take all such other action as may be necessary hereunder.

               (iv)  This  Agreement,  the  Custody  Agreement  and the Power of
Attorney have each been duly authorized,  executed and delivered by or on behalf
of such Selling  Shareholder and each constitutes a valid and binding  agreement
of such Selling Shareholder, enforceable in accordance with its terms, except as
rights to indemnity  hereunder or thereunder  may be limited by federal or state
securities laws and except as such  enforceability may be limited by bankruptcy,
insolvency,  reorganization or laws affecting the rights of creditors  generally
and subject to general  principles of equity. The execution and delivery of this
Agreement,  the Custody  Agreement and the Power of Attorney and the performance
of the terms hereof and thereof and the consummation of the transactions  herein
and therein  contemplated will not result in a breach or violation of any of the
terms and  provisions  of, or  constitute  a default  under,  any  agreement  or
instrument to which such Selling Shareholder is a party or by which such Selling
Shareholder is bound, or any law, regulation, order or decree applicable to such
Selling Shareholder; no consent, approval,  authorization or order of, or filing
with,  any court or  governmental  agency or body is required for the execution,
delivery and performance of this Agreement,  the Custody Agreement and the Power
of Attorney or for the consummation of the transactions  contemplated hereby and
thereby,  including  the  sale of the  Securities  being  sold  by such  Selling
Shareholder,  except such as may be required  under the Act or state  securities
laws or blue sky laws.

               (v) Such Selling  Shareholder  has not  distributed  and will not
distribute  any  prospectus or other  offering  material in connection  with the
offering and sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other  materials  permitted by the Act to be  distributed  by such
Selling Shareholder.

               (vi) Such  Selling  Shareholder  has  reviewed  the  Registration
Statement  and  the  Prospectus  and to  the  best  knowledge  of  such  Selling
Shareholder  neither the Registration  Statement nor the Prospectus contains any

                                       10
<PAGE>
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements  therein not misleading
regarding such Selling Shareholder, the other Selling Shareholders,  the Company
or otherwise.

               (vii) To the best  knowledge  of such  Selling  Shareholder,  the
representations and warranties of the Company contained in paragraph (a) of this
Section 2 are true and correct.

          (c) Any certificate signed by any officer of the Company and delivered
to you or to counsel for the Underwriters  shall be deemed a representation  and
warranty by the Company to each  Underwriter as to the matters covered  thereby;
any certificate  signed by or on behalf of any Selling  Shareholders as such and
delivered  to  you  or to  counsel  for  the  Underwriters  shall  be  deemed  a
representation  and warranty by such Selling  Shareholder to each Underwriter as
to the matters covered thereby.

     3. Purchase, Sale and Delivery of Securities.

     On the  basis of the  representations,  warranties  and  agreements  herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to issue and sell  1,669,000  Firm Shares,  and each Selling  Shareholder
agrees,  severally and not jointly,  to sell the number of Firm Shares set forth
opposite  the name of such  Selling  Shareholder  on  Schedule I hereto,  to the
several Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Shareholders the number of Firm Shares
set forth  opposite  the name of such  Underwriter  in Schedule  II hereto.  The
purchase  price for each Firm Share  shall be  **[$__________]  per  share.  The
obligation  of  each  Underwriter  to  each  of  the  Company  and  the  Selling
Shareholders  shall be to  purchase  from each of the  Company  and the  Selling
Shareholders  that number of Firm Shares (to be adjusted by the  Representatives
to avoid  fractional  shares) which represents the same proportion of the number
of Firm Shares to be sold by each of the  Company  and the Selling  Shareholders
pursuant to this  Agreement as the number of Firm Shares set forth  opposite the
name of such Underwriter in Schedule II hereto represents to the total number of
Firm Shares to be purchased by all Underwriters  pursuant to this Agreement.  In
making  this  Agreement,  each  Underwriter  is  contracting  severally  and not
jointly;  except as provided in paragraph (c) of this Section 3 and in Section 8
hereof,  the agreement of each  Underwriter  is to purchase only the  respective
number of Firm Shares specified in Schedule II.

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

                                       11
<PAGE>
later than 10:30 a.m.,  Central  time,  on the business day next  preceding  the
First Closing Date at the offices of U.S. Bancorp Piper Jaffray, 222 South Ninth
Street,  Minneapolis,  Minnesota,  or such  other  location  as may be  mutually
acceptable.

     On the  basis of the  representations,  warranties  and  agreements  herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby  grants to the  several  Underwriters  an option to  purchase  all or any
portion of the Option Shares at the same purchase price as the Firm Shares,  for
use solely in covering any over-allotments  made by the Underwriters in the sale
and  distribution  of the Firm  Shares.  The  option  granted  hereunder  may be
exercised  at any  time  (but not more  than  once)  within  30 days  after  the
effective  date of this  Agreement  upon  notice  (confirmed  in writing) by the
Representatives  to the Company  setting  forth the  aggregate  number of Option
Shares as to which the several Underwriters are exercising the option, the names
and  denominations  in which the  certificates  for the Option  Shares are to be
registered  and the date and time,  as determined by you, when the Option Shares
are to be delivered,  such time and date being herein referred to as the "Second
Closing" and "Second Closing Date",  respectively;  provided,  however, that the
Second Closing Date shall not be earlier than the First Closing Date nor earlier
than the second  business day after the date on which the option shall have been
exercised. The number of Option Shares to be purchased by each Underwriter shall
be the same  percentage  of the total number of Option Shares to be purchased by
the several  Underwriters  as the number of Firm Shares to be  purchased by such
Underwriter is of the total number of Firm Shares to be purchased by the several
Underwriters,  as  adjusted  by  the  Representatives  in  such  manner  as  the
Representatives  deem  advisable to avoid  fractional  shares.  No Option Shares
shall be sold and  delivered  unless the Firm Shares  previously  have been,  or
simultaneously are, sold and delivered.

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

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

     Notwithstanding anything else in this Agreement, the Underwriters shall not
solicit offers to purchase  Securities in Israel from more than 35 solicitees in
the aggregate and will obtain  confirmation  from such  solicitees that they are
purchasing  such  Securities  for  investment  purposes only and not with a view
toward  distribution  or sale.  On or before the date two days after the Closing
Date, the Underwriters shall furnish the Company, its counsel and the Securities

                                       12
<PAGE>
Authority of the State of Israel (the "ISA") with a list of such solicitees,  if
any (including their name and addresses),  so as to enable the Company to comply
with the terms of the exemption issued by the ISA.

     4. Covenants

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

               (i) If the  Registration  Statement has not already been declared
effective by the Commission,  the Company will use its best efforts to cause the
Registration  Statement  and any  post-effective  amendments  thereto  to become
effective as promptly as  possible;  the Company will notify you promptly of the
time when the  Registration  Statement  or any  post-effective  amendment to the
Registration  Statement has become effective or any supplement to the Prospectus
(including  any term  sheet  within  the  meaning  of Rule 434 of the  Rules and
Regulations)  has  been  filed  and of any  request  by the  Commission  for any
amendment or  supplement  to the  Registration  Statement or the  Prospectus  or
additional  information;  if the Company has elected to rely on Rule 430A of the
Rules and  Regulations,  the Company will prepare and file a Prospectus (or term
sheet  within the meaning of Rule 434 of the Rules and  Regulations)  containing
the  information  omitted  therefrom  pursuant  to Rule  430A of the  Rules  and
Regulations  with  the  Commission  within  the time  period  required  by,  and
otherwise in accordance  with the provisions of, Rules 424(b),  430A and 434, if
applicable,  of the Rules and  Regulations;  if the  Company has elected to rely
upon  Rule  462(b)  of the Rules and  Regulations  to  increase  the size of the
offering  registered  under  the  Act,  the  Company  will  prepare  and  file a
registration  statement with respect to such increase with the Commission within
the time period required by, and otherwise in accordance with the provisions of,
Rule 462(b);  the Company will  prepare and file with the  Commission,  promptly
upon your request,  any amendments or supplements to the Registration  Statement
or the  Prospectus  (including  any term sheet within the meaning of Rule 434 of
the Rules and Regulations) that, in your opinion,  may be necessary or advisable
in connection with the distribution of the Securities by the  Underwriters;  and
the  Company  will not file any  amendment  or  supplement  to the  Registration
Statement or Prospectus (including any term sheet within the meaning of Rule 434
of the Rules and Regulations) to which you shall reasonably  object by notice to
the Company  after having been  furnished a copy a reasonable  time prior to the
filing.

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

               (iii) Within the time during which a  prospectus  (including  any
term sheet within the meaning of Rule 434 of the Rules and Regulations) relating
to the  Securities  is required to be delivered  under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the Act, as
now and hereafter  amended,  and by the Rules and  Regulations,  as from time to
time in force,  so far as  necessary  to permit the  continuance  of sales of or
dealings in the  Securities as  contemplated  by the  provisions  hereof and the
Prospectus.  If during such period any event  occurs as a result of which in the

                                       13
<PAGE>
opinion  of counsel  for the  Company or of  counsel  for the  Underwriters  the
Prospectus would include an untrue statement of a material fact or omit to state
a material fact  necessary to make the statements  therein,  in the light of the
circumstances then existing,  not misleading,  or if during such period it is in
the opinion of counsel for the Company of counsel for the Underwriters necessary
to amend the Registration  Statement or supplement the Prospectus to comply with
the Act,  the Company  will  promptly  notify you and will  forthwith  amend the
Registration  Statement  or  supplement  the  Prospectus  (at the expense of the
Company) so as to correct such statement or omission or effect such compliance.

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

               (v) The Company  will furnish to the  Underwriters  copies of the
Registration  Statement  (three of which  will be signed  and will  include  all
exhibits), each Preliminary Prospectus,  the Prospectus,  and all amendments and
supplements  (including  any term sheet  within  the  meaning of Rule 434 of the
Rules and Regulations) to such documents,  in each case as soon as available and
in such quantities as you may from time to time reasonably request. Prior to the
filing  thereof  with the  Commission,  the Company will submit to you, for your
information,  a  copy  of  any  post-effective  amendment  to  the  Registration
Statement  and  any  supplement  to the  Prospectus  or any  amended  prospectus
proposed to be filed.

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

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

               (viii) The Company, whether or not the transactions  contemplated
hereunder are consummated or this Agreement is prevented from becoming effective
under the provisions of Section 9(a) hereof or is terminated,  will pay or cause
to be  paid  (A)  all  expenses  (including  transfer  taxes  allocated  to  the
respective  transferees)  incurred  in  connection  with  the  delivery  to  the
Underwriters of the Securities,  (B) all expenses and fees  (including,  without
limitation,  fees and  expenses of the  Company's  accountants  and counsel but,
except as otherwise  provided  below,  not including  fees of the  Underwriters'
counsel) in connection with the preparation,  printing,  filing,  delivery,  and
shipping of the  Registration  Statement  (including  the  financial  statements
therein and all amendments,  schedules,  and exhibits thereto),  the Securities,
each  Preliminary  Prospectus,  the  Prospectus,  and any  amendment  thereof or
supplement thereto, and the printing,  delivery,  and shipping of this Agreement
and other underwriting documents,  including Blue Sky Memoranda,  (C) all filing
fees  and  fees and  disbursements  of the  Underwriters'  counsel  incurred  in
connection with the qualification of the Securities for offering and sale by the

                                       14
<PAGE>
Underwriters  or by dealers under the  securities or blue sky laws of the states
and other  jurisdictions  which you shall  designate in accordance  with Section
4(d) hereof,  (D) the fees and expenses of any transfer agent or registrar,  (E)
the filing fees incident to any required  review by the NASD of the terms of the
sale of the  Securities,  (F) listing  fees, if any, and (G) all other costs and
expenses  incident to the performance of its obligations  hereunder that are not
otherwise  specifically  provided  for  herein.  If the  sale of the  Securities
provided  for  herein is not  consummated  by  reason  of action by the  Company
pursuant to Section 9(a) hereof which  prevents  this  Agreement  from  becoming
effective, or by reason of any failure,  refusal or inability on the part of the
Company or the Selling Shareholders to perform any agreement on their part to be
performed,  or because  any other  condition  of the  Underwriters'  obligations
hereunder required to be fulfilled by the Company or the Selling Shareholders is
not  fulfilled,  the Company will  reimburse  the several  Underwriters  for all
out-of-pocket  disbursements  (including  fees  and  disbursements  of  counsel)
incurred by the Underwriters in connection with their  investigation,  preparing
to market and marketing the Securities or in  contemplation  of performing their
obligations  hereunder.  The Company  shall not in any event be liable to any of
the Underwriters for loss of anticipated  profits from the transactions  covered
by this Agreement.

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

               (x) The Company will not, without your prior written consent, for
a period  of 90 days  after  the  commencement  of the  public  offering  of the
Securities by the  Underwriters  (the "Lock-Up  Period")  offer for sale,  sell,
contract to sell, grant any option for the sale of or otherwise issue or dispose
of any Ordinary Shares or any securities  convertible into or exchangeable  for,
or any options or rights to purchase or acquire,  Ordinary Shares, except to the
Underwriters  pursuant to this  Agreement and except for the issuance of options
pursuant to the Company's 1996 CSI Stock Option Plan,  1999 Israeli Share Option
Plan, 1999 Nonemployee  Directors Plan and the 1999 Employee Stock Purchase Plan
(each as  described  in the  Registration  Statement  and the  Prospectus)  (the
"Plans") and pursuant to the exercise of stock  options or warrants  outstanding
on the  date  hereof;  provided,  that no such  option  shall  vest  and  become
exercisable  prior to the end of the Lock-Up  Period.  The Company agrees not to
accelerate  the vesting of any option or warrant or the lapse of any  repurchase
right prior to the expiration of the Lock-Up Period.

               (xi) The Company either has caused to be delivered to you or will
cause to be delivered  to you prior to the  effective  date of the  Registration
Statement  a  letter  (the  "Lock-Up  Agreement")  from  each of the  **[Selling
Shareholders]  stating that such person agrees that,  from the date of execution

                                       15
<PAGE>
of this  Agreement  and  continuing  to and including the date 90 days after the
date of the  Prospectus,  he or she will not publicly or privately  announce any
intention to, will not allow any affiliate or subsidiary, if applicable, to, and
will not itself, without the prior written consent of U.S. Bancorp Piper Jaffray
on behalf of the Underwriters,  (i) offer, pledge, sell, offer to sell, contract
to sell,  sell any option or contract to purchase,  purchase any option to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly,  any Ordinary  Shares or any securities  convertible
into, or exercisable or exchangeable  for,  Ordinary Shares,  or (ii) enter into
any swap or other  agreement  that  transfers,  in whole or in part,  any of the
economic  consequences  of ownership of any  Ordinary  Shares or any  securities
convertible  into, or exercisable or exchangeable  for, Ordinary Shares (whether
any such  transaction  described in clause (i) or (ii) above is to be settled by
delivery of Ordinary Shares or such other securities,  in cash or otherwise), in
each case,  beneficially  owned  (within  the  meaning  of Rule 13d-3  under the
Securities  Exchange  Act of 1934,  as amended) or otherwise  controlled  by the
shareholder  on the  date  of the  Lock-Up  Agreement  or  thereafter  acquired;
provided,  however,  that, if the shareholder is an individual,  the shareholder
may,  without the prior written consent of U.S.  Bancorp Piper Jaffray on behalf
of the  Underwriters,  transfer  Ordinary  Shares or any securities  convertible
into, or exercisable or exchangeable  for,  Ordinary Shares either during his or
her lifetime or, on death, by will or intestacy to members of the  shareholder's
immediate  family or to trusts  exclusively  for the  benefit  of members of the
shareholder's  immediate family or in connection with bona fide gifts;  provided
that,  prior  to any such  transfer,  such  transferee  executes  an  agreement,
satisfactory  to U.S.  Bancorp Piper Jaffray,  pursuant to which such transferee
agrees to receive and hold such shares  subject to the provisions of the Lock-Up
Agreement and that there shall be no further  transfer except in accordance with
the  provisions  of the  Lock-Up  Agreement.  For  purposes  of this  paragraph,
"Immediate  family"  shall mean the  shareholder's  spouse,  lineal  descendant,
father, mother, brother or sister.

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

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

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

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

                                       16
<PAGE>
               (xvi) The Company is familiar with the Investment Company Act and
will conduct its affairs in such a manner to ensure that the Company was not and
will not be an "investment  company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act.

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

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

               (xix) If any payment of any sum due under this Agreement from the
Company is made to or received by the Underwriters or any controlling  person of
any  Underwriter  in a currency  other than freely  transferable  United  States
dollars,  whether by judicial  judgment or  otherwise,  the  obligations  of the
Company under this Agreement  shall be discharged  only to the extent of the net
amount of freely  transferable  United States dollars that the  Underwriters  or
such  controlling  persons,  as the case may be, in accordance  with normal bank
procedures,  are able to  lawfully  purchase  with  such  amount  of such  other
currency.  To the extent that the Underwriters or such  controlling  persons are
not able to purchase  sufficient  United States dollars with such amount of such
other currency to discharge the  obligations of the Company to the  Underwriters
or such  controlling  persons,  as the case may be, shall not be discharged with
respect to such difference,  and any such  undischarged  amount will be due as a
separate  obligation  and shall not be affected by payment or of judgment  being
obtained for any other sums due under or in respect of this Agreement.

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

                                       17
<PAGE>
          (b) Each  Selling  Shareholder  covenants  and agrees with the several
Underwriters as follows:

               (i) Except as otherwise  agreed to by the Company and the Selling
Shareholder,  such  Selling  Shareholder  will  pay all  taxes,  if any,  on the
transfer and sale,  respectively,  of the Securities  being sold by such Selling
Shareholder,  the fees of such  Selling  Shareholder's  counsel and such Selling
Shareholder's  proportionate  share (based upon the number of  Securities  being
offered by such Selling Shareholder  pursuant to the Registration  Statement) of
all costs and expenses (except for legal and accounting expenses and fees of the
registrar and transfer agent) incurred by the Company pursuant to the provisions
of Section 4(a)(viii) of this Agreement;  provided,  however,  that each Selling
Shareholder severally agrees to reimburse the Company for any reimbursement made
by the Company to the Underwriters  pursuant to Section 4(a)(viii) hereof to the
extent such  reimbursement  resulted  from the failure or refusal on the part of
such  Selling  Shareholder  to  comply  under the  terms or  fulfill  any of the
conditions of this Agreement.

               (ii) If this  Agreement  shall be terminated by the  Underwriters
because  of any  failure,  refusal  or  inability  on the  part of such  Selling
Shareholder  to perform any agreement on such Selling  Shareholder's  part to be
performed,  or because  any other  condition  of the  Underwriters'  obligations
hereunder required to be fulfilled by such Selling Shareholder is not fulfilled,
such Selling  Shareholder  agrees to reimburse the several  Underwriters for all
out-of-pocket disbursements (including fees and disbursements of counsel for the
Underwriters)   incurred  by  the   Underwriters   in   connection   with  their
investigation,   preparing  to  market  and  marketing  the   Securities  or  in
contemplation of performing their obligations hereunder. The Selling Shareholder
shall  not in any  event  be  liable  to any of the  Underwriters  for  loss  of
anticipated profits from the transactions covered by this Agreement.

               (iii)  The  Securities  to be sold by such  Selling  Shareholder,
represented by the  certificates  on deposit with the Custodian  pursuant to the
Custody  Agreement of such Selling  Shareholder,  are subject to the interest of
the several  Underwriters and the other Selling  Shareholders;  the arrangements
made for such  custody  are,  except as  specifically  provided  in the  Custody
Agreement,   irrevocable;  and  the  obligations  of  such  Selling  Shareholder
hereunder  shall not be  terminated,  except as provided in this Agreement or in
the Custody Agreement,  by any act of such Selling Shareholder,  by operation of
law,  whether  by  the  liquidation,  dissolution  or  merger  of  such  Selling
Shareholder,  by the death of such Selling Shareholder,  or by the occurrence of
any other event. If any Selling  Shareholder should liquidate,  dissolve or be a
party to a merger or if any other such event should occur before the delivery of
the Securities  hereunder,  certificates  for the Securities  deposited with the
Custodian  shall be delivered by the Custodian in accordance  with the terms and
conditions  of this  Agreement as if such  liquidation,  dissolution,  merger or
other event had not occurred,  whether or not the Custodian  shall have received
notice thereof.

               (iv)  Selling  Shareholder  has not  taken  and  will  not  take,
directly or  indirectly,  any action  designed to or which might  reasonably  be
expected to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities,  and
has not effected any sales of Ordinary Shares which, if effected by the Company,
would be required to be disclosed in response to Item 701 of Regulation S-K.

               (v) Such Selling  Shareholder shall immediately notify you if any
event  occurs,  or of  any  change  in  information  relating  to  such  Selling
Shareholder  or the  Company or any new  information  relating to the Company or
relating  to any  matter  stated in the  Prospectus  or any  supplement  thereto

                                       18
<PAGE>
(including  any term  sheet  within  the  meaning  of Rule 434 of the  Rules and
Regulations),  which results in the  Prospectus (as  supplemented)  including an
untrue  statement  of a material  fact or  omitting to state any  material  fact
necessary to make the statements  therein,  in light of the circumstances  under
which they were made, not misleading.

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

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

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

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

                                       19
<PAGE>
          (c)  No   Underwriter   shall  have   advised  the  Company  that  the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto  (including  any term sheet  within the meaning of Rule 434 of the Rules
and  Regulations),  contains an untrue statement of fact which, in your opinion,
is material, or omits to state a fact which, in your opinion, is material and is
required to be stated  therein or necessary to make the  statements  therein not
misleading.

          (d)  Except  as  contemplated  in the  Prospectus,  subsequent  to the
respective dates as of which information is given in the Registration  Statement
and the Prospectus,  neither the Company nor any of its subsidiaries  shall have
incurred any material  liabilities  or  obligations,  direct or  contingent,  or
entered into any  material  transactions,  or declared or paid any  dividends or
made any  distribution of any kind with respect to its share capital;  and there
shall not have been any change in the share capital  (other than a change in the
number of  outstanding  Ordinary  Shares due to the  issuance of shares upon the
exercise of  outstanding  options or  warrants),  or any material  change in the
short-term  or  long-term  debt of the  Company,  or any  issuance  of  options,
warrants,  convertible  securities  or  other  rights  to  purchase  the  equity
securities of the Company or any of its  subsidiaries,  or any material  adverse
change or any  development  involving  a  prospective  material  adverse  change
(whether  or not arising in the  ordinary  course of  business),  in the general
affairs, condition (financial or otherwise),  business, key personnel, property,
prospects,   net  worth  or  results  of  operations  of  the  Company  and  its
subsidiaries,  taken as a whole, that, in your judgment, makes it impractical or
inadvisable  to offer or deliver the  Securities  on the terms and in the manner
contemplated in the Registration Statement or the Prospectus.

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

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

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

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

          (g) On each Closing Date,  there shall have been  furnished to you, as
Representatives  of the several  Underwriters,  such  opinion or  opinions  from
Faegre & Benson LLP, U.S. counsel for the several Underwriters,  and Yigal Arnon

                                       20
<PAGE>
& Co., Israeli counsel for the several Underwriters, dated such Closing Date and
addressed  to  you,  with  respect  to  the  validity  of  the  Securities,  the
Registration  Statement,  the  Prospectus  and  other  related  matters  as  you
reasonably  may request,  and such counsel  shall have  received such papers and
information as they request to enable them to pass upon such matters.

          (h) On each  Closing  Date  you,  as  Representatives  of the  several
Underwriters,  shall have received a letter of Kost, Forer & Gabbay (a member of
Ernst & Young International), dated such Closing Date and addressed to you:

               (i)  confirming  that  they are  independent  public  accountants
within  the  meaning  of the Act  and  are in  compliance  with  the  applicable
requirements  relating to the  qualifications  of accountants under Rule 2-01 of
Regulation S-X of the Commission,

               (ii) stating that,  in their  opinion,  the audited  consolidated
financial  statements  and  schedules  examined  by  them  and  included  in the
Registration  Statement  and the  Prospectus  comply  in  form  in all  material
respects with the applicable  accounting  requirements  of the Act and the Rules
and Regulations,

               (iii) stating, as of the date of such letter (or, with respect to
matters involving changes or developments since the respective dates as of which
specified  financial  information is given in the  Prospectus,  as of a date not
more than five  days  prior to the date of such  letter),  the  conclusions  and
findings  of said firm  with  respect  to the  financial  information  and other
matters covered by its letter delivered to you  concurrently  with the execution
of this  Agreement,  and the  effect of the  letter so to be  delivered  on such
Closing Date shall be to confirm the  conclusions and findings set forth in such
prior letter,

               (iv) stating that, at a specific date not more than five business
days  prior to the date of such  letter,  there  were any  changes  in the share
capital or long-term  debt of the Company or any decrease in net current  assets
or shareholders'  equity of the Company in each case compared with amounts shown
on the December  31, 1999 audited  consolidated  balance  sheet  included in the
Registration  Statement  and the  Prospectus,  or for the period from January 1,
2000 to such  specified  date there were any  decreases,  as  compared  with the
comparable  period of the prior fiscal  quarter,  in total sales of services and
license fees, income before taxes or total or per share amounts of net income of
the Company,  except in all  instances  for changes,  decreases or increases set
forth in such letter,

               (v)  stating  that  they  have  carried  out  certain   specified
procedures,  not  constituting  an  audit,  with  respect  to  certain  amounts,
percentages  and  financial  information  that  are  derived  from  the  general
accounting records of the Company and are included in the Registration Statement
and the Prospectus, including the amounts, percentages and financial information
included under the captions "Summary Consolidated Financial and Operating Data,"
"Capitalization,"  "Selected  Consolidated  Financial  and  Operating  Data" and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"   and  have  compared  such  amounts,   percentages  and  financial
information with such records of the Company and with  information  derived from
such records and have found them to be in agreement,  excluding any questions of
legal interpretation.

          (i) On each Closing Date,  there shall have been  furnished to you, as
Representatives of the Underwriters, a certificate,  dated such Closing Date and
addressed  to you,  signed  by the  chief  executive  officer  and by the  chief
financial officer of the Company, to the effect that:

                                       21
<PAGE>
               (i) The  representations  and  warranties  of the Company in this
Agreement are true and correct,  in all material respects,  as if made at and as
of such Closing Date,  and the Company has complied with all the  agreements and
satisfied  all the  conditions  on its part to be  performed  or satisfied at or
prior to such Closing Date;

               (ii) No stop order or other order suspending the effectiveness of
the Registration  Statement or any amendment thereof or the qualification of the
Securities  for offering or sale has been  issued,  and no  proceeding  for that
purpose has been instituted or, to the best of their knowledge,  is contemplated
by the Commission or any state or regulatory body; and

               (iii) The signers of said certificate have carefully examined the
Registration  Statement  and the  Prospectus,  and  any  amendments  thereof  or
supplements  thereto (including any term sheet within the meaning of Rule 434 of
the Rules and  Regulations),  and (A) such documents  contain all statements and
information required to be included therein, the Registration  Statement, or any
amendment  thereof,  does not contain any untrue statement of a material fact or
omit to state any material  fact  required to be stated  therein or necessary to
make the statements  therein not misleading,  and the Prospectus,  as amended or
supplemented,  does not include any untrue statement of material fact or omit to
state a material fact necessary to make the statements  therein, in light of the
circumstances  under  which  they  were  made,  not  misleading,  (B)  since the
effective  date of the  Registration  Statement,  there  has  occurred  no event
required to be set forth in an amended or supplemented  prospectus which has not
been  so  set  forth,  (C)  subsequent  to  the  respective  dates  as of  which
information is given in the Registration  Statement and the Prospectus,  neither
the Company nor any of its subsidiaries has incurred any material liabilities or
obligations,  direct or contingent,  or entered into any material  transactions,
not in the  ordinary  course of business,  or declared or paid any  dividends or
made any distribution of any kind with respect to its share capital,  and except
as  disclosed  in the  Prospectus,  there  has not been any  change in the share
capital  (other  than a change in the number of  outstanding  shares of Ordinary
Shares due to the issuance of shares upon the exercise of outstanding options or
warrants),  or any material  change in the short-term or long-term  debt, or any
issuance  of  options,  warrants,  convertible  securities  or other  rights  to
purchase the equity securities,  of the Company, or any of its subsidiaries,  or
any Material Adverse Effect or any development  involving a prospective Material
Adverse Effect,  and (D) except as stated in the Registration  Statement and the
Prospectus,  there  is not  pending,  or,  to  the  knowledge  of  the  Company,
threatened or contemplated,  any action, suit or proceeding to which the Company
or any of its  subsidiaries  is a party  before or by any court or  governmental
agency, authority or body, or any arbitrator, which might result in any Material
Adverse Effect.

          (j) On each Closing Date,  there shall have been  furnished to you, as
Representatives  of the several  Underwriters,  the  opinion of  ______________,
counsel for the Selling  Shareholders,  dated such Closing Date and addressed to
you, to the effect that:

               (i)  Each of the  Selling  Shareholders  is the sole  record  and
beneficial  owner of the Securities to be sold by such Selling  Shareholder  and
delivery  of the  certificates  for the  Securities  to be sold by each  Selling
Shareholder   pursuant  to  this  Agreement,   upon  payment   therefor  by  the
Underwriters,  will pass marketable title to such Securities to the Underwriters
and the Underwriters will acquire all the rights of such Selling  Shareholder in
the  Securities  (assuming  the  Underwriters  have no  knowledge  of an adverse
claim),  free  and  clear  of any  security  interests,  claims,  liens or other
encumbrances.

               (ii) Each of the Selling Shareholders has the power and authority
to enter into the Custody  Agreement,  the Power of Attorney and this  Agreement
and to perform and discharge such Selling Shareholder's  obligations  thereunder

                                       22
<PAGE>
and  hereunder;  and this  Agreement,  the Custody  Agreements and the Powers of
Attorney have been duly and validly authorized, executed and delivered by (or by
the  Attorney-in-Fact  on behalf of) the Selling  Shareholders and are valid and
binding agreements of the Selling  Shareholders,  enforceable in accordance with
their  respective  terms (except as rights to indemnity  hereunder or thereunder
may be  limited  by  federal  or  state  securities  laws  and  except  as  such
enforceability  may be  limited by  bankruptcy,  insolvency,  reorganization  or
similar  laws  affecting  creditors'  rights  generally  and  subject to general
principles of equity).

               (iii) The execution and delivery of this  Agreement,  the Custody
Agreement and the Power of Attorney and the  performance of the terms hereof and
thereof and the consummation of the transactions herein and therein contemplated
will not result in a breach or violation of any of the terms and  provisions of,
or constitute a default under, any statute, rule or regulation, or any agreement
or instrument known to such counsel to which such Selling Shareholder is a party
or by which such Selling Shareholder is bound or to which any of its property is
subject,  any such  Selling  Shareholder's  charter or by-laws,  or any order or
decree  known to such counsel of any court or  government  agency or body having
jurisdiction over such Selling Shareholder or any of its respective  properties;
and no consent,  approval,  authorization or order of, or filing with, any court
or  governmental  agency or body is required  for the  execution,  delivery  and
performance of this Agreement,  the Custody  Agreement and the Power of Attorney
or for the  consummation of the  transactions  contemplated  hereby and thereby,
including  the sale of the  Securities  being sold by such Selling  Shareholder,
except such as may be required  under the Act or state  securities  laws or blue
sky laws.

               (iv) Under the laws of __________________,  the (i) submission by
the  Selling  Shareholders  to the  jurisdiction  of any  federal or state court
sitting in the City of  Minneapolis,  Minnesota,  (ii)  waiver,  to the  fullest
extent it may effectively do so, of any objection which the Selling Shareholders
may now or  hereafter  have to the  laying of venue of any such  proceeding  and
(iii)  submission by the Selling  Shareholders to the exclusive  jurisdiction of
such courts in any such suit, action or proceeding, are binding upon the Selling
Shareholders  and,  if  properly  brought  to  the  attention  of the  court  or
administrative  body in  accordance  with  the laws of  _____________,  would be
enforceable in any judicial or administrative proceeding in --------------.

               (v) Such other matters as you may reasonably request.

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

               (k) On each Closing Date, there shall have been furnished to you,
as Representatives of the several  Underwriters,  a certificate or certificates,
dated such  Closing  Date and  addressed  to you,  signed by each of the Selling
Shareholders or such Selling  Shareholder's  Attorney-in-Fact to the effect that
the representations and warranties of such Selling Shareholder contained in this
Agreement  are true and correct as if made at and as of such Closing  Date,  and
that such Selling Shareholder has complied with all the agreements and satisfied

                                       23
<PAGE>
all the  conditions  on such  Selling  Shareholder's  part  to be  performed  or
satisfied at or prior to such Closing Date.

               (l) Subsequent to the execution of this Agreement or, if earlier,
the  dates  as of which  information  is  given  in the  Registration  Statement
(exclusive  of any  amendment  thereto)  and the  Prospectus  (exclusive  of any
supplement  thereto),  there  shall  not have been (i) any  change  or  decrease
specified  in the  letter or letters  referred  to in  subparagraph  (h) of this
Section 5 or (ii) any change, or any development  involving a prospective change
(including without limitation a change in management or control of the Company),
in or affecting the business or  properties of the Company and its  subsidiaries
the effect of which, in any case referred to in clause (i) or (ii) above, is, in
the  judgment  of the  Representatives,  so  material  and adverse as to make it
impractical  or  inadvisable  to proceed  with the  offering  or delivery of the
Securities  as  contemplated  in the  Registration  Statement  (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto);

               (m) At the  execution of this  Agreement,  the Company shall have
furnished to the Representatives  from each Selling Shareholder an executed copy
of the Lock-Up Agreement addressed to the Representatives;

               (n) Prior to the  commencement of the offering of the Securities,
the  Securities  shall have been approved for  quotation on the Nasdaq  National
Market, subject to official notice of issuance; and

               (o) The Company  shall have  furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.

               All such opinions, certificates, letters and other documents will
be in compliance  with the provisions  hereof only if they are  satisfactory  in
form and  substance  to you and counsel for the  Underwriters.  The Company will
furnish you with such conformed copies of such opinions,  certificates,  letters
and other documents as you shall reasonably request.

     6. Indemnification and Contribution.

          (a) The Company and each Selling  Shareholder  agrees to indemnify and
hold  harmless  each  Underwriter  against  any  losses,   claims,   damages  or
liabilities,  joint or several,  to which such  Underwriter  may become subject,
under the Act or otherwise  (including in  settlement of any  litigation if such
settlement  is  effected  with the written  consent of the  Company  and/or such
Selling  Shareholders,  as the case may be),  insofar  as such  losses,  claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an  untrue  statement  or  alleged  untrue  statement  of a  material  fact
contained in the Registration Statement,  including the information deemed to be
a part of the Registration  Statement at the time of  effectiveness  pursuant to
Rules  430A  and  434(d)  of the  Rules  and  Regulations,  if  applicable,  any
Preliminary Prospectus,  the Prospectus,  or any amendment or supplement thereto
(including  any term  sheet  within  the  meaning  of Rule 434 of the  Rules and
Regulations), or arise out of or are based upon the omission or alleged omission
to state therein a material  fact required to be stated  therein or necessary to
make the statements therein not misleading,  and will reimburse each Underwriter
for any legal or other  expenses  reasonably  incurred by it in connection  with
investigating  or  defending  against  such loss,  claim,  damage,  liability or
action; provided,  however, that neither the Company nor any Selling Shareholder
shall be  liable  in any such  case to the  extent  that any such  loss,  claim,
damage,  liability or action arises out of or is based upon an untrue  statement
or  alleged  untrue  statement  or  omission  or  alleged  omission  made in the
Registration Statement, any Preliminary Prospectus,  the Prospectus, or any such
amendment  or  supplement,  in  reliance  upon and in  conformity  with  written

                                       24
<PAGE>
information  furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof; and further provided,  however,
that in no event shall any Selling Shareholder be liable under the provisions of
this Section 6 for any amount in excess of the aggregate amount of proceeds such
Selling  Shareholder  received from the sale of the Securities  pursuant to this
Agreement.

          In addition to their other  obligations  under this Section 6(a),  the
Company and each Selling  Shareholder  agrees that, as an interim measure during
the pendency of any claim,  action,  investigation,  inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or  omission,   described  in  this  Section  6(a),  they  will  reimburse  each
Underwriter on a monthly basis for all  reasonable  legal fees or other expenses
incurred in connection with  investigating or defending any such claim,  action,
investigation,  inquiry or other  proceeding,  notwithstanding  the absence of a
judicial  determination as to the propriety and  enforceability of the Company's
and/or the Selling  Shareholder's  obligation to reimburse the  Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction.  To the extent that any such
interim reimbursement payment is so held to have been improper,  the Underwriter
that received such payment shall promptly return it to the party or parties that
made such payment,  together with interest,  compounded daily, determined on the
basis of the prime rate (or other  commercial  lending rate for borrowers of the
highest credit  standing)  announced from time to time by Money Rates section of
the Wall Street  Journal  (the "Prime  Rate").  Any such  interim  reimbursement
payments  which are not made to an  Underwriter  within 30 days of a request for
reimbursement  shall  bear  interest  at the  Prime  Rate  from the date of such
request.  This indemnity agreement shall be in addition to any liabilities which
the Company or the Selling Shareholders may otherwise have.

          (b) Each  Underwriter will indemnify and hold harmless the Company and
each Selling Shareholder against any losses,  claims,  damages or liabilities to
which the Company and the Selling Shareholders may become subject, under the Act
or otherwise  (including in settlement of any litigation,  if such settlement is
effected with the written consent of such Underwriter),  insofar as such losses,
claims,  damages or liabilities (or actions in respect  thereof) arise out of or
are based upon an untrue  statement  or alleged  untrue  statement of a material
fact contained in the Registration Statement,  any Preliminary  Prospectus,  the
Prospectus,  or any amendment or supplement  thereto  (including  any term sheet
within the meaning of Rule 434 of the Rules and Regulations), or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated  therein or necessary to make the  statements  therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue  statement or omission or alleged  omission was made
in the Registration Statement,  any Preliminary Prospectus,  the Prospectus,  or
any such  amendment  or  supplement,  in reliance  upon and in  conformity  with
written  information  furnished  to the Company by you,  or by such  Underwriter
through you, specifically for use in the preparation thereof, and will reimburse
the  Company  and the  Selling  Shareholders  for any  legal or  other  expenses
reasonably incurred by the Company or any such Selling Shareholder in connection
with investigating or defending against any such loss, claim, damage,  liability
or action.

          (c) Promptly  after receipt by an indemnified  party under  subsection
(a) or (b) above of notice of the  commencement of any action,  such indemnified
party  shall,  if a  claim  in  respect  thereof  is  to  be  made  against  the
indemnifying  party  under such  subsection,  notify the  indemnifying  party in
writing  of  the  commencement  thereof;  but  the  omission  so to  notify  the

                                       25
<PAGE>
indemnifying  party shall not relieve the indemnifying  party from any liability
that it may have to any  indemnified  party.  In case any such  action  shall be
brought  against any  indemnified  party,  and it shall notify the  indemnifying
party of the commencement  thereof,  the indemnifying party shall be entitled to
participate  in, and, to the extent that it shall wish,  jointly  with any other
indemnifying  party  similarly  notified,  to assume the defense  thereof,  with
counsel  satisfactory  to such  indemnified  party,  and after  notice  from the
indemnifying  party  to  such  indemnified  party  of the  indemnifying  party's
election so to assume the defense thereof,  the indemnifying  party shall not be
liable to such  indemnified  party under such  subsection for any legal or other
expenses  subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if, in the sole  judgment of the  Representatives,  it is advisable for the
Underwriters   to  be   represented  as  a  group  by  separate   counsel,   the
Representatives shall have the right to employ a single counsel to represent the
Representatives  and all  Underwriters  who may be subject to liability  arising
from any claim in respect of which  indemnity may be sought by the  Underwriters
under  subsection (a) of this Section 6, in which event the reasonable  fees and
expenses of such separate  counsel shall be borne by the  indemnifying  party or
parties and reimbursed to the  Underwriters  as incurred (in accordance with the
provisions of the second  paragraph in subsection  (a) above).  An  indemnifying
party shall not be  obligated  under any  settlement  agreement  relating to any
action under this Section 6 to which it has not agreed in writing.

          (d)  If  the  indemnification  provided  for  in  this  Section  6  is
unavailable  or  insufficient  to  hold  harmless  an  indemnified  party  under
subsection (a) or (b) above,  then each  indemnifying  party shall contribute to
the amount paid or payable by such indemnified  party as a result of the losses,
claims,  damages or liabilities  referred to in subsection (a) or (b) above, (i)
in such proportion as is appropriate to reflect the relative  benefits  received
by the Company and the Selling Shareholders on the one hand and the Underwriters
on the other  from the  offering  of the  Securities  or (ii) if the  allocation
provided  by clause  (i)  above is not  permitted  by  applicable  law,  in such
proportion as is appropriate to reflect not only the relative  benefits referred
to in clause  (i)  above  but also the  relative  fault of the  Company  and the
Selling  Shareholders  on the one  hand  and the  Underwriters  on the  other in
connection  with the  statements  or  omissions  that  resulted in such  losses,
claims,  damages  or  liabilities,  as  well  as any  other  relevant  equitable
considerations.  The relative  benefits  received by the Company and the Selling
Shareholders  on the one hand and the  Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholders bear to
the total underwriting  discounts and commissions  received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.  The
relative fault shall be determined by reference to, among other things,  whether
the untrue or alleged  untrue  statement  of a material  fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company,  the Selling Shareholders or the Underwriters and the parties' relevant
intent,  knowledge,  access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, the Selling Shareholders and the
Underwriters  agree  that it would not be just and  equitable  if  contributions
pursuant to this  subsection  (d) were to be determined  by pro rata  allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other  method  of  allocation  which  does not  take  account  of the  equitable
considerations  referred to in the first  sentence of this  subsection  (d). The
amount paid by an indemnified party as a result of the losses,  claims,  damages
or liabilities referred to in the first sentence of this subsection (d) shall be
deemed  to  include  any legal or other  expenses  reasonably  incurred  by such

                                       26
<PAGE>
indemnified  party in connection  with  investigating  or defending  against any
action or claim which is the subject of this subsection (d). Notwithstanding the
provisions  of  this  subsection  (d),  no  Underwriter  shall  be  required  to
contribute  any amount in excess of the amount by which the total price at which
the Securities  underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has otherwise
been  required to pay by reason of such untrue or alleged  untrue  statement  or
omission or alleged omission.  No person guilty of fraudulent  misrepresentation
(within  the  meaning  of  Section  11(f)  of the  Act)  shall  be  entitled  to
contribution   from  any  person   who  was  not   guilty  of  such   fraudulent
misrepresentation.  The  Underwriters'  obligations  in this  subsection  (d) to
contribute   are  several  in  proportion  to  their   respective   underwriting
obligations and not joint.

          (e) The obligations of the Company and the Selling  Shareholders under
this Section 6 shall be in addition to any  liability  which the Company and the
Selling  Shareholders  may otherwise have and shall extend,  upon the same terms
and conditions,  to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 6
shall be in addition  to any  liability  that the  respective  Underwriters  may
otherwise  have and shall extend,  upon the same terms and  conditions,  to each
director of the Company (including any person who, with his consent, is named in
the  Registration  Statement as about to become a director of the  Company),  to
each  officer of the Company who has signed the  Registration  Statement  and to
each person, if any, who controls the Company or any Selling  Shareholder within
the meaning of the Act.

     7. Representations and Agreements to Survive Delivery. All representations,
warranties,  and agreements of the Company herein or in  certificates  delivered
pursuant hereto, and the agreements of the several Underwriters, the Company and
the Selling  Shareholders  contained in Section 6 hereof, shall remain operative
and in full  force and  effect  regardless  of any  investigation  made by or on
behalf of any Underwriter or any controlling  person thereof,  or the Company or
any  of  its  officers,  directors,  or  controlling  persons,  or  any  Selling
Shareholders or any controlling  person thereof,  and shall survive delivery of,
and payment for, the Securities to and by the Underwriters hereunder.

     8. Substitution of Underwriters.

          (a) If any Underwriter or  Underwriters  shall fail to take up and pay
for the amount of Firm Shares agreed by such  Underwriter or  Underwriters to be
purchased  hereunder,  upon  tender of such Firm Shares in  accordance  with the
terms  hereof,  and the amount of Firm Shares not  purchased  does not aggregate
more  than 10% of the total  amount of Firm  Shares  set  forth in  Schedule  II
hereto, the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective  underwriting  obligations hereunder as set forth
in Schedule II hereto  except as may  otherwise be  determined  by you) the Firm
Shares that the  withdrawing  or  defaulting  Underwriters  agreed but failed to
purchase.

          (b) If any Underwriter or  Underwriters  shall fall to take up and pay
for the amount of Firm Shares agreed by such  Underwriter or  Underwriters to be
purchased  hereunder,  upon  tender of such Firm Shares in  accordance  with the
terms hereof,  and the amount of Firm Shares not purchased  aggregates more than
10% of the total  amount of Firm  Shares set forth in  Schedule  II hereto,  and
arrangements  satisfactory  to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the  event  of any such  termination  neither  the  Company  nor any  Selling
Shareholder  shall be under any  liability  to any  Underwriter  (except  to the
extent provided in Section  4(a)(viii),  Section  4(b)(ii) and Section 6 hereof)

                                       27
<PAGE>
nor shall any  Underwriter  (other than an  Underwriter  who shall have  failed,
otherwise than for some reason  permitted under this Agreement,  to purchase the
amount of Firm Shares agreed by such  Underwriter to be purchased  hereunder) be
under any  liability to the Company or the Selling  Shareholders  (except to the
extent provided in Section 6 hereof).

          If Firm Shares to which a default  relates are to be  purchased by the
non-defaulting   Underwriters   or  by  any   other   party  or   parties,   the
Representatives  or the  Company  shall  have the  right to  postpone  the First
Closing Date for not more than seven  business  days in order that the necessary
changes in the Registration  Statement,  Prospectus and any other documents,  as
well as any  other  arrangements,  may be  effected.  As used  herein,  the term
"Underwriter"  includes any person  substituted  for an  Underwriter  under this
Section 8.

     9. Effective Date of this Agreement and Termination.

          (a) This Agreement shall become effective at 10:00 a.m., Central time,
on the first full business day following the effective date of the  Registration
Statement,  or at such earlier time after the effective time of the Registration
Statement as you in your discretion  shall first release the Securities for sale
to the public;  provided, that if the Registration Statement is effective at the
time this Agreement is executed,  this Agreement shall become  effective at such
time as you in your  discretion  shall first release the  Securities for sale to
the public.  For the purpose of this Section,  the Securities shall be deemed to
have been released for sale to the public upon release by you of the publication
of a newspaper  advertisement relating thereto or upon release by you of telexes
offering the Securities for sale to securities  dealers,  whichever  shall first
occur. By giving notice as hereinafter  specified before the time this Agreement
becomes effective,  you, as Representatives of the several Underwriters,  or the
Company may prevent this Agreement from becoming  effective without liability of
any party to any other party,  except that the provisions of Section 4(a)(viii),
Section 4(b)(ii) and Section 6 hereof shall at all times be effective.

          (b) You, as  Representatives of the several  Underwriters,  shall have
the right to terminate this Agreement by giving notice as hereinafter  specified
at any time at or prior to the First Closing Date, and the option referred to in
Section  3(b),  if  exercised,  may be cancelled at any time prior to the Second
Closing Date, if (i) the Company shall have failed,  refused or been unable,  at
or prior to such  Closing  Date,  to  perform  any  agreement  on its part to be
performed hereunder,  (ii) any other condition of the Underwriters'  obligations
hereunder is not fulfilled,  (iii) trading on the New York Stock Exchange or the
American  Stock  Exchange  shall have been  wholly  suspended,  (iv)  minimum or
maximum  prices for trading shall have been fixed,  or maximum ranges for prices
for securities  shall have been required,  on the New York Stock Exchange or the
American Stock  Exchange,  by such Exchange or by order of the Commission or any
other governmental authority having jurisdiction, (v) a banking moratorium shall
have  been  declared  by  Federal  or New York  authorities,  or (vi)  there has
occurred  any material  adverse  change in the  financial  markets in the United
States or an outbreak of major  hostilities (or an escalation  thereof) in which
the United  States is involved,  a  declaration  of war by  Congress,  any other
substantial national or international  calamity or any other event or occurrence
of a similar character shall have occurred since the execution of this Agreement
that, in your judgment,  makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities.  Any such  termination
shall be  without  liability  of any party to any other  party  except  that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.

                                       28
<PAGE>
          (c) If you elect to prevent this Agreement from becoming  effective or
to terminate  this  Agreement as provided in this  Section,  the Company and the
Attorney-in-Fact,  on  behalf of the  Selling  Shareholders,  shall be  notified
promptly by you by telephone or  telegram,  confirmed by letter.  If the Company
elects  to  prevent  this  Agreement  from  becoming  effective,   you  and  the
Attorney-in-Fact,  on behalf of the Selling  Shareholders,  shall be notified by
the Company by telephone or telegram, confirmed by letter.

     10. Default by One or More of the Selling  Shareholders or the Company.  If
one or more of the Selling  Shareholders shall fail at the First Closing Date to
sell and deliver the number of  Securities  which such  Selling  Shareholder  or
Selling Shareholders are obligated to sell hereunder,  and the remaining Selling
Shareholders  do not exercise the right hereby granted to increase,  pro rata or
otherwise,  the number of Securities  to be sold by them  hereunder to the total
number of  Securities  to be sold by all  Selling  Shareholders  as set forth in
Schedule I, then the Underwriters may at your option,  by notice from you to the
Company and the non-defaulting  Selling Shareholders,  either (a) terminate this
Agreement without any liability on the part of any  non-defaulting  party or (b)
elect to  purchase  the  Securities  which the  Company  and the  non-defaulting
Selling Shareholders have agreed to sell hereunder.

     In the event of a default by any Selling Shareholder as referred to in this
Section  10,  either  you  or  the  Company  or,  by  joint  action  only,   the
non-defaulting  Selling  Shareholders shall have the right to postpone the First
Closing  Date for a period  not  exceeding  seven  days in order to  effect  any
required  changes in the  Registration  Statement or  Prospectus or in any other
documents or arrangements.

     If the Company shall fail at the First Closing Date to sell and deliver the
number  of  Securities  which  it is  obligated  to sell  hereunder,  then  this
Agreement   shall   terminate   without  any   liability  on  the  part  of  any
non-defaulting party.

     No action taken  pursuant to this Section  shall relieve the Company or any
Selling  Shareholders so defaulting  from liability,  if any, in respect of such
default.

     11. Information Furnished by Underwriters.  The statements set forth in the
last  paragraph of the cover page and under the caption  "Underwriting,"  in any
Preliminary  Prospectus and in the Prospectus constitute the written information
furnished  by or on  behalf of the  Underwriters  referred  to in  Section 2 and
Section 6 hereof.

     12.  Notices.  Except as  otherwise  provided  herein,  all  communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed,  telegraphed  or delivered to the  Representatives  c/o U.S.  Bancorp
Piper Jaffray, 222 South Ninth Street, Minneapolis, Minnesota 55402, except that
notices  given to an  Underwriter  pursuant to Section 6 hereof shall be sent to
such  Underwriter  at the  address  stated  in the  Underwriters'  Questionnaire
furnished  by such  Underwriter  in  connection  with this  offering;  if to the
Company, shall be mailed, telegraphed or delivered to it at 3945 Freedom Circle,
Santa  Clara,  California  95054,  Attention:  James  Collins;  if to any of the
Selling Shareholders, at the address of the Attorney-in-Fact as set forth in the
Powers of  Attorney,  or in each case to such other  address as the person to be
notified may have  requested in writing.  All notices given by telegram shall be
promptly  confirmed  by letter.  Any party to this  Agreement  may chancre  such
address for notices by sending to the parties to this  Agreement  written notice
of a new address for such purpose.

     13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to
the  benefit  of and be binding  upon the  parties  hereto and their  respective
successors  and assigns and the  controlling  persons,  officers  and  directors
referred  to in Section 6.  Nothing in this  Agreement  is  intended or shall be
construed  to  give to any  other  person,  firm or  corporation  any  legal  or

                                       29
<PAGE>
equitable remedy or claim under or in respect of this Agreement or any provision
herein  contained.  The term  "successors  and assigns" as herein used shall not
include any purchaser,  as such purchaser,  of any of the Securities from any of
the several Underwriters.

     14.  Governing  Law. This  Agreement  shall be governed by and construed in
accordance with the laws of the State of Minnesota.

     15. Agent for Service of Process; Jurisdiction.  Each of the parties hereto
irrevocably (i) agrees that any legal suit, action or proceeding  arising out of
or based upon this  Agreement  or the  transactions  contemplated  hereby may be
instituted in any Federal or State Court in the City of Minneapolis,  Minnesota,
(ii) waives, to the fullest extent it may effectively do so, any objection which
it may now or hereafter  have to the laying of venue of any such  proceeding and
(iii)  submits to the  exclusive  jurisdiction  of such courts in any such suit,
action or  proceeding.  The Company  hereby  designates  and appoints  Commtouch
Software Inc. as its authorized agent (the "Authorized Agent") upon whom process
may be served in any such action  arising out of or based on this  Agreement  or
the  transactions  contemplated  hereby which may be instituted in any Minnesota
Court  by any  Underwriter  or by  any  person  who  controls  any  Underwriter,
expressly  consents to the jurisdiction of any such court in respect of any such
action,  and  waives  any  other  requirements  of  or  objections  to  personal
jurisdiction with respect thereto.  Such appointment shall be irrevocable unless
and until a successor  authorized  agent acceptable to the Underwriters in their
sole and absolute  discretion  shall have been  appointed  by the  Company.  The
Company  represents and warrants that the Authorized  Agent has agreed to act as
such  agent for  service  at  process  and  agrees  to take any and all  action,
including  the  filing of any and all  documents  and  instruments,  that may be
necessary to continue  such  appointment  in full force and effect as aforesaid.
Service of process upon the Authorized  Agent and written notice of such service
to the Company shall be deemed,  in every respect,  effective service of process
upon the Company.

     16.  Judgment  Currency.  In respect of any judgment or order given or made
for any amount  due  hereunder  that is  expressed  and paid in a currency  (the
"judgment  currency") other than United States dollars,  the Company and Selling
Shareholders,  as the case may be, will indemnify each  Underwriter  against any
loss  incurred by such  Underwriter  as a result of any variation as between (i)
the rate of exchange at which the United States dollar amount is converted  into
the  judgment  currency  for the purpose of such  judgment or order and (ii) the
rate of exchange at which such Underwriter on the date such judgment currency is
actually  received by the  Underwriter is able to purchase United States dollars
with the amount of the judgment  currency so received by such  Underwriter.  The
foregoing  indemnity shall  constitute a separate and independent  obligation of
the Company and Selling Shareholders and shall continue in full force and effect
notwithstanding  any such  judgment  or order as  aforesaid.  The term  "rate of
exchange" shall include any premiums and costs of exchange payable in connection
with the purchase of or conversion into United States dollars.

                            [Signature Page Follows]

                                       30
<PAGE>
     Please  sign and return to the  Company  the  enclosed  duplicates  of this
letter  whereupon  this  letter  will  become a binding  agreement  between  the
Company,  the Selling  Shareholders  and the several  Underwriters in accordance
with its terms.

                                        Very truly yours,
                                        COMMTOUCH SOFTWARE LTD.

                                        By
                                             -----------------------------------
                                        Its:
                                             -----------------------------------

                                        SELLING SHAREHOLDERS

                                        By
                                             -----------------------------------
                                                     Attorney-in-Fact

Confirmed as of the date first above
mentioned, on behalf of themselves and the
other several Underwriters named in Schedule
II hereto.

U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
  INCORPORATED
WARBURG DILLON READ, LLC
  a subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
BY U.S. BANCORP PIPER JAFFRAY

By
   --------------------------------
          Managing Director
<PAGE>
                                   SCHEDULE I

                              Selling Shareholders

                                                                      Number of
                                                                     Firm Shares
Name                                                                  to be Sold
----                                                                  ----------
Israel Growth Fund L.P.                                                400,000
k.t. Concord Venture Fund (Cayman), L.P.                               331,810
k.t. Concord Venture Fund (Israel), L.P.                                66,340
k.t. Concord Venture Advisors (Cayman), L.P.                             2,719
k.t. Concord Venture Advisors (Israel), L.P.                               531
Gideon Mantel                                                          100,000
Amir Lev                                                               100,000
Isabel Maxwell                                                          50,000
James E. Collins                                                        20,000
Nahum Sharfman                                                         165,000
Nomura International Plc.                                               31,000
Oceanic Bank and Trust Ltd.                                             31,800
Rumson Capital, L.L.C.                                                  31,800

                                       31
<PAGE>
                                   SCHEDULE II

                              List of Underwriters

Underwriter                                             Number of Firm Shares(2)
-----------                                             ---------------------
U.S. Bancorp Piper Jaffray Inc.........................
Thomas Weisel Partners LLC.............................
Warburg Dillon Read, LLC...............................
William Blair & Company................................
                                                               =========
Total Underwriters (_____)                                     3,000,000
                                                               =========

----------
(2)  The Underwriters may purchase up to an additional 450,000 Option Shares, to
     the  extent the  option  described  in  Section  3(b) of the  Agreement  is
     exercised, in the proportions and in the manner described in the Agreement.
<PAGE>
                                  SCHEDULE III

                                [To be provided]

<PAGE>
                                   SCHEDULE IV

                                [To be provided]MONTEREY BAY BANCORP, INC.
                              EMPLOYMENT AGREEMENT

         This AGREEMENT  ("Agreement") is made effective as of March 1, 1995, by
and between Monterey Bay Bancorp,  Inc. (the "Holding  Company"),  a corporation
organized under the laws of Delaware,  with its principal  administrative office
at 36  Brennan  Street,  Watsonville,  California,  and  Marshall  G.  Delk (the
"Executive").  Any  reference to  "Institution"  herein  shall mean  Watsonville
Federal Savings and Loan Association or any successor thereto.

         WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and

         WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.

         NOW,  THEREFORE,  in  consideration  of  the  mutual  covenants  herein
contained,  and upon the other terms and conditions  hereinafter  provided,  the
parties hereby agree as follows:

1.       POSITION AND RESPONSIBILITIES.

         During  the period of his  employment  hereunder,  Executive  agrees to
serve as  President  and Chief  Operating  Officer of the Holding  Company.  The
Executive  shall render  administrative  and management  services to the Holding
Company  such as are  customarily  performed  by persons in a similar  executive
capacity.  During said period, Executive also agrees to serve, if elected, as an
officer and director of any subsidiary of the Holding Company.

2.       TERMS.

         (a) The period of Executive's  employment under this Agreement shall be
deemed to have  commenced as of the date first above written and shall  continue
for a period of twenty-four (24) full calendar months thereafter.  Commencing on
March 1, 1995, the term of this agreement shall be extended for one day each day
until such time as the board of directors of the Holding  Company (the  "Board")
or Executive  elects not to extend the term of this  Agreement by giving written
notice to the other party in  accordance  with Section 8 of this  Agreement,  in
which case the term of this Agreement shall be fixed and shall end on the second
anniversary date of such written notice.

         (b) During the period of Executive's  employment hereunder,  except for
~eriods of absence  occasioned  by illness,  reasonable  vacation  periods,  and
reasonable  leaves of absence,  Executive  shall  devote  substantially  all his
business time, attention,  skill, and efforts to the faithful performance of his
duties hereunder including  activities and services related to the organization,
operation  and  management of the Holding  Company and its,  direct or indirect,
subsidiaries   ("Subsidiaries")   and   participation  in  community  and  civic
organizations;  provided,  however,  that,  with the  approval of the Board,  as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold

#27938/February 10, 1995

<PAGE>

any other offices or positions in,  companies or  organizations,  which, in such
Board's  judgment,  will not present any  conflict of interest  with the Holding
Company or its Subsidiaries, or materially affect the performance of Executive's
duties pursuant to this Agreement.

         (c)   Notwithstanding   anything  herein  contained  to  the  contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement.

3.       COMPENSATION AND REIMBURSEMENT.

         (a) The  Executive  shall  be  entitled  to a salary  from the  Holding
Company or its Subsidiaries of not less than $94,800 year ("Base Salary").  Base
Salary shall include any amounts of compensation deferred by Executive under any
qualified  or  unqualified  plan  maintained  by the  Holding  Company  and  its
Subsidiaries. Such Base Salary shall be payable semi-monthly.  During the period
of this Agreement,  Executive's Base Salary shall be reviewed at least annually;
the first such  review will be made no later than one year from the date of this
Agreement.  Such review shall be conducted by the Board or by a Committee of the
Board delegated such responsibility by the Board. The Committee or the Board may
increase  Executive's  Base Salary.  The increased  Base Salary shall become the
"Base  Salary" for  purposes of this  Agreement.  In addition to the Base Salary
provided in this Section 3(a), the Holding Company shall also provide Executive,
at no premium cost to Executive,  all such other benefits as provided  uniformly
to permanent full-time employees of the Holding Company and its Subsidiaries.

         (b) The  Executive  shall be entitled to  participate  in any  employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this  Agreement,  and the Holding  Company
and its Subsidiaries will not, without  Executive's prior written consent,  make
any changes in such plans,  arrangements or perquisites  which would  materially
adversely affect Executive's rights or benefits thereunder. Without limiting the
generality of the foregoing  provisions of this Subsection (b),  Executive shall
be entitled to  participate in or receive  benefits  under any employee  benefit
plans including,  but not limited to, retirement plans,  supplemental retirement
plans, pension plans,  profit-sharing plans,  health-and-accident plans, medical
coverage or any other employee benefit plan or arrangement made available by the
Holding Company and its Subsidiaries in the future to its senior  executives and
key management  employees,  subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements.  Executive
shall be entitled to incentive  compensation and bonuses as provided in any plan
of the Holding  Company and its  Subsidiaries  in which Executive is eligible to
participate.  Nothing paid to the Executive  under any such plan or  arrangement
will be deemed to be in lieu of other  compensation  to which the  Executive  is
entitled under this Agreement.

         (c) In addition to the Base Salary  provided  for by  paragraph  (a) of
this Section 3 and other  compensation  provided  for by  paragraph  (b) of this
Section 3, the Holding Company shall

#27938/February 10, 1995
                                        2

<PAGE>

pay or  reimburse  Executive  for all  reasonable  travel  and other  reasonable
expenses  incurred by Executive  performing his obligations under this Agreement
and may provide such  additional  compensation  in such form and such amounts as
the Board may from time to time determine.

4.       PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.

         (a) Upon the occurrence of an Event of Termination  (as herein defined)
during the Executive's term of employment  under this Agreement,  the provisions
of  this  Section  shall  apply.  As  used  in  this  Agreement,  an  "Event  of
Termination"  shall mean and include any one or more of the  following:  (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than a termination  governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof,  (ii)  Executive's  resignation  from the
Holding Company's employ, upon any (A) failure to elect or reelect or to appoint
or  reappoint  Executive  as  President  and  Chief  Operating  Officer,  unless
consented to by the Executive,  (B) a material  change in Executive's  function,
duties, or responsibilities with the Holding Company and its Subsidiaries, which
change would cause Executive's position to become one of lesser  responsibility,
importance,  or scope from the  position  and  attributes  thereof  described in
Section 1, above,  unless  consented to by the  Executive,  (C) a relocation  of
Executive's  principal  place  of  employment  by more  than 50  miles  from its
location at the effective  date of this  Agreement,  unless  consented to by the
Executive,  (D) a material  reduction  in the benefits  and  perquisites  to the
Executive from those being provided as of the effective date of this  Agreement,
unless  consented to by the  Executive,  (E) a liquidation or dissolution of the
Holding  Company  or the  Institution,  or (F) breach of this  Agreement  by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D) (E) or (F), above, Executive shall have the right to elect to terminate
his employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full calendar  months after the event
giving rise to said right to elect.

         (b) Upon the  occurrence  of an  Event of  Termination,  on the Date of
Termination,  as defined in Section 8, the Holding Company shall be obligated to
pay Executive,  or, in the event of his  subsequent  death,  his  beneficiary or
beneficiaries,  or his estate, as the case may be, a sum equal to the sum of (i)
the amount of the remaining  payments that the Executive would have earned if he
had continued his employment with the  Institution  during the remaining term of
this Agreement at the Executive's  Base Salary at the Date of  Termination;  and
(ii) the amount equal to the annual  contributions  that would have been made on
Executive's  behalf to any  employee  benefit  plans of the  Institution  or the
Holding   Company  during  the  remaining  term  of  this  Agreement   based  on
contributions  made (on an annualized basis) at the Date of Termination.  At the
election  of the  Executive,  which  election is to be made prior to an Event of
Termination,  such  payments  shall be made in a lump sum as of the  Executive's
Date of  Termination.  In the event  that no  election  is made,  payment to the
Executive will be made on a monthly basis in  approximately  equal  installments
during the remaining term of the  Agreement.  Such payments shall not be reduced
in the event the Executive  obtains other  employment  following  termination of
employment.

#27938/February 10, 1995
                                        3

<PAGE>

         (c) Upon the occurrence of an Event of Termination, the Holding Company
will  cause to be  continued  life,  medical,  dental  and  disability  coverage
substantially  equivalent to the coverage  maintained by the Holding  Company or
its  Subsidiaries  for Executive  prior to his termination at no premium cost to
the  Executive.  Such coverage  shall cease upon the expiration of the remaining
term of this Agreement.

5.       CHANGE IN CONTROL.

         (a) For  purposes  of this Plan,  a "Change in  Control" of the Holding
Company or the  Institution  shall mean an event of a nature that;  (i) would be
required to be  reported in response to Item 1(a) of the Current  Report on Form
8-K,  as in effect on the date  hereof,  pursuant  to Section 13 or 15(d) of the
Securities  Exchange  Act of 1934 (the  "Exchange  Act");  or (ii)  results in a
Change in Control of the Holding  Company within the meaning of the Home Owners'
Loan Act of 1933, as amended,  the Federal Deposit  Insurance Act, and the Rules
and  Regulations  promulgated  by the  Office  of  Thrift  Supervision  (or  its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the rules and regulations
of the OTS, the Board shall  substitute  its  judgment for that of the OTS);  or
(iii)  without  limitation  such a Change  in  Control  shall be  deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial  owner" (as defined
in Rule  13d-3  under the  Exchange  Act),  directly  or  indirectly,  of voting
securities of the Institution or the Holding Company representing 20% or more of
the Institution's or the Holding Company's  outstanding voting securities or the
right to  acquire  such  securities  except  for any  voting  securities  of the
Institution purchased by the Holding Company and any securities purchased by any
employee  benefit  plan of the Holding  Company's or its  Subsidiaries';  or (B)
individuals who constitute the Board on the date hereof (the "Incumbent  Board")
cease for any reason to  constitute at least a majority  thereof,  provided that
any person becoming a director  subsequent to the date hereof whose election was
approved by a vote of at least  three-quarters  of the directors  comprising the
Incumbent Board, or whose nomination for election by the Company's  stockholders
was  approved by a Nominating  Committee  solely  composed of members  which are
Incumbent Board members,  shall be, for purposes of this clause (B),  considered
as  though  he  were  a  member  of  the  Incumbent  Board;  or  (C) a  plan  of
reorganization,  merger,  consolidation,  sale of all or  substantially  all the
assets of the Institution or the Holding Company or similar  transaction  occurs
or is  effectuated  in which  the  Institution  or  Holding  Company  is not the
resulting  entity;  provided,  however,  that such an event listed above will be
deemed to have  occurred  upon the receipt of all  required  federal  regulatory
approvals,  not including the lapse of any statutory  waiting periods;  or (D) a
proxy statement shall be distributed soliciting proxies from stockholders of the
Holding  Company,  by someone  other than the current  management of the Holding
Company,  seeking  stockholder  approval O{ a plan of reorganization,  merger or
consolidation   of  the  Holding  Company  or  Institution   with  one  or  more
corporations  as a result  of  which  the  outstanding  shares  of the  class of
securities  then  subject  to such  plan or  transaction  are  exchanged  for or
converted into cash or property or securities  not issued by the  Institution or
the Holding Company shall be distributed;  or (E) a tender offer is made for 20%
or more of the voting  securities of the Institution or the Holding Company then
outstanding.

#27938/February 10, 1995
                                        4

<PAGE>

         (b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined  that a Change in Control has occurred,  Executive shall be
entitled to the benefits  provided in paragraphs  (c) and (d), of this Section 5
upon his  subsequent  termination  of  employment at any time during the term of
this Agreement due to (i) Executive's  dismissal or (ii)  Executive's  voluntary
resignation  following  any  demotion,  loss of  title,  office  or  significant
authority or responsibility, reduction in the annual compensation or benefits or
relocation of his  principal  place of employment by more than 30 miles from its
location immediately prior to the change in control), unless such termination is
because of his death or termination for Cause.

         (c) Upon the  Executive's  entitlement to benefits  pursuant to Section
5(b), the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or  beneficiaries,  or his estate,  as the case may be, a
sum equal to the greater of: (i) the payments due for the remaining  term of the
Agreement;  or (ii) three (3) times Executive's  average annual compensation the
three (3) preceding  taxable years. Such annual  compensation  shall include any
commissions,  bonuses,  contributions  on behalf of Executive to any pension and
profit sharing plan, severance payments,  directors or committee fees and fringe
benefits paid or to be paid to the Executive  during such years. At the election
of the Executive, which election is to be made prior to a Change in Control such
payment shall be made in a lump sum as of the  Executive's  Date of Termination.
In the event that no election is made,  payment to the Executive will be made on
a monthly basis in approximately equal installments during the remaining term of
the Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.

         (d) Upon the  Executive's  entitlement to benefits  pursuant to Section
5(b),  the  Company  will  cause  to be  continued  life,  medical,  dental  and
disability coverage  substantially  equivalent to the coverage maintained by the
Institution  for  Executive  at no  premium  cost  to  Executive  prior  to  his
severance.  Such  coverage  and  payments  shall  cease upon the  expiration  of
thirty-six (36) months following the Change in Control.

6.       CHANGE OF CONTROL RELATED PROVISIONS.

         (a) Notwithstanding the paragraphs of Section 5, in the event that:

                  (i)      the  aggregate  payments  or  benefits  to be made or
                           afforded  to  Executive,   which  are  deemed  to  be
                           parachute  payments as defined in Section 280G of the
                           Internal  Revenue  Code  of  1986,  as  amended  (the
                           "Code") or any successor  thereof,  (the "Termination
                           Benefits")  would be deemed  to  include  an  "excess
                           parachute  payment"  under  Section 280G of the Code;
                           and

                  (ii)     if  such  Termination  Benefits  were  reduced  to an
                           amount (the  "Non-Triggering  Amount"),  the value of
                           which is one dollar ($1.00) less than an amount equal
                           to three  (3) times  Executive's  "base  amount,"  as
                           determined in  accordance  with said Section 280G and
                           the  Non-Triggering  Amount would be greater than the
                           aggregate value of the Termination

#27938/February 10, 1995
                                        5

<PAGE>

                            Benefits (excluding such reduction) minus the amount
                            of tax required to be paid by the Executive  thereon
                            by Section 4999 of the Code,

         then the  Termination  Benefits shall be reduced to the  Non-Triggering
Amount.  The allocation of the reduction  required  hereby among the Termination
Benefits shall be determined by the Executive.

7.       TERMINATION FOR CAUSE.

         The term  "Termination for Cause" shall mean  termination  because of a
material loss to the Holding  Company or one of its  Subsidiaries  caused by the
Executive's  intentional failure to perform stated duties,  personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar  offenses)  or final cease and desist  order or material  breach of this
Agreement.  For  purposes  of this  Section,  no act,  or the failure to act, on
Executive's  part shall be "willful"  unless done, or omitted to be done, not in
good faith and without  reasonable belief that the action or omission was in the
best interest of the Holding Company or its  Subsidiaries.  Notwithstanding  the
foregoing,  Executive  shall not be deemed  to have  been  terminated  for Cause
unless and until there shall have been  delivered to him a Notice of Termination
which shall include a copy of a resolution duly adopted by the affirmative  vote
of not less than  three-fourths  of the members of the Board at a meeting of the
Board called and held for that purpose (after reasonable notice to Executive and
an opportunity  for him,  together with counsel,  to be heard before the Board),
finding  that in the good faith  opinion of the Board,  Executive  was guilty of
conduct justifying  termination for Cause and specifying the particulars thereof
in detail.  The Executive  shall not have the right to receive  compensation  or
other benefits for any period after termination for Cause. Any stock options and
related  limited rights granted to Executive under any stock option plan, or any
unvested awards granted to Executive under any restricted  stock benefit plan of
the Holding  Company or its  Subsidiaries,  shall become null and void effective
upon Executive's  receipt of Notice of Termination for Cause pursuant to Section
8 hereof,  and shall not be exercisable by or delivered to Executive at any time
subsequent to such Termination for Cause.

8.       NOTICE.

         (a) Any purported  termination  by the Holding  Company or by Executive
shall be  communicated  by Notice of Termination to the other party hereto.  For
purposes  of this  Agreement,  a "Notice  of  Termination"  shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's  employment  under the
provision so indicated.

         (b) "Date of  Termination"  shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).

#27938/February 10, 1995
                                        6

<PAGE>

         (c) If,  within  thirty  (30) days after any Notice of  Termination  is
given,  the party receiving such Notice of Termination  notifies the other party
that a dispute exists concerning the termination,  except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of  Termination  shall be the date  specified  in the  Notice,  the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties,  by a binding  arbitration award, or
by a final judgment,  order or decree of a court of competent  jurisdiction (the
time for appeal  therefrom  having expired and no appeal having been  perfected)
and provided further that the Date of Termination  shall be extended by a notice
of dispute  only if such notice is given in good faith and the party giving such
notice  pursues  the  resolution  of such  dispute  with  reasonable  diligence.
Notwithstanding  the pendency of any such dispute,  the Company will continue to
pay Executive his full compensation in effect when the notice giving rise to the
dispute was given (including,  but not limited to, Base Salary) and continue him
as a participant in all  compensation,  benefit and insurance  plans in which he
was  participating  when the notice of dispute  was given,  until the dispute is
finally  resolved in  accordance  with this  Agreement.  Amounts paid under this
Section are in addition to all other amounts due under this  Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.

9.       POST-TERMINATION OBLIGATIONS.

         All payments and benefits to Executive  under this  Agreement  shall be
subject  to  Executive's  compliance  with this  Section 9 for one (1) full year
after  the  earlier  of the  expiration  of this  Agreement  or  termination  of
Executive's   employment  with  the  Holding  Company.   Executive  shall,  upon
reasonable  notice,  furnish  such  information  and  assistance  to the Holding
Company as may reasonably be required by the Holding  Company in connection with
any litigation in which it or any of its  subsidiaries  or affiliates is, or may
become, a party.

10.      NON-COMPETITION.

         (a) Upon any termination of Executive's  employment  hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Holding Company or
its  Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's  normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board.  Executive  agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise  serve with,  directly or  indirectly,  any entity  whose  business
materially competes with the depository, lending or other business activities of
the Holding Company or its  Subsidiaries.  The parties hereto,  recognizing that
irreparable  injury will result to the Holding Company or its Subsidiaries,  its
business  and  property in the event of  Executive's  breach of this  Subsection
10(a)  agree  that in the event of any such  breach by  Executive,  the  Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages  available,  to an injunction  to restrain the  violation  hereof by
Executive,  Executive's partners,  agents,  servants,  employees and all persons
acting for or under the direction of Executive.  Executive represents and admits
that in the event of the termination

#27938/February 10, 1995
                                        7

<PAGE>

of his  employment  pursuant  to Section 7 hereof,  Executive's  experience  and
capabilities are such that Executive can obtain employment in a business engaged
in other  lines  and/or of a different  nature  than the Holding  Company or its
Subsidiaries, and that the enforcement of a remedy by way of injunction will not
prevent Executive from earning a livelihood. Nothing herein will be construed as
prohibiting  the Holding  Company or its  Subsidiaries  from  pursuing any other
remedies available to the Holding Company or its Subsidiaries for such breach or
threatened breach, including the recovery of damages from Executive.

         (b) Executive  recognizes  and  acknowledges  that the knowledge of the
business activities and plans for business activities of the Holding Company and
its  Subsidiaries as it may exist from time to time, is a valuable,  special and
unique  asset of the  business  of the  Holding  Company  and its  Subsidiaries.
Executive  will not,  during or after the term of his  employment,  disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person,  firm,  corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors  or required by law.  Notwithstanding  the  foregoing,
Executive  may disclose  any  knowledge of banking,  financial  and/or  economic
principles,  concepts or ideas which are not solely and exclusively derived from
the business  plans and  activities  of the Holding  Company.  In the event of a
breach or threatened  breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing,  in whole or in part, the knowledge of the past, present, planned or
considered  business  activities of the Holding  Company or its  Subsidiaries or
from rendering any services to any person,  firm,  corporation,  other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be  disclosed.  Nothing  herein will be  construed  as  prohibiting  the Holding
Company from pursuing any other  remedies  available to the Holding  Company for
such  breach or  threatened  breach,  including  the  recovery  of damages  from
Executive.

11.      SOURCE OF PAYMENTS.

         (a) All  payments  provided in this  Agreement  shall be timely paid in
cash or check from the  general  funds of the  Holding  Company  subject to this
Section 11(b).

         (b) Notwithstanding any provision herein to the contrary, to the extent
that  payments  and  benefits,  as  provided by this  Agreement,  are paid to or
received  by  Executive  under the  Employment  Agreement  dated  March 1, 1995,
between Executive and the Institution,  such compensation  payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement.  Payments pursuant to this
Agreement and the Institution  Agreement shall be allocated in proportion to the
level of activity and the time  expended on such  activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.

#27938/February 10, 1995
                                        8

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12.      EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.

         This Agreement  contains the entire  understanding  between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any  predecessor  of the  Holding  Company  and  Executive,  except that this
Agreement  shall not affect or operate  to reduce  any  benefit or  compensation
inuring to the  Executive  of a kind  elsewhere  provided.  No provision of this
Agreement  shall be  interpreted  to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.

13.      NO ATTACHMENT.

         (a) Except as required by law, no right to receive  payments under this
Agreement  shall be  subject to  anticipation,  commutation,  alienation,  sale,
assignment,  encumbrance,  charge,  pledge, or  hypothecation,  or to execution,
attachment,  levy, or similar process or assignment by operation of law, and any
attempt,  voluntary  or  involuntary,  to affect any such action  shall be null,
void, and of no effect.

         (b) This Agreement  shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.

14.      MODIFICATION AND WAIVER.

         (a)  This  Agreement  may  not be  modified  or  amended  except  by an
instrument in writing signed by the parties hereto.

         (b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement,  except by written  instrument of the party charged with such
waiver or estoppel.  No such written waiver shall be deemed a continuing  waiver
unless specifically  stated therein,  and each such waiver shall operate only as
to the specific  term or condition  waived and shall not  constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.

15.      SEVERABILITY.

         If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this  Agreement or any part of such  provision not held so invalid,  and each
such other provision and part thereof shall to the' full extent  consistent with
law continue in full force and effect.

16.      HEADINGS FOR REFERENCE ONLY.

         The headings of sections and paragraphs  herein are included solely for
convenience of reference and shall not control the meaning or  interpretation of
any of the provisions of this Agreement.

#27938/February 10, 1995
                                        9

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17.      GOVERNING LAW.

         This Agreement  shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.

18.      ARBITRATION.

         Any dispute or  controversy  arising under or in  connection  with this
Agreement shall be settled exclusively by arbitration,  conducted before a panel
of three  arbitrators  sitting in a location  selected by the  Executive  within
fifty (50) miles from the location of the  Association,  in accordance  with the
rules of the American  Arbitration  Association then in effect.  Judgment may be
entered on the arbitrator's  award in any court having  jurisdiction;  provided,
however,  that Executive  shall be entitled to seek specific  performance of his
right to be paid  until  the Date of  Termination  during  the  pendency  of any
dispute or controversy arising under or in connection with this Agreement.

         In the event any dispute or controversy  arising under or in connection
with Executive's  termination is resolved in favor of the Executive,  whether by
judgment, arbitration or settlement,  Executive shall be entitled to the payment
of all  back-pay,  including  salary,  bonuses and any other cash  compensation,
fringe  benefits and any  compensation  and benefits  due  Executive  under this
Agreement.

19.      PAYMENT OF LEGAL FEES.

         All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of  interpretation  relating to this Agreement shall be paid
or reimbursed by the Holding Company,  if Executive is successful  pursuant to a
legal judgment, arbitration or settlement.

20.      INDEMNIFICATION.

         The Holding  Company  shall  provide  Executive  (including  his heirs,
executors and  administrators)  with coverage  under a standard  directors'  and
officers' liability  insurance policy at its expense, or in lieu thereof,  shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent  permitted  under  Delaware  law against  all  expenses  and  liabilities
reasonably incurred by him in connection with or arising out of any action, suit
or  proceeding  in which he may be  involved  by  reason  of his  having  been a
director or officer of the Holding Company  (whether or not he continues to be a
director or officer at the time of incurring such expenses or liabilities), such
expenses and  liabilities to include,  but not be limited to,  judgments,  court
costs and attorneys' fees and the cost of reasonable settlements.

#27938/February 10, 1995
                                       10

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21.      SUCCESSOR TO THE HOLDING COMPANY.

         The Holding  Company shall  require any successor or assignee,  whether
direct or indirect, by purchase,  merger,  consolidation or otherwise, to all or
substantially  all the  business  or assets of the  Association  or the  Holding
Company,  expressly  and  unconditionally  to assume  and agree to  perform  the
Holding Company's  obligations  under this Agreement,  in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.

#27938/February 10,1995
                                       11

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                                   SIGNATURES

         IN WITNESS  WHEREOF,  Eugene R. Friend has caused this  Agreement to be
executed and its seal to be affixed hereunto by its duly authorized  officer and
its directors, and Executive has signed this Agreement, on the 1st day of March,
1995.

ATTEST:                                 MONTEREY BAY BANCORP, INC.

/s/ Carlene Anderson                      /s/ Eugene R. Friend
Secretary                               Chairman of the Board and
                                        Chief Executive Officer

[SEAL]

WITNESS:

/s/ Deborah R. Chandler                      /s/ Marshall G. Delk
                                           Marshall G. Delk
                                           President and Chief Operating Officer

#27938/February 10,1995
                                       12

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