As filed with the Securities and Exchange Commission on January 7, 2005.
                                                  Registration No. 333-
                                                                   -------------
================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM F-3
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

                             COMMTOUCH SOFTWARE LTD.
             (Exact name of registrant as specified in its charter)

                   Israel                               Not Applicable
       (State or other jurisdiction of                 (I.R.S. Employer
       incorporation or organization)                 Identification No.)

                                1A Hazoran Street
                      Poleg Industrial Park, P.O. Box 8511
                              Netanya 42504, Israel
                               011-972-9-863-6888
               (Address, including zip code and telephone number,
        including area code, of registrant's principal executive offices)

                               c/o Commtouch Inc.
                     Devyani Patel, Vice President, Finance
                         1300 Crittenden Lane, Ste. 103
                         Mountain View, California 94043
                                 (650) 864-2000
            (Name, address, including zip code and telephone number,
                   including area code, of agent for service)

                                   Copies to:


------------------------------- ---------------------------- -----------------------------
                                                        
Gary Davis                         Aaron M. Lampert           Nathaniel M. Cartmell III
General Counsel & Secretary        Naschitz, Brandes & Co.    Pillsbury Winthrop LLP
Commtouch Inc.                     5 Tuval Street             50 Fremont Street
1300 Crittenden Lane, Suite 103    Tel Aviv 67897 Israel      San Francisco, CA 94105-2228
Mountain View, CA 94043            Tel: 972-3-623-5000        Tel: (415) 983-1000
Tel: (650) 864-2000                Fax: 972-3-623-5005        Fax: (415) 983-1200
Fax: (650) 864-2006            

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



Approximate  date of  commencement of the proposed sale of the securities to the
public: From time to time after the Registration Statement becomes effective.

     If the only  securities  being  registered  on this Form are being  offered
pursuant to dividend or interest  reinvestment plans, please check the following
box. |_|

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous  basis  pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |X|

     If this Form is filed to  register  additional  securities  for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list  the  Securities  Act  registration  statement  number  of the  earlier
effective registration statement for the same offering. |_|

     If this Form is a  post-effective  amendment  filed pursuant to Rule 462(c)
under the  Securities  Act,  check the following box and list the Securities Act
registration  statement number of the earlier effective  registration  statement
for the same offering. |_|

     If delivery of the  prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

     The Registrant  hereby amends this  Registration  Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further  amendment  which  specifically  states  that  this  Registration
Statement shall  thereafter  become effective in accordance with Section 8(a) of
the  Securities  Act of 1933 or until the  Registration  Statement  shall become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.





Calculation of Registration Fee
====================================================================================================================================
                                                                                                  
                                                      Proposed
                  Title of Each Class                  Maximum           Proposed
                     of Securities                  Amount to be      Aggregate Price     Maximum Aggregate        Amount of
                   To Be Registered                 Registered(1)       Per Unit(2)        Offering Price     Registration Fee(3)
------------------------------------------------------------------------------------------------------------------------------------
Ordinary Shares, NIS 0.05 nominal value per share    6,955,684             $0.35             $2,434,489             $286.54
====================================================================================================================================

(1) Represents shares being registered for resale by the holders (the "selling  securityholders")  of Ordinary Shares and associated
warrants for purchase of Ordinary Shares of the Company,  pursuant to an agreement between the Company and selling  securityholders,
as follows: (i) 2,340,000 Ordinary Shares, representing 130% of shares issuable to selling securityholders upon conversion of Series
A Preferred Shares under the Redemption,  Amendment and Exchange Agreement of October 31, 2004 (the "RAE");  (ii) 4,333,336 Ordinary
Shares,  representing  130% of shares  issuable upon exercise of warrants  issued to selling  securityholders  under the RAE;  (iii)
282,348 Ordinary Shares,  representing  shares issuable to selling  securityholders  upon exercise of additional  investment  rights
arising under the Securities Purchase Agreement of May 18, 2004 as a result of anti-dilution protections triggered by the closing of
the Securities Purchase Agreement of October 31, 2004; and (iv) an indeterminable number of additional Ordinary Shares,  pursuant to
Rule 416 under the Securities Act of 1933 that may be issued to prevent  dilution  resulting from stock splits,  stock  dividends or
similar transactions affecting the shares to be offered by the selling securityholders.

(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) based on the average of
the high and low prices of the Company's Ordinary Shares as reported on The Nasdaq SmallCap Market System on January 3, 2005.

(3) The Registrant  initially filed a Registration  Statement on Form F-1  (Registration  No. 333-31836) on March 6, 2000 (the "Form
F-1"), to register certain offers and sales of its Ordinary Shares as set forth in that Registration  Statement.  Subsequently,  the
Registrant withdrew the Form F-1 on April 12, 2000. The Registrant is filing this Registration Statement on Form F-3 to register the
reoffer and resale of the securities  indicated on this cover page. A registration fee of $49,468.00 was paid in connection with the
filing of the Form F-1.  Pursuant to Rule 457(p),  the aggregate  total dollar amount of the filing fee  associated  with the unsold
Ordinary Shares under the F-1 has previously been offset by the filing fees in the amounts of (a) $119.80 for Registration Statement
on Form S-8 No. 333-65532 filed on July 20, 2001; (b) $158.24 for  Registration  Statement on Form F-3 No. 333-68248 filed on August
24, 2001; (c) $104.45 for  Registration  Statement on Form F-3 No.  333-88248  filed on May 15, 2002;  (d) $687.66 for  Registration
Statement on Form F-3 No.  333-109837 filed on October 20, 2003; (e) $824.58 for Registration  Statement on Form F-3 No.  333-111731
filed on January 6, 2004;  (f) $302.53 for  Registration  Statement  on Form F-3 No.  333-111734  filed on January 6, 2004;  and (g)
$1,268.19 for Registration  Statement on Form F-3 No. 333-117085 filed on July 1, 2004. The remaining balance of $46,002.55 is being
further offset by the filing fee due for this Registration Statement.
====================================================================================================================================


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

                                EXPLANATORY NOTE

Pursuant  to Rule  429  under  the  Securities  Act of  1933,  as  amended,  the
prospectus which is a part of this registration  statement also incorporates and
amends the prospectuses that are included in the Registration Statements on Form
F-3 No.  333-117085  and No.  333-1111734  filed on July 1, 2004 and  January 6,
2004, respectively.

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



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

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

                  SUBJECT TO COMPLETION, DATED JANUARY__, 2005

                                   PROSPECTUS

                             Commtouch Software Ltd.

                           23,605,490 Ordinary Shares
--------------------------------------------------------------------------------

Private  Placements of Ordinary Shares and Ordinary Shares  Underlying  Series A
Preferred Shares, Additional Investment Rights and Warrants

      As we describe  further  below under "Plan of  Distribution,"  the selling
securityholders  identified in this  prospectus  are selling up to 23,605,490 of
our Ordinary Shares,  2,340,000 of which underlie convertible Series A Preferred
Shares,  5,413,931 of which underlie additional investment rights and 11,784,396
of which underlie warrants. The Series A Preferred Shares, additional investment
rights and warrants  themselves  are not being offered by this  prospectus.  The
selling  securityholders  acquired the  Ordinary  Shares,  convertible  Series A
Preferred  Shares and rights to  purchase  Ordinary  Shares  from the Company in
three  private  placements  - a  convertible  note  transaction  entered into on
November  26,  2003,  a private  equity sale  transaction  of May 18, 2004 and a
Redemption,  Amendment  and Exchange  Agreement of October 31, 2004 (the "RAE"),
which  primarily  modified  the terms of the  convertible  note  transaction  of
November  26,  2003.  It  is  noted  that  Iroquois  Capital  LP  is  a  selling
securityholder  hereunder only by way of its  participation  in the May 18, 2004
transaction.  Shareholders of the Company  approved the May 18, 2004 transaction
at an extraordinary  meeting of shareholders  held on June 28, 2004 and approved
the RAE at the annual meeting of shareholders held on December 6, 2004.

      The  Ordinary  Shares  offered  hereby are being  registered  pursuant  to
registration  rights  granted to the selling  securityholders  by the Company in
connection  with the RAE.  These  securities may be offered from time to time by
the selling  securityholders  through public or private transactions,  on or off
the  Nasdaq  SmallCap  Market,  at  prevailing  market  prices  or at  privately
negotiated prices. The selling  securityholders will receive all of the proceeds
from  this  offering  and  will  pay  all  underwriting  discounts  and  selling
commissions,  if any, applicable to the sale of the securities.  The Company has
agreed to indemnify the selling  securityholders  against  certain  liabilities,
including  liabilities under the Securities Act. For additional  detail,  please
see the section below entitled "Plan of Distribution".

      The  Ordinary  Shares  are being  offered by the  selling  securityholders
subject to prior sale,  subject to their  right to reject  offers in whole or in
part and subject to certain other conditions.

      Our Ordinary  Shares are currently  traded on The Nasdaq  SmallCap  Market
under the symbol  "CTCHC." On January 6, 2005 the last reported  sales price of
an Ordinary Share on The Nasdaq SmallCap Market was $0.50 per share.

--------------------------------------------------------------------------------
     This investment involves risk. See "Risk Factors" beginning on page 5.
--------------------------------------------------------------------------------

Neither  the  Securities  and  Exchange  Commission  nor  any  state  securities
commission has approved or disapproved of these securities or determined if this
prospectus  is truthful or  complete.  Any  representation  to the contrary is a
criminal offense.

                 The date of this Prospectus is _________, 2005


                                TABLE OF CONTENTS

                                                                          Page
                                                                         ------

Special Note Regarding Forward-Looking Information.....................     1
Commtouch Software Ltd. ...............................................     2
Risk Factors ..........................................................     5
Capitalization and Indebtedness .......................................    15
The Offer and Listing..................................................    16
Reasons for the Offer and Use of Proceeds .............................    17
Selling Securityholders ...............................................    17
Shares Eligible for Future Sale .......................................    20
Plan of Distribution...................................................    21
Legal Matters .........................................................    23
Experts ...............................................................    23
Where You Can Find More Information ...................................    23
Information Incorporated by Reference .................................    24
Enforceability of Civil Liabilities ...................................    24
Financial Statements ..................................................   F-1




               SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION


This document contains forward-looking  statements,  including projections about
our business,  within the meaning of Section 27A of the  Securities  Act of 1933
and Section 21E of the Securities Exchange Act of 1934. For example,  statements
in the future tense,  and statements  including words such as "expect",  "plan",
"estimate",  anticipate",  or "believe" are  forward-looking  statements.  These
statements  are based on  information  available  to us at the time of filing of
this  document;  we do not assume  any  obligation  to update  any of them.  The
statements in this document are not guarantees of future  performance and actual
results could differ  materially  from our current  expectations  as a result of
numerous factors, including the failure of the Company to satisfy the conditions
imposed by the Nasdaq Listing  Qualifications Panel for the continued listing of
Commtouch shares on The Nasdaq SmallCap Market;  business  conditions and growth
or deterioration in the Internet market,  commerce and the general economy, both
domestic   as  well  as   international;   fewer   than   expected   new-partner
relationships;  competitive  factors including pricing pressures;  technological
developments,   and  products   offered  by   competitors;   and   technological
difficulties and resource constraints  encountered in developing new products as
well as those risks  described in the Company's  Annual Reports on Form 20-F and
reports on Form 6-K, which are available through www.sec.gov.

                                       1




                             COMMTOUCH SOFTWARE LTD.

We are a provider of anti-spam  solutions to enterprise  customers.  The Company
offers its anti-spam  solutions to small, medium and large enterprises through a
variety of third party distribution  channels.  The solutions are also available
for integration with security, content filtering, anti-virus and other filtering
solutions  through  alliances  and  strategic  partnerships.  A  combination  of
proprietary  patented  and  patent-pending  technologies  makes it possible  for
Commtouch to detect,  alert and block most spam attacks as they are  distributed
over the Internet.

Our  enterprise  anti-spam  solution  consists of both a software  element  (the
"Enterprise  Gateway") and a service component (the "Detection Center").  At the
Enterprise Gateway,  messages are filtered at the customer  organization's entry
point,  before being distributed to recipients,  with added user-level  controls
and a top level of secure spam detection services from the Detection Center, all
allowing for real-time  reaction to worldwide spam attacks.  At the heart of the
solution,  however,  is the Detection Center,  which detects new spam attacks as
soon as they are launched  and  distributed  over the  Internet.  The  Detection
Center  provides  real-time spam detection  services to enterprise  customers by
maintaining  constant  communication  with Enterprise  Gateways that are locally
installed at customer premises in different locations  worldwide.  The Detection
Center  collects  information  from  multiple  sources  about new spam  attacks,
analyzes the input using  Commtouch  patent-pending  technology,  identifies and
detects  spam,  classifies  the data,  matches  its stored  information  against
outstanding  queries for spam detection from Enterprise  Gateways and replies in
real-time  back to the  Enterprise  Gateways  with a  prioritized  and  accurate
resolution.

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

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

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

     o        If the  solution  does not match the  message  to a known  source,
              either  spam  or  non-spam,  it  compares  characteristics  of the
              incoming message against the Enterprise  Gateway cache of recently
              identified spam;

     o        If the message  remains  suspicious,  but cannot be  confirmed  as
              spam,  the  Enterprise  Gateway  queries the Detection  Center for
              remote spam detection and classification services;

     o        The outgoing query consists of digital signatures taken from email
              header   information.   The  signatures  may  be  hashed  (one-way
              encrypted) to ensure enterprise security and confidentiality.  The
              query does not contain the full email body or its  attachments and
              it is therefore very small in size (500 Bytes);

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

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

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

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

                                       2




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

     o        Anti-virus applications;

     o        Content filtering solutions;

     o        Firewall systems;

     o        Security servers; and 

     o        Other network appliances


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


Office Location

Our  principal  executive  offices  are  located  at 1A  Hazoran  Street,  Poleg
Industrial  Park,  Netanya  42504,   Israel,   where  our  telephone  number  is
011-972-9-863-6888.  Our wholly owned subsidiary,  Commtouch Inc., is located at
1300  Crittenden  Lane,  Suite 103,  Mountain  View,  California  94043,  with a
telephone number of (650) 864-2000. Our website address is www.commtouch.com.


Operating and Financial Review and Prospects

The following  discussion  should be read in conjunction  with the  Consolidated
Financial  Statements and the Notes thereto  included  elsewhere in this report.
This  discussion   contains   forward-looking   statements  based  upon  current
expectations  that involve risks and  uncertainties.  Any  statements  contained
herein  that  are  not  statements  of  historical  fact  may  be  deemed  to be
forward-looking  statements.  For example,  the words "expects,"  "anticipates,"
"believes,"  "intends," "plans," "seeks" and "estimates" and similar expressions
are intended to identify forward-looking statements.  Commtouch's actual results
and the timing of certain events may differ  significantly  from those projected
in the  forward-looking  statements.  Factors that might cause future results to
differ  materially  from  those  projected  in  the  forward-looking  statements
include, but are not limited to, those set forth elsewhere in this report. These
factors are based on  information  available to us at the time of filing of this
document; we do not assume any obligation to update any of them.


Overview

During 2004 and 2003, our business was to develop and sell, through a variety of
third party distribution channels, anti-spam solutions to various customers. The
Company  expects  that  it  will  continue  to be  dependent  upon  third  party
distribution  channels for a significant portion of its revenues,  which will be
derived from sales of the Company's anti-spam solutions.


Critical Accounting Policies and Estimates

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


Revenue recognition

Our  enterprise  anti-spam  solution  consists of both a software  element  (the
"Enterprise  Gateway") and a service component (the "Detection Center").  At the
Enterprise Gateway,  messages are filtered at the customer  organization's entry
point,  before being distributed to recipients.  At the heart of the solution is
the  Detection  Center,  which detects new spam attacks as they are launched and
distributed  over the Internet.  The Detection  Center  provides  real-time spam
detection services to enterprise customers by maintaining constant communication
with  Enterprise  Gateways  that are locally  installed at customer  premises in
different  locations.  The Detection  Center collects  information from multiple
sources  about  new spam  attacks,  analyzes  the input  using  our  technology,
identifies and detects spam, classifies the data, matches its stored information
against  outstanding  queries for spam  detection from  Enterprise  Gateways and
replies  in  real-time  back  to the  Enterprise  Gateways  with  a  prioritized
resolution.

                                       3



We also offer a Software  Development Kit ("SDK").  The SDK enables  third-party
vendors to integrate  the Commtouch  anti-spam  solution  advantages  into their
existing  offerings,  providing  them  with full  spam  identification  and spam
classification  services from the Detection Center.  The SDK communicates  fully
with the remote Detection Center,  receiving results to queries about suspicious
messages and acting according to set policies on the customer side.

The  service   component  of  our  revenues  is  considered   essential  to  the
functionality of the software components.  Furthermore,  the software components
cannot be used on a standalone basis, or with another party's service.

Revenues from anti-spam  service are recognized when  persuasive  evidence of an
arrangement exists, services are provided, no significant obligation with regard
to  the  implementation   remains,   the  fee  is  fixed  and  determinable  and
collectibility  is  probable.  Revenues  deriving  from  anti-spam  services are
recognized ratably over the life of the service period.


Contingencies

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

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

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


Revenue Sources

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


Results of Operations (U.S. dollars in thousands)


                                                        Nine Months  Nine Months
                                                           Ended       Ended
                                                          Sept. 30,   Sept. 30, 
                                                            2004        2003
                                                          -------     -------
Revenues: ...........................................     $   933     $   260

Cost of revenues: ...................................         475         447
                                                          -------     -------
Gross profit (loss) .................................         458        (187)
                                                          -------     -------
Operating expenses:
    Research and development ........................       1,055       1,095
    Sales and marketing .............................       2,964       1,137
    General and administrative ......................       1,383       1,335
    Amortization of stock-based employee 
        deferred compensation .......................          30         189
                                                          -------     -------
    Total operating expenses ........................       5,432       3,756
                                                          -------     -------
Operating loss ......................................      (4,974)     (3,943)
    Interest and other income (expense), net ........         398        (283)
    Equity in Income of Imatrix .....................         (63)        282
                                                          -------     -------
Net loss ............................................     $(4,639)    $(3,944)
                                                          =======     =======


                                       4


Comparison of the Nine Months Ended September 30, 2004 and 2003 --
(U.S. dollars in thousands, except share and per share data)

Revenues.  Revenues  increased  over  two  and a half  fold  from  $260  for the
nine-months  ended  September  30,  2003 to $933  for the same  period  in 2004.
Revenues were expected to rise for the  nine-months  ended September 30, 2004 as
we had a full nine months of sales due to our  anti-spam  solutions  compared to
the same period 2003, where we had just started to sell the product in the third
quarter of 2003. For the  nine-months  ended  September 30, 2004,  33.57% of the
revenues were derived from one customer. For the nine-months ended September 30,
2003,  82.16% of the revenues  were derived  from three  customers  (35.32% from
customer A, 31.52% from customer B and 15.32% from customer C).

Cost of  Revenues.  Due to an  increase  in sales,  cost of  revenues  increased
marginally  for the  nine-months  ended  September 30, 2004 in comparison to the
same period in 2003. Cost of revenues did not increase in the same proportion as
sales during the period due to economies of scale.

Research and Development.  Research and development expenses decreased 3.7% from
$1,095  for the  nine-months  ended  September  30,  2003 to $1,055 for the same
period in 2004 due to the decrease in personnel and other related costs.

Sales and Marketing. Sales and marketing expenses increased 161% from $1,137 for
the nine-months  ended September 30, 2003 to $2,964 for the same period in 2004,
as we hired sales and marketing  personnel to sell our new anti-spam  solutions.
We also  earmarked  additional  marketing  resources  towards  our  new  product
offerings.

General and Administrative.  General and administrative  expenses increased 3.6%
from $1,335 for the nine-months  ended September 30, 2003 to $1,383 for the same
period in 2004.

Amortization  of Stock-Based  Employee  Deferred  Compensation.  Our stock-based
employee deferred  compensation expenses decreased from $189 for the nine-months
ended  September  30,  2003  to $30  for  the  same  period  in  2004.  Deferred
compensation   totaling  $13  remaining   from  1999was   amortized   using  the
sum-of-digits  method  over the vesting  schedule,  generally  four years.  This
amortization  concluded during the third quarter of  2003.Deferred  compensation
expenses of $30 and $176 for the nine-months  ended September 30, 2004 and 2003,
respectively,  relating to the  repricing  of stock  options  during  2001,  was
amortized  using the  straight-line  method over a three year vesting  schedule.
This amortization concluded during the first quarter of 2004.

Interest and Other Income,  Net. Our interest and other income,  net,  increased
from a net loss of $283 for the  nine-months  ended  September  30 2003 to a net
income of $398 for the  nine-months  ended  September 30, 2004, due primarily to
the company recording a non-cash financial income of approximately $613 relating
to the  November  2003  convertible  loan and  related  warrants  and fair value
adjustment thereof.


Liquidity and Capital Resources

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

As of September 30, 2004, we had approximately  $5,107 of cash, which we believe
is sufficient  to fund  operations  through at least  December  2005.  See "Risk
Factors  -  Investment  Risks  -  We  may  need  additional  capital."  For  the
nine-months  ended  September 30, 2004 and 2003, we utilized  $3,987 and $3,190,
respectively  of cash to fund operating  losses.  Net cash provided by financing
activities  was  approximately  $5,120  and  $4,455  for the  nine-months  ended
September 30, 2004 and 2003, respectively,  mainly due to proceeds from issuance
of convertible notes and Ordinary Shares.


                                  RISK FACTORS

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


                                       5


Business Risks


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

Our success  depends on the  acceptance  and use of our  anti-spam  solutions by
enterprise,  OEM and ISP customers and partners.  While we have been selling our
anti-spam  products for over one year, it remains difficult to estimate the size
or growth rate of the  potential  market for our  anti-spam  offerings.  This is
accentuated by the fact that during the third quarter of 2004

     o        we signed five new OEM  agreements,  with the  majority of the new
              integrated  products utilizing our technology only having launched
              in  the  fourth  quarter  of  2004  -  therefore  we do  not  have
              experience with the sales potential of these OEMs, and

     o        our new  Enterprise  Gateway  version 4.0 was launched,  which may
              have different market acceptance from our previous products.

Therefore,  we have yet to  achieve  a level of  customer  experience  that will
enable us to accurately  predict the market's  reaction to these important,  new
offerings.  If the market for  anti-spam  solutions  fails to grow or grows more
slowly than we currently anticipate, our business will suffer dramatically. Even
if that market grows, our solutions may not achieve broad market  acceptance and
our business could fail.

Our business may be adversely affected as a consequence of legislation  imposing
legal penalties on distributors of unsolicited email.

On December 16, 2003, President Bush signed into law the Controlling the Assault
of  Non-Solicited  Pornography and Marketing Act of 2003 (CAN-SPAM  Act),  which
establishes a framework of  administrative,  civil, and criminal tools to combat
spam.  The law  establishes  both civil and criminal  prohibitions  to assist in
deterring the most offensive forms of spam, including unmarked sexually-oriented
messages and emails  containing  fraudulent  headers.  Under the law, senders of
email are  required to honor a request by a consumer  not to receive any further
unsolicited  messages.  Recent high profile prosecutions of direct marketers are
likely to have some deterrent effect on the future activities of these and other
similar direct marketers of unsolicited email.

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

Furthermore,  each member state in the European  Union was  obligated by October
2003  to  implement  the  Electronic   Communications   Directive  that  imposes
restrictions on the use of unsolicited email for commercial purposes.

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


Dependence upon resellers and product concentration.

We expect to continue to be  dependent  upon  resellers  and OEM  partners for a
significant  portion of our  revenues,  which will be derived  from sales of our
anti-spam solutions. Also, we are still developing our distribution channels and
are currently dependent on a relatively small number of our global resellers and
OEM partners to close the majority of sales transactions.  If anticipated orders
from  these  resellers  fail  to  materialize,  or one of the key  resellers  or
distribution  channels  ceases the  promotion  of our  business,  our  operating
results and financial condition will be materially adversely affected.

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

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

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

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

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

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

     o        The threat of delisting by Nasdaq;

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

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


                                       6



     o        The success of our resellers'  and OEM partners'  sales efforts to
              potential customers;
      
     o        The solvency of our  resellers  and OEM partners and their ability
              to allocate sufficient  resources towards the marketing of our new
              anti-spam solutions to their potential customers;
      
     o        The rate of adoption of  anti-spam  solutions  by customers in the
              current economic environment;

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

     o        Our ability to  successfully  develop and market new,  modified or
              upgraded solutions,  as may be needed; o The substantial  decrease
              in information technology spending;

     o        Pricing of our solutions;

     o        Our  ability  to timely  collect  fees owed by  resellers  and OEM
              partners; and

     o        The effectiveness of our customer support, whether provided by our
              resellers and OEM partners, or directly by Commtouch.

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

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

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

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

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

As this  market  continues  to  develop,  a number  of  companies  with  greater
resources  than ours could attempt to increase  their presence in this market by
acquiring  or forming  strategic  alliances  with our  competitors  or  business
partners.  One such example of this is the recent  acquisition  of Brightmail by
Symantec Corp.

Competitors  could introduce  products with superior  features,  scalability and
functionality  at lower prices than our products and could also bundle  existing
or new products with other more established  products that discourage users from
purchasing our products. In addition,  because there are relatively low barriers
to entry for the software market,  we expect  additional  competition from other
established and emerging companies. Increased competition is likely to result in
price  reductions,  reduced gross margins and loss of market share, any of which
could harm our business.

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

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


                                       7


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

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

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

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

We incurred net losses of  approximately  $61.0 million in 2001, $4.9 million in
2002 and $6.8 million in 2003.  As of December 31, 2003 and October 31, 2004, we
had an accumulated  deficit of approximately  $158.5 million and approximately $
163.6  million,  respectively.  We are  participating  in a  relatively  new and
unstable market,  we have not achieved  profitability in any period and we might
continue to incur net losses in the future. If we do not achieve  profitability,
our share price may decline further.

Risk of Litigation.

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

In September  2003, a final order was entered by a U.S.  District  Court for the
Northern  District of California,  thereby settling the shareholder class action
lawsuit filed on behalf of  shareholders  against the Company in early 2001. The
litigation  was  initiated  against the Company and two members of management in
response to the Company's  announcement that it had decided to restate unaudited
earnings  for the first  three  quarters  of 2000,  alleging  violations  of the
antifraud provisions of the Securities Exchange Act of 1934.


Indemnification of Directors and Officers.

The Company has  agreements  with its  directors,  subject to Israeli law,  that
provide for the Company to indemnify  these  directors  for any of the following
obligations  or  expenses  incurred  as a result of an act or  omission  of such
persons in their capacity as directors:  (a) any monetary liability imposed upon
such a director for the benefit of a third party  pursuant to a court  judgment,
including a settlement or an arbitrator's  decision,  confirmed by a court,  and
(b) reasonable  litigation expenses,  including legal fees, actually incurred by
such a director or imposed upon the  director by a court order,  in a proceeding
brought  against  him by or on  behalf  of the  Company  or by  others,  or in a
criminal  action in which he was acquitted,  or in a criminal  action which does
not require proof of criminal intent in which he was convicted.


Risk due to economic conditions.

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

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

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

Our low head-count of 49 employees (as of November 30, 2004) continues to strain
our operational  resources,  and the lack of sufficient personnel may compromise
our ability to enhance revenues.


                                       8


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

As of November 30, 2004, we had sales  offices in Israel and the United  States.
We also are  marketing  our  anti-spam  solutions  in  international  markets by
utilizing appropriate  distributorship channels.  However, we may not be able to
compete  effectively in  international  markets due to various risks inherent in
conducting business internationally, such as:

     o        Differing technology standards;

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

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

     o        Difficulties   in  collecting   accounts   receivable  and  longer
              collection periods;

     o        Unexpected changes in regulatory requirements;

     o        Political and economic instability;

     o        Potentially adverse tax consequences;

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

     o        Potentially reduced protection for intellectual property rights.

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

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

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


Technology Risks

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

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

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

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


                                       9


Investment Risks

We may need additional capital.

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

The Company remains very thinly capitalized.  As such, we might become dependent
upon  raising  additional  funds to finance our  business.  Our cash  balance at
December  31,  2003 and  October 31,  2004 was  approximately  $4.1  million and
approximately $4.6 million, respectively.  Based on the cash balance at December
31, 2003, the payment to the Company in January 2004 of approximately $1 million
as a result of the exercise of warrants by previous  convertible  note  holders,
the  closing  of two  private  placements  in June and  December  2004  totaling
approximately $7 million to the Company,  the Company's  repayment of $3 million
in convertible notes in December 2004, current projections of revenues,  related
expenses and the ability to further curtail certain discretionary  expenses, the
Company believes it has sufficient cash to continue  operations through at least
December 2005.

However, the Company may need to raise additional funds during the first quarter
of 2005, and potentially thereafter,  in order to satisfy Nasdaq's shareholders'
equity maintenance requirements. See the risk factor immediately below.

If we are unable to raise additional funds, the Company could fail. There can be
no assurance  that we will be able to raise  necessary  funds or that we will be
able to do so on terms  acceptable  to us. If needed,  our  inability  to obtain
adequate  capital would limit our ability to continue our  operations.  Any such
additional funding may result in significant dilution to existing shareholders.

In the past we have received funds for the  development of our business from the
State of Israel through the Office of the Chief  Scientist,  or the OCS.  Grants
received  from  the OCS  through  2002  that  the  Company  potentially  will be
obligated to repay totaled approximately $800,000.


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

Our Ordinary Shares are quoted on The Nasdaq SmallCap Market.  To continue to be
listed,  among other  requirements,  we are  required to maintain  shareholders'
equity  of at  least  $2,500,000,  or  market  value of our  outstanding  shares
(excluding  shares held by Company  insiders and principal  shareholders)  of at
least $35,000,000, or we must have realized at least $500,000 in net income from
continuing operations in our last fiscal year or in two of our last three fiscal
years.  Since our share price as quoted on The Nasdaq  SmallCap  Market was at a
price  that  resulted  in our  market  value  being  below  $35,000,000  and our
shareholders'  equity  was  below  $2.5  million,  we  received  a Nasdaq  Staff
Determination  letter on May 10, 2004  indicating  that  Commtouch had failed to
comply with the  shareholders'  equity,  net income and market value of publicly
held  shares  requirements  for  continued  listing,  as set  forth in  Nasdaq's
Marketplace Rule 4320(e)(2)(B),  and that Commtouch's  securities were therefore
subject to delisting from The Nasdaq SmallCap Market.  The subject rule requires
compliance  with at least one of the  above  requirements  in order to  maintain
listing with The Nasdaq SmallCap Market.

Commtouch appealed the Nasdaq Staff Determination and a hearing was held on June
17, 2004 before a Nasdaq Listing  Qualifications  Panel  ("Panel") to review the
Staff  Determination.  The Panel,  in its decision of June 28, 2004,  determined
that the  Company's  Ordinary  Shares would  continue to be listed on The Nasdaq
SmallCap Market  pursuant to an exception from the requirement  that the Company
maintain  at least  $2.5  million in  shareholders'  equity.  The Panel  imposed
several conditions to the continued availability of that exception.

While the Company was successful in meeting the Panel's initial  conditions,  it
failed to  satisfy  the  requirement  to submit to Nasdaq by  October  31,  2004
evidence of compliance, for the quarter ending September 30, 2004, with the $2.5
million  shareholders'  equity  requirement,  as set forth in  Marketplace  Rule
4310(c)(2)(B) (the "September 30th Requirement").

On October 27, 2004, the Panel granted the Company's request for an extension of
the September 30th Requirement, subject to the following amended conditions:

    1.   By no later than  November  1, 2004,  the  Company was to have signed a
         definitive  agreement for the  investment  transactions  that closed in
         December  2004,  and to have  issued  a press  release  announcing  the
         proposed transaction. The Company complied with these conditions.

    2.   On or before  November 15, 2004, the Company was to have filed with the
         SEC and Nasdaq a proxy  statement  evidencing  the Company's  intent to
         seek shareholder approval of the investment transactions that closed in
         December 2004. The Company complied with this condition on November 12,
         2004.


                                       10


    3.   On or before  December 15, 2004,  the Company was to have made a public
         filing  with the SEC and Nasdaq  that  included  an  unaudited  balance
         sheet,  no older than 60 days and containing all  appropriate pro forma
         adjustments   (including  for  any   consummation   of  the  investment
         transactions),  evidencing  the  Company's  compliance  with  the  $2.5
         million  shareholders'  equity  requirement.  The Company complied with
         this condition on December 15, 2004.

    4.   On or before  January 31 and April 30, 2005, the Company must submit to
         Nasdaq an unaudited  balance sheet  evidencing the Company's  continued
         compliance with the $2.5 million shareholders' equity requirement as of
         December 31, 2004 and March 31, 2005, respectively.

    5.   On or before  June 30,  2005,  the  Company  must file with the SEC and
         Nasdaq  the  Company's  annual  report  on  Form  20-F  evidencing  the
         Company's  compliance  with  the  $2.5  million   shareholders'  equity
         requirement, on an audited basis, as of December 31, 2004.

In addition,  the Company must  continue to maintain  compliance  with all other
requirements  for continued  listing on The Nasdaq SmallCap  Market.  Failure to
satisfy  any of the  foregoing  conditions  or  noncompliance  with these  other
requirements  will result in the  Company's  delisting.  The Company will remain
subject  to  this  listing   exception  until  such  time  as  the  Company  has
demonstrated  to the Panel an  ability to sustain  compliance  with the  minimum
shareholders' requirement over the long term.

There can be no assurance  that the Company will continue to have the ability to
meet the Nasdaq's conditions to the exception and, accordingly,  there can be no
assurance that we will continue to comply with the Nasdaq  listing  requirements
for listing on the Nasdaq  SmallCap  Market.  If our shares are  delisted by the
Nasdaq, trading in our shares may be conducted in the over-the-counter market in
the so-called "pink sheets" or, if available,  the "OTC Bulletin Board Service."
As a result,  an investor would likely find it  significantly  more difficult to
dispose of, or to obtain accurate quotations as to the value of, our shares.

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

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


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

Our directors and  affiliates of our directors,  our executive  officers and our
shareholders  who currently  individually  beneficially own over five percent of
our Ordinary Shares, beneficially own, in the aggregate, approximately 51.72% of
our  outstanding  Ordinary  Shares and  convertible  Series A  Preferred  Shares
(aggregated  for purposes of  determining  voting power) as of December 31, 2004
plus  warrants  and options  exercisable  within 60 days  thereof.  If they vote
together (especially if they were to convert all beneficial holdings into shares
entitled to voting rights in the Company),  these  shareholders  will be able to
exercise significant  influence over all matters requiring shareholder approval,
including  the  election of  directors  and  approval of  significant  corporate
transactions.  This  concentration  of  ownership  could also delay or prevent a
change in control of Commtouch.  This  concentration  of ownership may also have
the effect of delaying or preventing a change in control. In addition, conflicts
of interest may arise as a consequence of the significant  shareholders  control
relationship with us, including:

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

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

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


                                       11


Substantial sales of our Ordinary Shares could adversely affect our share price;
Potential dilution.

The sale, or  availability  for sale, of substantial  quantities of our Ordinary
Shares may have the  effect of further  depressing  its  market  price.  A large
number  of  our  Ordinary  Shares  which  were  previously   subject  to  resale
restrictions,  are  currently  eligible  for resale under  various  registration
statements  declared effective by the SEC. In addition,  a significant number of
shares will be eligible for resale in the future, if the shareholders in the two
transactions  of October  31, 2004  decide to convert  their  Series A Preferred
Shares into Ordinary  Shares,  as well as those shares that will be eligible for
resale due to the  exercise of warrants  issued  during 2004 and prior  periods.
Until  September  14,  2005,  Series A  Preferred  Shares are  convertible  into
Ordinary  Shares  on a  one  for  one  basis;  from  September  15,  2005,  each
outstanding  Series A Preferred Share may be converted into two Ordinary Shares.
These shares will dilute existing shareholders.


Risk of failure to honor registration rights for the 2002, 2003 and 2004 private
placements.

According to the agreements with the selling  securityholders under registration
statements  on Forms F-3 filed with the SEC on May 15,  2002,  October 20, 2003,
January  6,  2004 and July 1,  2004,  as well as the  agreements  under  the two
transactions  signed on October  31,  2004  pertaining  to the  registration  of
Ordinary  Shares to be issued  thereunder,  should the Company fail to a) timely
file those registration  statements,  b) receive from the SEC in a timely manner
(as defined in the  agreements  with selling  securityholders)  a declaration of
effectiveness of those registration statements, or c) maintain the effectiveness
of those  registration  statements  for the  periods  stated  in the  respective
agreements, the Company risks having imposed on it liquidated damages as defined
in those  agreements.  For  example,  one of the  October  31,  2004  agreements
provides for  liquidated  damages of up to one million  additional  unregistered
Series A Preferred Shares.  For details about the penalties for the 2002 private
placement,  refer to  Exhibit  2.8 of the Report on Form 20-F filed on April 26,
2002.  For details  about the  penalties  for the July 2003 private  placements,
refer to the Report on Form 6-K for the month of July,  filed on July 28,  2003,
and for the month of August  filed on August 15,  2003.  For  details  about the
penalties  for the November  2003 private  placement,  refer to Form 6-K for the
month of November,  filed  December 2, 2003. For details about the penalties for
the May 2004 private  placement,  refer to Form 6-K for the month of May,  filed
May 19,  2004.  For  details  about the  penalties  for the two October 31, 2004
transactions,  refer to Form 6K for the month of  November,  filed  November  5,
2004.


Reduced proceeds from sale or liquidation of the Company.

Upon a sale of the  Company  by way of an  Organic  Change,  as  defined  in the
Company's  Amended and Restated  Articles of  Association  (see Form 6-K for the
month of November, filed November 12, 2004) or Company liquidation,  the holders
of Series A Preferred Shares, in exchange for each Preferred Share, are entitled
to receive from the sale consideration or remaining  liquidation  assets, as the
case may be, at least  $1.00 in the form of  securities  or other  assets.  This
could  result in a  reduction  in the  amount of sales or  liquidation  proceeds
otherwise available for holders of our Ordinary Shares.


Intellectual Property Risks


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

We regard our patented and patent pending technology, copyrights, service marks,
trademarks,  trade secrets and similar intellectual  property as critical to our
success,  and  rely  on  patent,  trademark  and  copyright  law,  trade  secret
protection  and  confidentiality  or license  agreements  with our employees and
customers to protect our proprietary rights. We recently purchased a patent, and
have  one  pending  formal  patent  application,  as  well  as  one  outstanding
provisional  patent  application  covering  certain  aspects  of  our  anti-spam
technology.  We  may  seek  to  patent  certain  additional  software  or  other
technology  in the  future.  Any such  patent  applications  might not result in
patents issued within the scope of the claims we seek, or at all.

Third parties may infringe or  misappropriate  our patent or our patent  pending
technology,  trade  secrets,  copyrights,  trademarks  and  similar  proprietary
rights. We may not have the proper resources in order to adequately  protect our
intellectual property.

We cannot be certain that our software does not infringe issued patents that may
relate to our anti-spam solutions.  In addition,  because patent applications in
the  United  States  are not  publicly  disclosed  until the  patent is  issued,
applications  previously  may have been  filed  which  relate  to our  anti-spam
solutions.  Therefore,  other parties may assert infringement claims against us.
We may also be subject to legal  proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of the
patents,  trademarks and other intellectual  property rights of third parties by
ourselves and our licensees. Such claims, even if not meritorious,  could result
in the expenditure of significant financial and managerial resources. We may not
have the proper resources in order to adequately defend against such claims.

Also,  despite our  precautions,  unauthorized  third  parties may copy  certain
portions of our  technology  or reverse  engineer or obtain and use  information
that we regard as proprietary.  In addition,  the laws of some foreign countries


                                       12


do not  protect  proprietary  rights  to the same  extent  as do the laws of the
United  States.  Our means of protecting  our  proprietary  rights in the United
States or abroad may not be adequate and competitors may  independently  develop
similar technology.


If we are  unable  to  obtain  third-party  content  licenses,  on  commercially
reasonable  terms, our business,  financial  condition and operating results may
suffer.

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


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

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


Risks Relating to Operations in Israel

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

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

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

In addition,  Israel and some companies doing business with Israel have been the
subject of an economic  boycott by Arab countries since Israel's  establishment.
These  restrictive laws and policies may have an adverse impact on our operating
results, financial condition or expansion of our business.

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

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

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


                                       13


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

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

Prior to 1998, we received  grants from the  Government  of Israel,  through the
Office  of the Chief  Scientist,  or OCS,  for the  financing  of a  significant
portion of our  research and  development  expenditures  in Israel.  In 1999 and
2000,  we did not receive  any grants  from the OCS.  In 2001 we  received  $0.6
million and in 2002 we received $0.2 million.  While we submitted an application
for an  additional  grant in 2003,  we decided not to draw any funds  thereunder
during 2003. We did not submit an application for funding during 2004.  However,
we may apply  for  additional  grants in the  future.  The OCS  budget  has been
subject to reductions  which may affect the  availability  of funds for possible
future grants.  Therefore, we cannot be certain that we will continue to receive
grants at the same rate,  or at all.  In  addition,  the terms of any future OCS
grants may be less favorable than our past grants.

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

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

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

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

Pursuant to the Law for the Encouragement of Capital Investments, the Government
of Israel through the Investment Center previously granted "approved enterprise"
status to a portion  of our  capital  investment  programs.  The  portion of our
income derived from our approved  enterprise program will be exempt from tax for
a  limited  period of two years  commencing  in the first  year in which we have
taxable income, and will be subject to a reduced tax for an additional period of
five to eight years  dependent  on the  percentage  of holdings of our shares by
foreign  shareholders.  The  benefits  available to an approved  enterprise  are
conditioned upon the fulfillment of specified  conditions,  including a required
amount of investments in fixed assets and a portion of these  investments  being
made  with  net  proceeds  of  equity  capital  raised  by us as  stipulated  in
applicable  law and in the  specific  certificates  of  approval.  If we fail to
comply  with these  conditions,  in whole or in part,  we may be required to pay
additional taxes (together with linkage adjustment to the Israeli consumer price
index and interest) for the period in which we benefited  from the tax exemption
or reduced tax rates and would likely be denied these benefits in the future. In
addition,  the law and  regulations  prescribing  the  benefits  provide  for an
expiration  date for the grant of new  benefits.  The  expiration  date has been
extended  several times in the past. The expiration  date currently in effect is
March 31, 2005 (which may be extended  by  ministerial  decision  until June 30,
2005), and no new benefits will be granted after that date unless the expiration
date is extended. We cannot assure you that new benefits will be available after
March 31, 2005 or that benefits will be continued in the future at their current
levels or at all.  Various  proposals have been put forth for new legislation to
replace the Law for the Encouragement of Capital Investments. We are not able to
predict whether or when this new legislation will be enacted, nor can we predict
the nature and scope of benefits that may be available under any new law.


                                       14


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

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

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

Israeli  corporate  law regulates  mergers and  acquisitions  of shares  through
tender offers, requires special approvals for transactions involving significant
shareholders  and regulates other matters that may be relevant to these types of
transactions.  Furthermore,  Israel tax law treats stock-for-stock  acquisitions
between an Israeli  company and a foreign  company less favorably than does U.S.
tax law. For example,  Israeli tax law may subject a  shareholder  who exchanges
his ordinary shares for shares in a foreign corporation to immediate taxation or
to taxation  before his investment in the foreign  corporation  becomes  liquid.
These provisions may adversely  affect the price of our shares.  You should rely
only on the information contained in this prospectus. We have not authorized any
other person to provide you with different  information.  This prospectus is not
an offer to sell,  nor is it seeking an offer to buy,  these  securities  in any
jurisdiction  where the offer or sale is not permitted.  The information in this
prospectus  is complete and accurate as of the date on the front cover,  but the
information may have changed since that date.



                         CAPITALIZATION AND INDEBTEDNESS

The following table sets forth the  capitalization and indebtedness of Commtouch
as of  October  31,  2004,  actual and as  adjusted  for the  financing  related
transactions,  which closed on December 9, 2004 pursuant to agreements  dated as
of October 31, 2004:



                                                                   (UNAUDITED)   (UNAUDITED)
                                                                     Actual       As adjusted
                                                                 (IN THOUSANDS) (IN THOUSANDS)
                                                                  ------------   ------------
                                                                                  
Long-term liabilities                                              $   3,432      $     679
                                                                   ---------      ---------
Shareholders' equity:
     Ordinary Shares 150,000,000 shares authorized, 
      with 42,533,464 issued and outstanding,                            517            517

     Series A Preferred Shares 8,280,000 shares authorized, 
      with 7,280,000 issued and outstanding                             --            3,365

Additional paid-in capital                                           163,533        165,760
Preferred stock discount                                                --           (1,893)
Accumulated other comprehensive income                                    (7)            (7)
Notes receivable from shareholders                                       (57)           (57)
Accumulated deficit                                                 (163,593)      (164,936)
                                                                   ---------      ---------
Total shareholders' equity                                         $     393      $   2,749
                                                                   ---------      ---------
Total capitalization and indebtedness                              $   3,825      $   3,428
                                                                   ---------      ---------


The as adjusted  numbers  reflect the issuance of  7,280,000  Series A Preferred
Shares under the two financing  related  transactions of October 31, 2004, which
resulted in new funding of $3.19 million to the Company and the Company's  early
repayment of $3 million plus  accumulated  interest under the convertible  notes
issued pursuant to the November 2003 Securities Purchase Agreement.


                                       15



                              THE OFFER AND LISTING



The Offering

                                                           
Ordinary Shares offered by selling securityholders..........  23,605,490 shares, NIS 0.05 par value per share

Price.......................................................  As determined by each selling securityholder

Ordinary Shares outstanding after the offering..............  66,393,392  shares  (taking into  account  42,787,902
                                                              Ordinary  Shares  outstanding  prior to the  offering
                                                              on December 31, 2004)

Use of proceeds.............................................  Commtouch  will not receive any of the proceeds  from
                                                              the   sale   of   the    shares   by   the    selling
                                                              securityholders in this offering.

Nasdaq SmallCap Market Symbol ..............................  CTCHC

Shares will be offered on a registered basis and not as bearer shares.


Market Information

The Company's  Ordinary  Shares were traded  publicly on The Nasdaq Stock Market
under the symbol  "CTCH" from July 13, 1999 (up to June 7, 2002 on the  National
Market,  and  subsequently  on the SmallCap  Market)  through June 29, 2004, and
thereafter under the symbol "CTCHC".

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

                                                          High          Low
                                                       ---------     ----------
1999 (beginning July 13, 1999): ..................     $   49.12     $ 11.0625

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

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


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

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

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

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


2004:
First Quarter ....................................     $    1.24     $  0.83
Second Quarter ...................................     $    1.09     $  0.55
Third Quarter ....................................     $    0.58     $  0.27
Fourth Quarter ...................................     $    0.55     $  0.31


Most Recent Six Months:
July 2004 ........................................          0.58        0.37
August 2004 ......................................          0.40        0.27
September 2004 ...................................          0.36        0.30
October 2004 .....................................          0.53        0.31
November 2004 ....................................          0.50        0.40
December 2004 ....................................          0.55        0.38


                                       16



                    REASONS FOR THE OFFER AND USE OF PROCEEDS

We will not  receive  any  proceeds  from the sale of the shares by the  selling
securityholders in this offering. However, we will receive the exercise price if
the selling  securityholders  exercise their  warrants or additional  investment
rights.  We  cannot  be  certain  as to when  and if all of  these  warrants  or
additional  investment  rights  will be  exercised  and as to the  amount of the
proceeds we will actually receive from exercises.  All proceeds from the sale of
the shares will be for the account of the selling securityholders,  as described
below. See "Selling Securityholders" and "Plan of Distribution."


                             SELLING SECURITYHOLDERS

The  Ordinary  Shares  being  offered  by the  selling  securityholders  (i) are
issuable upon  conversion of Series A Preferred  Shares and exercise of warrants
issued under the  Redemption,  Amendment  and Exchange  Agreement of October 31,
2004 ("RAE") (ii) were issued under the Securities  Purchase Agreement dated May
18, 2004, (iii) are issuable upon exercise of additional  investment  rights and
warrants,  which were also issued pursuant to the Securities  Purchase Agreement
of May 18, 2004,  and (iv) are issuable upon  exercise of warrants  issued under
the  Securities   Purchase  Agreement  of  November  26,  2003.  For  additional
information  regarding  the  issuance  of those  shares,  additional  investment
rights,  convertible  Series A  Preferred  Shares  and  warrants,  see  "Private
Placements of Ordinary Shares and Ordinary Shares  Underlying Series A Preferred
Shares, Additional Investment Rights and Warrants" above. We are registering the
Ordinary  Shares in order to permit  the  selling  securityholders  to offer the
shares  for resale  from time to time.  Except  for their  participation  in the
various agreements  described above and Israel Seed IV, L.P.'s  participation in
the Company's private  placement of late July 2003, the selling  securityholders
have not had any material relationship with us within the past three years.

The table below  presents  information  provided by the selling  securityholders
with respect to beneficial  ownership of our Ordinary  Shares as of December 31,
2004,  as  adjusted  to  reflect  the  sale of the  shares  offered  under  this
prospectus  by the selling  securityholders,  and assumes  that all shares being
offered under this  prospectus are ultimately  sold in the offering.  The second
column lists the number of Ordinary  Shares  beneficially  owned by each selling
securityholder,  based  on  its  ownership  of the  Ordinary  Shares,  Series  A
Preferred Shares,  additional investment rights and warrants, as of December 31,
2004,  assuming  conversion of all Series A Preferred Shares and exercise of the
additional investment rights and warrants held by the selling securityholders on
that date, without regard to any limitations on conversions or exercise.

The fourth column lists the Ordinary  Shares being offered under this prospectus
by the selling securityholders.


In accordance with the terms of registration  rights agreements with the selling
securityholders,  this prospectus  generally covers the resale of the sum of (i)
130% of the number of Ordinary  Shares  issuable  upon  exercise of warrants and
conversion of Series A Preferred  Shares  issued to the selling  securityholders
under  the RAE  (ii)  the  number  of  Ordinary  Shares  issued  to the  selling
securityholders  in the private  placement  of May 18,  2004,  (iii) 130% of the
number of Ordinary  Shares  issuable  upon  exercise of the warrants  under such
transaction,  (iv) the number of  Ordinary  Shares  issuable  upon  exercise  of
additional  investment rights under such transaction and (iv) 130% of the number
of Ordinary  Shares  issuable  upon  exercise of the  warrants  issued under the
November  26, 2003  transaction,  determined  as if the  outstanding  additional
investment  rights,  warrants  and  convertible  Series A Preferred  Shares were
exercised in full, in each case, as of the trading day immediately preceding the
date the registration  statement relating to this prospectus was initially filed
with the SEC. Because the exercise price and number of the additional investment
rights and  warrants may be adjusted  pursuant to the terms of those  documents,
the number of shares  that will  actually be issued may be more or less than the
number of shares being offered by this prospectus.  The sixth column assumes the
sale of all of the shares  offered by the  selling  securityholders  pursuant to
this prospectus.

Under the terms of the  additional  investment  rights and  warrants,  a selling
securityholder may not exercise the additional investment rights or warrants, to
the extent such exercise or conversion would cause such selling  securityholder,
together with its affiliates,  to  beneficially  own a number of Ordinary Shares
which would exceed 4.99% of our then outstanding  Ordinary Shares following such
exercise,  excluding for purposes of such determination Ordinary Shares issuable
upon exercise of the  additional  investment  rights and warrants which have not
been exercised.  The number of shares in the second column does not reflect this
limitation.  The  selling  securityholders  may sell all,  some or none of their
shares in this offering. See "Plan of Distribution."


                                       17


In the table below,  the  applicable  percentage  of ownership  for each selling
securityholder  is based on 42,787,902  Ordinary  Shares and 7,280,000  Series A
Preferred  Shares  outstanding as of December 31, 2004 and  66,393,392  Ordinary
Shares and 6,380,000 Series A Preferred Shares outstanding immediately following
the completion of this offering, together with any remaining warrants and Series
A Preferred Shares held by that selling  securityholder that are exercisable and
convertible within 60 days of December 31, 2004.




                                                                             Shares
                                        Shares Beneficially                  to be                Shares Beneficially
                                      Owned Prior to Offering               Offered              Owned After Offering
                                    --------------------------            ------------          ------------------------
                                                        Percent of                  Percent of                  Percent of
                                                       Outstanding                 Outstanding                 Outstanding
Name of Beneficial Owner               Number            Shares          Number       Shares      Number          Shares
------------------------              --------           -------        --------     --------    --------        --------
                                                                                                  
Israel Seed IV, L.P.(1)              9,629,023            19.75        7,863,975      16.16      2,679,785         5.39
c/o Maples and Calder, P.O. Box
309 G.T., Ugland House, South
Church Street
Grand Cayman, Cayman Island

Smithfield Fiduciary LLC(2)          3,163,417             6.88        3,846,784       8.25        200,000         0.43
c/o Highbridge Capital
Management, LLC
9 West 57th Street, 27th Floor
New York, New York  10019

Omicron Master Trust (3)             3,570,901             7.85        4,111,649       8.93        100,000         0.22
c/o Omicron Capital
810 Seventh Avenue
39th Floor
New York, New York 10019

Cranshire Capital L.P. (4)           3,076,542             6.77        3,741,432       8.12        100,000         0.22
c/o Downsview Capital, Inc.
The General Partner
666 Dundee Road, Suite 1901
Northbrook, IL  60062

Vertical Ventures, LLC (5)           2,592,468             5.78        3,168,749       6.98              0            0
900 Third Avenue, 26th Floor
New York, New York  10022

Iroquois Capital LP (6)              1,108,433             2.54          872,900       2.01        300,000         0.69
641 Lexington Avenue, 26th Floor
New York, New York  10022

TOTALS                              23,140,784            38.45       23,605,490      37.87      3,379,785         5.28



                                       18

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

         (1) Israel Seed IV, L.P.  ("ISLP IV") is  organized  as a "blind  pool"
partnership in which the limited  partners have no discretion over investment or
sale decisions,  are not able to withdraw from ISLP IV except under  exceptional
circumstances, and generally participate ratably in each investment made by ISLP
IV. The sole General  Partner of ISLP IV is Israel  Venture  Partners  2000 Ltd.
("IVP"),  which has sole  investment  control  with respect to ISLP IV. The sole
principals of the investment advisors to IVP are Jonathan Medved, Neil Cohen and
Michael  Eisenberg and, as such, they may be deemed to share voting control over
the shares of the Company held by the ISLP IV. No other persons have  investment
control  over IVP or ISLP IV. IVP and  Jonathan  Medved,  Neil Cohen and Michael
Eisenberg disclaim beneficial  ownership of any shares held by ISLP IV except to
the extent of their respective pecuniary interests. Shares shown as beneficially
owned by Israel ISLP IV prior to the offering also include shares  acquired as a
result of its investment in the Company in a private placement of July 2003.

         (2) Highbridge Capital Management,  LLC ("Highbridge"),  is the trading
manager of Smithfield  Fiduciary LLC  ("Smithfield") and consequently has voting
control and investment  discretion  over the Ordinary Shares held by Smithfield.
Glenn Dubin and Henry Swieca control Highbridge.  Each of Highbridge and Messrs.
Dubin  and  Swieca  disclaims   beneficial  ownership  of  the  shares  held  by
Smithfield.

         (3) Omicron  Capital,  L.P., a Delaware limited  partnership  ("Omicron
Capital"),  serves as investment manager to Omicron Master Trust, a trust formed
under  the laws of  Bermuda  ("Omicron").  Omicron  Capital,  Inc.,  a  Delaware
corporation  ("OCI"),   serves  as  general  partner  of  Omicron  Capital,  and
Winchester Global Trust Company Limited  ("Winchester") serves as the trustee of
Omicron. By reason of such relationships,  Omicron Capital and OCI may be deemed
to share  dispositive  power over the  shares of our  Ordinary  Shares  owned by
Omicron, and Winchester may be deemed to share voting and dispositive power over
our  Ordinary  Shares  owned by Omicron.  Omicron  Capital,  OCI and  Winchester
disclaim  beneficial  ownership of such shares.  Omicron  Capital has  delegated
authority  from the board of directors of  Winchester  regarding  the  portfolio
management decisions with respect to the shares of common stock owned by Omicron
and, as of April 21, 2003,  Mr.  Olivier H. Morali and Mr.  Bruce T.  Bernstein,
officers of OCI,  have  delegated  authority  from the board of directors of OCI
regarding the portfolio  management decisions of Omicron Capital with respect to
the  shares of  common  stock  owned by  Omicron.  By  reason of such  delegated
authority, Messrs. Morali and Bernstein may be deemed to share dispositive power
over our Ordinary Shares owned by Omicron. Messrs. Morali and Bernstein disclaim
beneficial  ownership  of such shares and neither of such  persons has any legal
right to maintain such delegated  authority.  No other person has sole or shared
voting or dispositive power with respect to our Ordinary Shares being offered by
Omicron,  as those terms are used for  purposes  under  Regulation  13D-G of the
Securities  Exchange Act of 1934,  as amended.  Omicron and  Winchester  are not
"affiliates" of one another, as that term is used for purposes of the Securities
Exchange  Act of  1934,  as  amended,  or of any  other  person  named  in  this
prospectus  as a selling  securityholder.  No person or "group" (as that term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the
SEC's Regulation 13D-G) controls Omicron or Winchester.

         (4) Mitchell P. Kopin is the president of Downsview Capital,  Inc., the
general  partner of Cranshire  Capital,  L.P.,  and has sole voting  control and
investment discretion over securities held by Cranshire Capital, L.P.

         (5) Joshua Silverman,  a partner of Vertical  Ventures,  LLC has voting
control and investment  discretion over  securities  held by Vertical  Ventures,
LLC. Mr. Silverman disclaims beneficial ownership of the shares held by Vertical
Ventures, LLC.

         (6) Shares shown as beneficially owned by Iroquois Capital,  L.P. prior
to the offering also include  Ordinary Shares  underlying  convertible  Series A
Preferred Shares purchased in a separate private  placement of October 31, 2004.
Joshua  Silverman has voting control and investment  discretion  over securities
held by Iroquois Capital,  LP. Mr. Silverman disclaims  beneficial  ownership of
the shares held over by Iroquois Capital, LP.


                                       19


                         SHARES ELIGIBLE FOR FUTURE SALE


Freely Tradable Shares--Registered Shares

Future sales of substantial amounts of our Ordinary Shares in the public market,
or the possibility of these sales occurring,  could adversely affect  prevailing
market  prices for our Ordinary  Shares or our future  ability to raise  capital
through an offering of equity securities.

As of  December  31,  2004,  we had  42,787,902  Ordinary  Shares and  7,280,000
convertible Series A Preferred Shares outstanding,  plus 15,162,840  outstanding
warrants  exercisable into an identical  amount of Ordinary  Shares,  additional
investment rights to purchase  5,413,931Ordinary Shares and related rights to an
additional  2,706,964 warrants  exercisable into an identical amount of Ordinary
Shares.  The  primary  transactions   pursuant  to  which  the  above  described
securities  were  issued by the  Company are  summarized  as follows:  3,450,000
Ordinary  Shares sold in our  initial  public  offering in July 1999;  1,344,086
Ordinary  Shares issued to InfoSpace  and Vulcan  Ventures  concurrent  with our
initial  public  offering and  registered in 2000 in a secondary  offering along
with 707,965 Ordinary Shares we issued to Microsoft Corporation;  315,789 shares
we issued to Rideau Ltd., a private investor, on June 30, 2001; 1,406,612 shares
registered in August 2001 in a secondary  offering for shareholders of Wingra, a
former  subsidiary  of the  Company;  7,095,886  shares  and  shares  underlying
warrants  registered  in May  2002  for  certain  shareholders  under a  private
placement,  as  identified  in the Form F-3 filed with the SEC on May 15,  2002;
8,793,564 shares and shares underlying  warrants  registered on November 3, 2003
for  certain  shareholders  under  the two  July  2003  private  placements,  as
identified  in the Form F-3 filed with the SEC on October 20,  2003;  11,345,358
shares and shares underlying warrants registered in January 2004 under the first
Form F-3 filed with the SEC on January 6, 2004 relating to certain  shareholders
who  participated  in the convertible  loan  transaction of January 29, 2003, as
amended on March 28, 2003,  May 15, 2003 and November 18, 2003;  780,000  shares
underlying  warrants  registered  on January  20, 2004 under the second Form F-3
filed with the SEC on January 6, 2004 relating to certain shareholders under the
convertible  loan  transaction  of November 26, 2003, as amended on May 18, 2004
and October 31,  2004;  15,869,806  shares and shares  underlying  warrants  and
additional   investment   rights   registered  on  July  15,  2004  for  certain
shareholders  under the private  placement of May 18, 2004, as identified in the
Form F-3 filed with the SEC on July 1, 2004;  and  6,380,000  Series A Preferred
Shares  issued to  certain  shareholders  pursuant  to the  Securities  Purchase
Agreement of October 31, 2004.

Apart from the Ordinary Shares  underlying Series A Preferred Shares relating to
the  Securities  Purchase  Agreement  of  October  31,  2004,  which  are  to be
registered on a Form F-3 to be filed by early February 2005, the above described
shareholdings  are all freely tradable in the public market without  restriction
under the  Securities  Act,  unless the shares are held by  "affiliates"  of the
Company, as that term is defined in Rule 144 under the Securities Act.

In addition,  the 6,955,684  Ordinary Shares included for registration under the
Form F-3 filed in January 2005 will also be freely tradable without  restriction
under this  prospectus,  unless  otherwise  indicated in the related  prospectus
supplement.

We have 3,684,211 shares remaining under a shelf Registration  Statement on file
with and previously  declared effective by the SEC. All of the shares thereunder
would be freely tradable as and when issued if the  Registration  Statement were
to continue to meet SEC requirements relating to its effectiveness.  The Company
has no present intention of utilizing this shelf Registration Statement.


Freely Tradable Shares--Shares Under Employee Benefit Plans

On  January  20,  2000,  we filed a Form S-8  Registration  Statement  under the
Securities  Act to  register  5,000,000  Ordinary  Shares  under  the  Company's
employee stock option plans, 250,000 under the Company's  non-employee  director
stock option plan and 150,000 Ordinary Shares under the Company's Employee Stock
Purchase  Plan.  On July 20,  2001,  the Company  filed a Form S-8  Registration
Statement to register: an additional 250,000 Ordinary Shares under the Company's
non-employee  director stock option plan; an additional  79,156 shares  issuable
under our Employee Stock Purchase  Plan; and 162,257 shares  underlying  options
issuable  to  employees  of Wingra  pursuant  to the terms of the Wingra  merger
agreement  and the Wingra  Technologies,  LLC 1998 Unit Option Plan. On July 27,
2004,  the  Company  filed a Form S-8  Registration  Statement  to  register  an
additional  6,460,000  Ordinary Shares under the Company's employee stock option
plans  and  an  additional   1,790,000   Ordinary  Shares  under  the  Company's
non-employee director stock option plan.

The obligations of the Company to employees under the Wingra plan ended with the
Company's  sale of Wingra in early 2002.  The Employee  Stock  Purchase Plan was
terminated  in late 2001,  with the  remaining  unsold  56,323  Ordinary  Shares
deregistered by way of a post-effective  amendment to Form S-8 filed on June 25,
2004.

The Company issues  employee and director stock options from time to time.  Such
options are subject to vesting  periods  after which the shares may be resold by
the holders,  subject to Rule 144 limitations if the holder is an affiliate.  Of
17,841,144  options  issued in the  past,  as of  December  15,  2004  there are
9,796,550  options  outstanding,  with 5,608,478  option shares being vested and
unexercised  and 2,184,983  options  having been  exercised.  Of these  options,
601,390  options  priced at $0.0125 remain  outstanding  and  exercisable,  with
568,108 being fully vested.


                                       20


Warrants,  Additional  Investment  Rights  and  Conversion  Rights  of  Series A
Preferred Shares

Please  see the  section  above  entitled  "Freely  Tradable  Shares--Registered
Shares",  as well as our annual  report on Form 20-F for 2003 filed with the SEC
on June  18,  2004 for  detail  relating  to  outstanding  warrants,  additional
investment rights and conversion rights granted in the past by the Company.

As of the date of this prospectus, only conversion rights pertaining to Series A
Preferred  Shares  remain  outstanding.  Until  September  14,  2005,  Series  A
Preferred  Shares are  convertible  into Ordinary Shares on a one for one basis;
from  September  15,  2005,  each  outstanding  Series A Preferred  Share may be
converted into two Ordinary Shares. A full description of the rights, powers and
authorities  of  Series A  Preferred  Shares  can be found  in the  Amended  and
Restated Articles of Association attached to the Company's Proxy Statement filed
with the SEC on Form 6-K on November 12, 2004.


                              PLAN OF DISTRIBUTION

         We are  registering  the  Ordinary  Shares  issued  and  issuable  upon
exercise of the additional  investment rights and warrants and conversion of the
Series A  Preferred  Shares,  in order to permit  the  resale of these  Ordinary
Shares by the holders of the  Ordinary  Shares,  additional  investment  rights,
convertible  Series A Preferred  Shares and the warrants from time to time after
the date of this  prospectus.  We will not receive any of the proceeds  from the
sale by the selling  securityholders  of the Ordinary  Shares.  We will bear all
fees and expenses incident to our obligation to register the Ordinary Shares.

         The selling  securityholders  may sell all or a portion of the Ordinary
Shares  beneficially owned by them and offered hereby from time to time directly
or through one or more  underwriters,  broker-dealers or agents. If the Ordinary
Shares  are  sold   through   underwriters   or   broker-dealers,   the  selling
securityholders will be responsible for underwriting discounts or commissions or
agent's commissions. The Ordinary Shares may be sold in one or more transactions
at fixed prices, at prevailing market prices at the time of the sale, at varying
prices determined at the time of sale, or at negotiated prices.  These sales may
be effected in transactions, which may involve crosses or block transactions,

     o        on any national  securities exchange or quotation service on which
              the securities may be listed or quoted at the time of sale;

     o        in the over-the-counter market;

     o        in transactions otherwise than on these exchanges or systems or in
              the over-the-counter market;

     o        through the writing of options, whether such options are listed on
              an options exchange or otherwise;

     o        ordinary  brokerage  transactions  and  transactions  in which the
              broker-dealer solicits purchasers;

     o        block trades in which the  broker-dealer  will attempt to sell the
              shares as agent but may position and resell a portion of the block
              as principal to facilitate the transaction;

     o        purchases  by a  broker-dealer  as  principal  and  resale  by the
              broker-dealer for its account;

     o        an  exchange  distribution  in  accordance  with the  rules of the
              applicable exchange;

     o        privately negotiated transactions;

     o        short sales;

     o        broker-dealers may agree with the selling  securityholders to sell
              a specified number of such shares at a stipulated price per share;

     o        a combination of any such methods of sale; and


                                       21


     o        any other method permitted pursuant to applicable law.

         The selling  securityholders  may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus.

         If the  selling  securityholders  effect such  transactions  by selling
Ordinary  Shares to or through  underwriters,  broker-dealers  or  agents,  such
underwriters,  broker-dealers  or agents may receive  commissions in the form of
discounts,  concessions  or  commissions  from the  selling  securityholders  or
commissions  from  purchasers  of the  Ordinary  Shares for whom they may act as
agent or to whom they may sell as principal  (which  discounts,  concessions  or
commissions as to particular  underwriters,  broker-dealers  or agents may be in
excess of those customary in the types of transactions  involved). In connection
with sales of the Ordinary Shares or otherwise,  the selling securityholders may
enter into hedging transactions with broker-dealers, which may in turn engage in
short sales of the Ordinary  Shares in the course of hedging in  positions  they
assume.  The selling  securityholders  may also sell  Ordinary  Shares short and
deliver Ordinary Shares covered by this prospectus to close out short positions.
The  selling  securityholders  may  also  loan  or  pledge  Ordinary  Shares  to
broker-dealers that in turn may sell such shares.

         The selling  securityholders may pledge or grant a security interest in
some or all of the additional investment rights,  convertible Series A Preferred
Shares,  warrants or Ordinary  Shares  owned by them and, if they default in the
performance of their secured  obligations,  the pledgees or secured  parties may
offer and sell the Ordinary Shares from time to time pursuant to this prospectus
or any amendment to this  prospectus  under Rule  424(b)(3) or other  applicable
provision of the Securities Act of 1933, as amended, amending, if necessary, the
list of selling  securityholders  to include the  pledgee,  transferee  or other
successors in interest as selling  securityholders  under this  prospectus.  The
selling  securityholders  also may transfer  and donate the  Ordinary  Shares in
other  circumstances  in which case the transferees,  donees,  pledgees or other
successors  in interest  will be the selling  beneficial  owners for purposes of
this prospectus.

         The selling securityholders and any broker-dealer  participating in the
distribution  of the Ordinary Shares may be deemed to be  "underwriters"  within
the meaning of the Securities Act, and any commission  paid, or any discounts or
concessions  allowed to, any such broker-dealer may be deemed to be underwriting
commissions  or  discounts  under the  Securities  Act. At the time a particular
offering of the Ordinary Shares is made, a prospectus  supplement,  if required,
will be distributed which will set forth the aggregate amount of Ordinary Shares
being offered and the terms of the offering,  including the name or names of any
broker-dealers   or  agents,   any  discounts,   commissions   and  other  terms
constituting  compensation from the selling  securityholders  and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.

         Under the securities  laws of some states,  the Ordinary  Shares may be
sold in such states only through  registered or licensed brokers or dealers.  In
addition,  in some states the Ordinary Shares may not be sold unless such shares
have been  registered or qualified  for sale in such state or an exemption  from
registration or qualification is available and is complied with.

         There can be no assurance that any selling securityholder will sell any
or all of the  Ordinary  Shares  registered  pursuant to the shelf  registration
statement, of which this prospectus forms a part.

         The selling  securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended,  and the rules and regulations  thereunder,  including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of  purchases  and  sales  of  any  of  the  Ordinary   Shares  by  the  selling
securityholders  and any  other  participating  person.  Regulation  M may  also
restrict the ability of any person engaged in the  distribution  of the Ordinary
Shares  to engage in  market-making  activities  with  respect  to the  Ordinary
Shares. All of the foregoing may affect the marketability of the Ordinary Shares
and the  ability of any person or entity to engage in  market-making  activities
with respect to the Ordinary Shares.

         We will pay all expenses of the  registration  of the  Ordinary  Shares
pursuant to the registration  rights agreements,  as detailed below,  including,
without limitation,  Securities and Exchange Commission filing fees and expenses
of compliance with state securities or "blue sky" laws; provided,  however, that
a  selling  securityholder  will  pay all  underwriting  discounts  and  selling
commissions,  if any.  We will  indemnify  the selling  securityholders  against
liabilities,  including some liabilities under the Securities Act, in accordance
with the registration rights agreements,  or the selling securityholders will be
entitled to contribution.  We may be indemnified by the selling  securityholders
against civil liabilities,  including liabilities under the Securities Act, that
may  arise  from  any  written  information  furnished  to  us  by  the  selling
securityholder  specifically for use in this prospectus,  in accordance with the
related registration rights agreements, or we may be entitled to contribution.


                                       22


         Once  sold  under  the  shelf  registration  statement,  of which  this
prospectus  forms a part,  the  Ordinary  Shares will be freely  tradable in the
hands of persons other than our affiliates.


Expenses Associated with Registration

We are paying  substantially  all of the  expenses of  registering  the Ordinary
Shares under the Securities Act and of compliance with blue sky laws,  including
registration and filing fees, printing and duplication expenses,  administrative
expenses,  and our legal and  accounting  fees. We estimate these expenses to be
approximately $36,087, which include the following categories of expenses:

    SEC registration fee............................................   $   287*
    Blue Sky filing fees............................................     1,800
    Printing and engraving expenses.................................         0
    Legal fees and expenses ........................................    20,000
    Accounting fees and expenses....................................    12,000
    Transfer agent and registrar fees and expenses..................         0
    Miscellaneous expenses..........................................     2,000
                                                                        ------
    Total...........................................................   $36,087

    *     This fee is being offset  against the filing fee  previously  paid for
          Registration   No.   333-31836,   which   was   withdrawn   prior   to
          effectiveness.

                                  LEGAL MATTERS

The  validity of the  Ordinary  Shares  offered  hereby is being passed upon for
Commtouch  by  Naschitz,  Brandes  & Co.,  Tel-Aviv,  Israel.  The  partners  of
Naschitz,  Brandes & Co. and the firm itself,  beneficially own in the aggregate
15,000 Ordinary Shares of the Company.


                                     EXPERTS

The Consolidated  Financial  statements of Commtouch  Software Ltd. appearing in
Commtouch  Software Ltd.'s Annual Report (Form 20-F) for the year ended December
31, 2003, have been audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst
& Young Global,  an independent  registered public accounting firm, as set forth
in their  report  to the Form  20-F  incorporated  herein  by  reference  . Such
consolidated  financial  statements  are  incorporated  herein by  reference  in
reliance  upon such  report  given on the  authority  of such firm as experts in
accounting and auditing.


                       WHERE YOU CAN FIND MORE INFORMATION

We have filed a  Registration  Statement on Form F-3 with the SEC for the shares
we are offering by this prospectus.  This prospectus does not include all of the
information  contained in the  Registration  Statement.  You should refer to the
Registration Statement and its exhibits for additional information.  Whenever we
make reference in this  prospectus to any of our contracts,  agreements or other
documents,  the references are not necessarily  complete and you should refer to
the exhibits  attached to the  Registration  Statement  for copies of the actual
contract, agreement or other document.

We are required to file annual and special  reports and other  information  with
the SEC. You can read our SEC filings,  including  the  Registration  Statement,
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at its public reference facilities at
450 Fifth Street,  NW,  Washington,  DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference  Section of the
SEC at 450 Fifth Street, NW, Room 1024,  Washington,  DC 20549.  Please call the
SEC at  1-800-SEC-0330  for further  information  on the operation of the public
reference facilities.

We are subject to certain of the informational requirements of the Exchange Act.
As a "foreign  private  issuer," we are exempt from the rules under the Exchange
Act  prescribing  certain  disclosure  and  procedural  requirements  for  proxy
solicitations and our officers,  directors and principal shareholders are exempt
from the reporting and  "short-swing"  profit recovery  provisions  contained in
Section 16 of the Exchange  Act,  with respect to their  purchases  and sales of
Ordinary Shares.  In addition,  we are not required to file quarterly reports or
to file annual and current reports and financial  statements with the Securities
and Exchange  Commission as frequently  or as promptly as U.S.  companies  whose
securities are  registered  under the Exchange Act.  However,  we intend to file
with the  Securities and Exchange  Commission,  within 180 days after the end of
each fiscal year, an annual report on Form 20-F containing  financial statements
that  will be  examined  and  reported  on,  with  an  opinion  expressed  by an
independent accounting firm, as well as quarterly reports on Form 6-K containing
unaudited financial  information,  within 60 days after the end of each calendar
quarter.


                                       23


                      INFORMATION INCORPORATED BY REFERENCE

The  SEC  allows  us  to  "incorporate  by  reference"   information  into  this
prospectus.  This means that we can  disclose  important  information  to you by
referring  you to  another  document  filed  by us  with  the  SEC.  Information
incorporated  by reference is deemed to be part of this  prospectus,  except for
any information superseded by this prospectus or by information we file with the
SEC in the future.

The following documents are incorporated by reference:

(a) Our Annual Report on Form 20-F for the fiscal year ended December 31, 2003;

(b)  The  description  of our  Ordinary  Shares  contained  in the  Registration
Statement  under the  Exchange Act on Form 8-A as filed with the  Commission  on
June 25, 1999, and any  subsequent  amendment or report filed for the purpose of
updating this description;

(c) The  description of our Series A Preferred  Shares  contained in the Amended
and Restated  Articles of Association of the Company attached to Proxy Statement
filed with the SEC on Form 6-K on November 12, 2004;

(d) The terms of the RAE and Securities  Purchase  Agreement of October 31, 2004
contained in the Form 6-K filed with the SEC on November 5, 2004;

(e) The terms of the private placement of May 18, 2004 contained in the Form 6-K
filed with the SEC on May 19, 2004; and

(f) Our first, second and third quarter 2004 financial results included on Forms
6-K  filed  by the  Company  with the SEC on June 29,  2004,  July 29,  2004 and
November 12, 2004, respectively.

(g) The report on Form 6-K filed with the SEC on  December  15, 2004 in relation
to the Nasdaq Listing  Qualifications Panel's requirements for continued listing
of the Company's shares on The Nasdaq SmallCap Market.

In  addition,  all  subsequent  annual  reports  filed on Form 20-F prior to the
termination of this offering are incorporated by reference into this prospectus.
Also, we may  incorporate by reference our future reports on Form 6-K by stating
in  those  Forms  that  they are  being  incorporated  by  reference  into  this
prospectus.

We will provide without charge to any person (including any beneficial owner) to
whom this prospectus has been delivered, upon oral or written request, a copy of
any document incorporated by reference in this prospectus but not delivered with
the prospectus  (except for exhibits to those documents unless a document states
that one of its  exhibits  is  incorporated  into  the  document  itself).  Such
requests  should be directed to Devyani  Patel,  Vice  President,  Finance,  c/o
Commtouch Inc.,  1300  Crittenden  Lane,  Suite 103,  Mountain View,  California
94043.   Our  corporate   website  address  is   http://www.commtouch.com.   The
information on our website is not intended to be a part of this prospectus.


                       ENFORCEABILITY OF CIVIL LIABILITIES

We are  incorporated  in  Israel,  and  many of our  directors  and  many of the
executive officers and the Israeli experts named herein are not residents of the
United States and  substantially  all of their assets and our assets are located
outside  the  United  States.  Service  of process  upon our  non-U.S.  resident
directors  and  executive  officers  or the  Israeli  experts  named  herein and
enforcement  of  judgments  obtained  in the United  States  against us, and our
directors and executive  officers,  or the Israeli experts named herein,  may be
difficult to obtain within the United  States.  Commtouch Inc. is the U.S. agent
authorized to receive service of process in any action against us arising out of
this offering or any related  purchase or sale of securities.  We have not given
consent for this agent to accept service of process in connection with any other
claim.

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

      *    the judgment was rendered by a court which was, according to the laws
           of the state of the court, competent to render the judgment,
      *    the judgment is no longer appealable,
      *    the obligation  imposed by the judgment is  enforceable  according to
           the rules relating to the  enforceability  of judgments in Israel and
           the substance of the judgment is not contrary to public policy, and
      *    the judgment is executory in the state in which it was given.


                                       24


Even if the above conditions are satisfied,  an Israeli court will not enforce a
foreign  judgment  if it was given in a state  whose laws do not provide for the
enforcement of judgments of Israeli courts (subject to exceptional  cases) or if
its  enforcement is likely to prejudice the sovereignty or security of the State
of Israel.

An Israeli court also will not declare a foreign judgment enforceable if:

     o        the judgment was obtained by fraud,
     o        there was no due process,
     o        the judgment  was  rendered by a court not  competent to render it
              according to the laws of private international law in Israel,
     o        the judgment is at variance  with another  judgment that was given
              in the same  matter  between  the same  parties and which is still
              valid, or
     o        at the time the action was brought in the foreign  court a suit in
              the same matter and between the same parties was pending  before a
              court or  tribunal  in Israel.  

Judgments  rendered or enforced by Israeli  courts will  generally be payable in
Israeli  currency.  Judgment  debtors bear the risk  associated  with converting
their awards into foreign currency,  including the risk of unfavorable  exchange
rates.


                                       25



                              FINANCIAL STATEMENTS

                                                               Page
                                                               ----

Condensed Consolidated Balance Sheets.......................   F-2
Condensed Consolidated Statements of Operations.............   F-3
Consolidated Statements of Cash Flows.......................   F-4
Notes to Consolidated Financial Statements..................   F-5

                                      F-1






                      CONDENSED CONSOLIDATED BALANCE SHEETS
                               (USD in thousands)



                                                                                                 Sept. 30,    December 31,
                                                                                                   2004           2003
                                                                                                (Unaudited)     Audited*
                                                                                                 --------       --------
                                                                                                               
Assets
Current Assets:
   Cash and cash equivalents.................................................................    $  5,107        $ 4,125
   Trade receivables, net....................................................................          52             92
   Receivables on account of shares..........................................................          --            955
   Prepaid expenses and other accounts receivable............................................         232            171
                                                                                                 --------       --------
Total current assets.........................................................................       5,391          5,343
                                                                                                 --------       --------
Long-term lease deposits.....................................................................           5              5
Severance pay fund...........................................................................         412            391
Investment in affiliate .....................................................................         223            339
Deferred charges.............................................................................         266            353*
Property, equipment and other assets, net....................................................         382            452
                                                                                                 --------       --------
                                                                                                 $  6,679         $6,883
                                                                                                 --------       --------
Liabilities and Shareholders' Equity
Current Liabilities:
   Accounts payable..........................................................................         354            479
   Employees and payroll accruals............................................................         520            418
   Deferred revenues.........................................................................       1,127            222
   Accrued expenses and other liabilities....................................................         434            376
                                                                                                 --------       --------
Total current liabilities....................................................................       2,435          1,495
                                                                                                 --------       --------
  Convertible loan, net......................................................................       2,753          2,134
  Accrued severance pay......................................................................         457            425
  Other long term liabilities ...............................................................         192            372
                                                                                                 --------       --------
                                                                                                    3,402          2,931
                                                                                                 --------       --------
Shareholders' Equity
   Ordinary Shares, nominal value NIS 0.05 par value - Authorized : 75,000,000
    and  40,000,000  shares  as  of  September 30, 2004 and  2003:  issued  and
    outstanding : 42,787,902 and 28,091,148,
    as of September 30, 2004 and 2003, respectively..........................................         517            456
   Additional paid-in capital................................................................     163,533        160,592
   Deferred stock compensation...............................................................          --            (30)
   Notes receivable from shareholders........................................................         (57)          (102)
   Accumulated other comprehensive income (loss).............................................          (7)            46
   Accumulated deficit.......................................................................    (163,144)      (158,505)
                                                                                                 --------       --------
   Total shareholders' equity................................................................         842          2,457
                                                                                                 --------       --------
                                                                                                 $  6,679         $6,883
                                                                                                 ========       ========


* - reclassified to conform to current period presentation


                                      F-2



          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
                  (USD in thousands, except per share amounts)

                                                            Nine         Nine
                                                           Months       Months
                                                           Ended        Ended
                                                          Sept. 30,    Sept. 30,
                                                            2004         2003
                                                          -------      -------
  Revenues:...........................................    $   933      $   260
   
  Cost of revenues:...................................        475          447
                                                          -------      -------
Gross profit (loss)...................................        458         (187)
                                                          -------      -------
Operating expenses:
   Research and development...........................      1,055        1,095
   Sales and marketing................................      2,964        1,137
   General and administrative.........................      1,383        1,335
   Amortization of stock-based employee
      deferred compensation...........................         30          189
                                                          -------      -------
   Total operating expenses...........................      5,432        3,756
                                                          -------      -------
Operating loss........................................     (4,974)      (3,943)
   Interest and other income (expense), net...........        398         (283)
   Equity in earnings (losses) of affiliate...........        (63)         282
                                                          -------      -------
Net loss .............................................    $(4,639)     $(3,944)
                                                          =======      =======
Basic and diluted net loss per share..................    $ (0.12)     $ (0.17)
                                                          =======      =======
Weighted average number of shares used
   in computing basic and diluted net loss per share..     39,080       23,173
                                                          =======      =======


                                      F-3




                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                               (USD in thousands)



                                                                                      Nine months  Nine months
                                                                                         ended         ended
                                                                                        Sept. 30,    Sept. 30,
                                                                                          2004         2003
                                                                                         -------      -------
                                                                                                     
Cash flows from operating activities:
   Net loss ........................................................................     $(4,639)     $(3,944)
         Adjustments to reconcile net loss to net cash used in Operating activities:
      Depreciation and amortization ................................................         340          460
      Amortization of stock-based employee deferred
         compensation and warrants issued for services received ....................          82          189
      Amortization of convertible loan discount related beneficial
         conversion feature and warrants fair value ................................        (763)         167

      Equity in earnings (losses) of affiliate .....................................          63         (282)
   Changes in assets and liabilities:
      Trade receivables, net .......................................................          40           64
      Prepaid expenses and other accounts receivable ...............................         (61)           2
      Accounts payable .............................................................        (125)          83
      Employee and payroll accruals, accrued expenses and other liabilities ........         160           26
      Deferred revenues ............................................................         905           48
      Accrued severance pay, net ...................................................          11            4

     Other .........................................................................        --             (7)
                                                                                         -------      -------
Net cash used in operating activities ..............................................      (3,987)      (3,190)
                                                                                         -------      -------
Cash flows from investing activities:
   Purchase of property. equipment and other assets ................................        (151)        --
                                                                                         -------      -------

Net cash used in investing activities ..............................................        (151)        --
                                                                                         -------      -------
Cash flows from financing activities:
   Repayment of note receivable by shareholder .....................................          45          198
   Proceeds from issuance of convertible loan ......................................       1,455        1,258
   Deferred charges related to convertible loan ....................................          87         --
   Proceeds from issuance of shares, net ...........................................       3,533        2,999
                                                                                         -------      -------
Net cash provided by financing activities ..........................................       5,120        4,455
                                                                                         -------      -------
Increase in cash and cash equivalents ..............................................         982        1,265
Cash and cash equivalents at the beginning of the period ...........................       4,125        1,388
                                                                                         -------      -------
Cash and cash equivalents at the end of the period .................................     $ 5,107      $ 2,653
                                                                                         =======      =======
Supplemental disclosure
Non-cash transaction
Investment in affiliate - foreign currency translation adjustment ..................     $    53      $  --
                                                                                         -------      -------


                                       F-4



NOTE 1: GENERAL

a. Commtouch Software Ltd.  ("Commtouch",  "the Company") was incorporated under
the laws of Israel in 1991.  The Company  and its  subsidiary  (Commtouch  Inc.)
develop and provide  email  anti-spam  solutions  to various  customers  through
various  third party  distribution  channels.  The Company  expects that it will
continue to be dependent  upon  resellers  and OEM  partners  for a  significant
portion  of its  revenues,  which will be  derived  from sales of the  Company's
anti-spam solutions.

For the  nine-months  ended  September  30, 2004,  33.57% of the  revenues  were
derived from one customer.  For the nine-months ended September 30, 2003, 82.16%
of the  revenues  were  derived from three  customers  (35.32% from  customer A,
31.52% from customer B and 15.32% from customer C).

b. Basis of preparation:

The accompanying  unaudited interim consolidated  financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information.  Accordingly, they do not include all the information and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included.  Operating  results for the nine-months ended September 30, 2004,
are not necessarily indicative of the results of operations that may be expected
for the year ended December 31, 2004.

The  balance  sheet at  December  31,  2003 has been  derived  from the  audited
financial  statements  at that date but does not include all of the  information
and footnotes required by generally accepted accounting  principles for complete
financial  statements.  For  further  information,  refer  to  the  consolidated
financial  statements and footnotes thereto included in the Registrant Company's
annual report on Form 20-F for the year ended December 31, 2003.


NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of Estimates:

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

b. Recently Issued Accounting Pronouncements:

In March 2004,  the Financial  Accounting  Standards  Board (FASB)  approved the
consensus  reached on the Emerging Issues Task Force (EITF) issue No. 03-1, "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments".  The issue's  objective  is to provide  guidance  for  identifying
other-than-temporarily   impaired  investments.  EITF  03-1  also  provides  new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  In September  2004,  the FASB issued a FASB Staff Position (FSP) EITF
03-1-1  that  delays  the  effective  date of the  measurement  and  recognition
guidance in EITF 03-1 until after further  deliberations  by the FASB.  Once the
FASB reaches a final decision on the measurement and recognition provisions, the
Company will evaluate the impact of the adoption of EITF 03-1.

On December 16, 2004,  the Financial  Accounting  Standards  Board (FASB) issued
Statement No. 123 (revised 2004),  Share-Based  Payment,  which is a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation.  Generally, the
approach in Statement  123(R) is similar to the approach  described in Statement
123. However,  Statement 123(R) requires all share-based  payments to employees,
including grants of employee stock options, to be recognized in the statement of
operations  based on their fair  values.  Pro forma  disclosure  is no longer an
alternative. The new standard will be effective for public entities in the first
interim or annual  reporting  period  beginning after June 15, 2005. The Company
has not  completed a valuation or  determined  the impact of adopting  Statement
123(R).


NOTE 3: MAY 2004 PRIVATE PLACEMENT

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

The  investors  also received five year warrants to purchase up to an additional
2,565,793  ordinary  shares,  with an  exercise  price of $0.836 per  share.  In
addition,  the Company had granted the investors additional investment rights to
purchase up to an additional 5,131,583 ordinary shares at $0.836 per share. Upon


                                       F-5



such additional  purchases the investors would also receive additional  warrants
to purchase up to an additional 2,565,793 ordinary shares with an exercise price
of $0.836 per share, for a period of one year following the effectiveness of the
registration  statement  covering the resale of the ordinary  shares  underlying
these rights.


The  Company  agreed  to  reduce  the  conversion  and  exercise  prices  of the
convertible  notes and warrants issued to the investors in the November 26, 2003
transaction between those investors and the Company. The conversion price of the
notes  previously  set at $1.153 was reduced to $0.83 and the exercise  price of
the  initial  warrants  was  similarly  reduced.  The  conversion  price  of the
additional  notes and  exercise  price of the  additional  warrants  issuable in
connection  with the November 26, 2003  transaction  (if and when the investors'
option to loan additional funds is exercised) was reduced to $0.90. In addition,
the exercise  period for the additional loan was extended for a period 18 months
from the effectiveness of the registration statement (January 20, 2004).


The closing of the financing occurred in late June 2004.


NOTE 4:  STOCK-BASED COMPENSATION

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

As at the balance sheet date, the Company continues to apply APB 25. The Company
applies  the  disclosure  requirements  SFAS 148,  "Accounting  for Stock  Based
Compensation Transition and Disclosure" - an amendment of FASB Statement No. 123
("SFAS  148").  FAS 148 requires  new  disclosures  about the ramp-up  effect of
stock-based  employee  compensation  on reported  results.  The  Statement  also
requires  that those effects be disclosed  more  prominently  by specifying  the
form,  content,  and location of those disclosures.  Pro forma information under
SFAS 123 are as follows:

                                                     Nine months  Nine months
                                                        ended       ended
                                                      Sept. 30,    Sept.30,
                                                        2004         2003
                                                      -------      -------

Net loss as reported............................      $(4,639)     $(3,944)

Add:
Stock based compensation expense
included in the determination
of net loss, as reported .......................           30          189

Deduct:
Stock based compensation expense
determined under fair value method
for all awards..................................       (1,034)        (687)
                                                      -------      -------
Pro forma net loss..............................      $(5,643)     $(4,442)
                                                      =======      ======= 
Pro forma basic and diluted
net loss per share..............................      $ (0.14)     $ (0.19)
                                                      =======      =======

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


NOTE 5: GEOGRAPHIC INFORMATION

The Company  conducts its business on the basis of one  reportable  segment (see
Note 1 for brief description of the Company's business).


                                       F-6


Revenues from external customers:

                                                  Nine months  Nine months
                                                     ended        ended
                                                   Sept. 30,    Sept. 30,
                                                     2004         2003
                                                     ----         ----
         Israel ...................................  $113         $ 18
         U.S.A. ...................................   777          224
         Europe ...................................    20          ---
         Japan ....................................    23           18
                                                     ----         ----
                                                     $933         $260
                                                     ====         ====

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

                                                  Nine months      Year
                                                     ended        ended
                                                   Sept. 30,   December 31,
                                                     2004         2003
                                                     ----         ----
         Israel....................................   $85         $294
         U.S.A.....................................   257          158
                                                     ----         ----
                                                     $342         $452
                                                     ====         ====

NOTE 6: LOSS PER SHARE:

The following table sets forth the computation of basic and diluted net loss per
share:



1. Numerator:
                                                                                    Nine months ended
                                                                                       Sept.  30,
                                                                                 ----------------------
                                                                                   2004          2003
                                                                                  ------        ------
                                                                                        Unaudited
                                                                                 ----------------------
                                                                                               
     Numerator for basic and diluted loss per share -

     Numerator for basic and dilutedloss available to Ordinary shareholders      $  (4,639)   $  (3,944)
                                                                                 =========    =========
2. Denominator (in thousands):

     Denominator for basic and diluted loss per share --
     Weighted average number of shares                                              39,080       23,173
                                                                                 =========    =========


All  outstanding  stock  options  and  warrants  have  been  excluded  from  the
calculation  of the  diluted  loss per share  because  all such  securities  are
anti-dilutive for all periods  presented.  The total number of shares related to
outstanding  options and warrants  excluded from the calculations of diluted net
loss  per  share  were  15,047,899  and  15,919,861  for the  nine-months  ended
September 30, 2004 and September 30, 2003, respectively.

NOTE 7: SUBSEQUENT EVENTS

a. OCTOBER 2004 REDEMPTION, AMENDMENT AND EXCHANGE AGREEMENT

On October 31,  2004,  the Company  entered  into a  Redemption,  Amendment  and
Exchange  Agreement  ("RAE") that  provided for the  Company's  repayment of the
outstanding convertible notes described in Note 3 above, plus the performance of
certain  other  obligations  delineated  below (see also Form 6-K of November 5,
2004). The transaction closed on December 9, 2004. Under the RAE transaction:


    1.   At the closing,  the Company repaid in full the $3 million in principal
         amount, plus accrued interest, outstanding under the convertible notes.

    2.   In exchange for the  cancellation  by the  convertible  note holders of
         their rights,  pursuant to the terms of the November 2003 financing, to
         purchase  up  to  $3  million  in  additional  notes  convertible  into
         approximately  3.3 million  Ordinary Shares at a $0.90 conversion price
         (plus  the  issuance  of an  additional  600,000  warrants  as  warrant


                                       F-7


         coverage  thereon),  the  Company  issued to such  holders  warrants to
         purchase an aggregate of  approximately  3.3 million Ordinary Shares at
         an exercise price of $0.90 per share.

    3.   The  note  holders  (and the  additional  investor  under  the May 2004
         Securities  Purchase  Agreement) waived certain rights  restricting the
         ability of the  Company to enter into the private  placement  described
         under  subparagraph  b of this Note.  In exchange for such waiver,  the
         Company  delivered to such  persons an  aggregate  of 900,000  Series A
         Preferred Shares.

    4.   The note holders' security interests in Company assets were terminated.

In  accordance  with EITF 00-19,  the value of the warrants of $333,000  will be
classified as equity.  The overall loss from the transaction will amount to $1.2
million.

b. OCTOBER 2004 SERIES A PREFERRED SHARE PRIVATE PLACEMENT

On October 31, 2004, the Company  entered into a Securities  Purchase  Agreement
("SPA") for the sale of Series A Preferred  Shares to  investors  of the Company
identified  in the  schedule  of buyers to the SPA.  The  transaction  closed on
December 9, 2004. Under the transaction:

    1.   The  Company  sold  6,380,000  Series  A  Preferred  Shares  to new and
         existing  investors,  including three of its current directors,  for an
         aggregate  purchase price of $3.19 million dollars.  The purchase price
         per share paid in the transaction was $0.50.

    2.   The  Series A  Preferred  Shares  are  convertible  into the  Company's
         Ordinary  Shares,  and  enjoy  certain  preferences  and  other  rights
         relating to liquidation and business combinations,  as described in the
         Amended and Restated  Articles of Association (see Form 6-K of November
         12, 2004).

In accordance  with the terms of the SPA and the  requirements of EITF 98-05 and
EITF 00-27, a beneficial  conversion  feature was valued at  approximately  $1.9
million, which will be amortized over a nine month period.

                                       F-8




                           23,605,490 Ordinary Shares


                             COMMTOUCH SOFTWARE LTD.




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


                                   PROSPECTUS


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




                                 _________, 2005






                                     PART II


                     INFORMATION NOT REQUIRED IN PROSPECTUS


Item 8. Indemnification of Directors and Officers.

Israeli  law  permits a  company  to insure  an  office  holder  in  respect  of
liabilities incurred by him as a result of the breach of his duty of care to the
company or to another person, or as a result of the breach of his fiduciary duty
to the  company,  to the extent  that he acted in good faith and had  reasonable
cause to believe that the act would not  prejudice  the  company.  A company can
also insure an office holder for monetary  liabilities  as a result of an act or
omission that he committed in connection  with his serving as an office  holder.
Moreover,  a company can  indemnify  an office  holder for any of the  following
obligations  or  expenses  incurred  as a result of an act or  omission  of such
person in his capacity as an office holder:  (a) monetary liability imposed upon
him in  favor  of  other  persons  pursuant  to a court  judgment,  including  a
settlement or an arbitrator's  decision  confirmed by a court and (b) reasonable
litigation  expenses,  including  attorneys' fees,  actually  incurred by him or
imposed upon him by a court (i) in an action, suit or proceeding brought against
him by or on behalf of the company or other persons,  (ii) in a criminal  action
in which he was acquitted,  or (iii) in a criminal action which does not require
proof of criminal intent in which he was convicted.  The term "office holder" of
a company includes any person who, either formally or in substance,  serves as a
director, general manager or chief executive officer, or other executive officer
who  reports  directly to the general  manager or chief  executive  officer of a
company.

Israeli Law provides  that a company's  articles of  association  may permit the
company to (a)  indemnify an office  holder  following a  determination  to this
effect made by the company after the occurrence of the event in respect of which
the office holder will be indemnified; and (b) undertake in advance to indemnify
an  office  holder,  provided  that  the  undertaking  is  limited  to  types of
occurrences,  which, in the opinion of the company's board of directors, are, at
the time of the undertaking, foreseeable and to an amount the board of directors
has  determined is reasonable  in the  circumstances.  Israeli law also allows a
company,  if permitted by its  articles of  association,  to exculpate an office
holder in advance,  in whole or in part, from liability for damages sustained by
a breach of duty of care to the company.

Our Amended and Restated Articles of Association  allow us to insure,  indemnify
and exculpate  office  holders to the fullest  extent  permitted by law provided
such  insurance,  indemnification  or exculpation is approved in accordance with
Israel's  Companies  Law.  The Company has  acquired  directors'  and  officers'
liability  insurance  covering the officers and directors of the Company and its
subsidiaries  for certain claims.  In addition,  the Company has entered into an
undertaking  to  indemnify  the  directors  of the  Company  subject  to certain
limitations,  as well as indemnification and exculpation  agreements,  and these
undertakings and agreements have been ratified by our shareholders.

Certain members of our management team are officers of our subsidiary, Commtouch
Inc.,  a  California  Corporation,  or reside in  California.  The  Articles  of
Incorporation  of Commtouch Inc.  provide that the liability of the directors of
the corporation  for monetary  damages shall be eliminated to the fullest extent
permissible  under  California  law and that the  corporation  is  authorized to
provide  for the  indemnification  of agents of the  corporation,  as defined in
Section  317 of the  California  General  Corporation  Law,  in  excess  of that
expressly permitted by Section 317 for breach of duty to the corporation and its
shareholders to the fullest extent permissible under California law.

With  respect to all  proceedings  other than  shareholder  derivative  actions,
Section 317 permits a California  corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person  reasonably  believed to be in the best interests of the corporation
and, in the case of a criminal  proceeding,  had no reasonable  cause to believe
the conduct of such person was unlawful.  In the case of derivative  actions,  a
California  corporation  may indemnify any of its directors,  officers or agents
only if such person acted in good faith and in a manner such person  believed to
be in the best interests of the corporation and its  shareholders.  Furthermore,
in derivative  actions,  no indemnification is permitted (i) with respect to any
matter with respect to which the person to be  indemnified  has been held liable
to the corporation,  unless such  indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise  disposing of a pending  action without
court  approval;  or (iii) of expenses  incurred in  defending a pending  action
which is settled or otherwise disposed of without court approval.  To the extent
that a director,  officer or agent of a corporation  has been  successful on the
merits in defense of any  proceeding for which  indemnification  is permitted by
Section 317, a corporation  is obligated by Section 317 to indemnify such person
against  expenses  actually  and  reasonably  incurred  in  connection  with the
proceeding.

Pursuant to the terms under which the Ordinary Shares were issued to the selling
securityholders, the Company has agreed to indemnify the selling securityholders
against such  liabilities as they may incur as a result of any untrue  statement
of a material fact in the  Registration  Statement,  or any omission  therein to
state a material fact necessary in order to make the  statements  made, in light
of  the  circumstances  under  which  they  were  made,  not  misleading.   Such
indemnification includes liabilities under the Securities Act, the Exchange Act,
state  securities laws and the rules  thereunder,  but excludes  liabilities for
statements or omissions that were based on  information  provided by the selling
securityholders,  as  to  which  the  selling  securityholders  have  agreed  to
indemnify the Company.

                                      II-1



Item 9. Exhibits.

The exhibits listed on the exhibit index to this filing are incorporated  herein
by reference.


Item 10. Undertakings.

(a) The undersigned Registrant hereby undertakes:

      (1) To file during any period in which  offers or sales are being made,  a
post-effective amendment to this Registration Statement:

           (i) to include any  prospectus  required  by Section  10(a)(3) of the
      Securities Act;

           (ii) to reflect in the  prospectus  any facts or events arising after
      the  effective  date of the  Registration  Statement  (or the most  recent
      post-effective amendment thereof) which, individually or in the aggregate,
      represent  a  fundamental  change  in the  information  set  forth  in the
      Registration Statement.

           (iii) to include any material information with respect to the Plan of
      Distribution not previously disclosed in the Registration Statement or any
      other material change to such information in the Registration Statement.

Provided,  however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information  required  to be  included in a  post-effective  amendment  by those
paragraphs  is  contained  in periodic  reports  filed with or  furnished to the
Commission  by the  Registrant  pursuant  to Section 13 or Section  15(d) of the
Exchange Act that are incorporated by reference in the Registration Statement.

      (2) That, for the purpose of determining any liability under the 1933 Act,
each such  post-effective  amendment  shall be  deemed to be a new  Registration
Statement relating to the securities  offered therein,  and the offering of such
securities  at that time shall be deemed to be the  initial  bona fide  offering
thereof.

      (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

      (4) To file a post-effective  amendment to the  Registration  Statement to
include any financial  statements required by Item 8.A of Form 20-F at the start
of  any  delayed  offering  or  throughout  a  continuous  offering.   Financial
statements  and  information  otherwise  required  by  Section  10(a)(3)  of the
Securities Act need not be furnished,  provided that the Registrant  includes in
the prospectus,  by means of a post-effective  amendment,  financial  statements
required  pursuant to this paragraph (a)(4) and other  information  necessary to
ensure that all other  information  in the  prospectus is at least as current as
the date of those  financial  statements.  Notwithstanding  the foregoing,  with
respect to Registration Statements on Form F-3, a post-effective  amendment need
not be filed to include financial statements and information required by Section
10(a)(3)  of the  Securities  Act or  Item  8.A of Form  20-F if such  financial
statements  and  information  are  contained in periodic  reports  filed with or
furnished to the Commission by the Registrant  pursuant to Section 13 or Section
15(d) of the Exchange Act that are incorporated by reference in the Form F-3.

(b)  The  undersigned   Registrant  hereby  undertakes  that,  for  purposes  of
determining  any liability  under the Securities Act of 1933, each filing of the
Registrant's  annual  report  pursuant to section  13(a) or section 15(d) of the
Securities  Exchange  Act of  1934  that is  incorporated  by  reference  in the
Registration  Statement  shall  be  deemed  to be a new  Registration  Statement
relating to the securities offered therein,  and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification  for liabilities arising under the Securities Act
of 1933 may be permitted to directors,  officers and controlling  persons of the
Registrant pursuant to the foregoing  provisions,  or otherwise,  the Registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore,  unenforceable. In the event that a claim for indemnification
against  such  liabilities  (other than  payment by the  Registrant  of expenses
incurred or paid by a director,  officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director,  officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as  expressed  in the  Securities  Act and will be  governed by the final
adjudication of such issue.

                                      II-2




                                   SIGNATURES

Pursuant to the  requirements  of the  Securities  Act of 1933,  the  Registrant
certifies  that it has  reasonable  grounds to believe  that it meets all of the
requirements  for  filing  on Form F-3 and has  duly  caused  this  Registration
Statement  to  be  signed  on  its   behalf   by   the  undersigned,   thereunto
duly  authorized,  in  the  city  of  Mountain View,  state  of  California,  on
January 7, 2005.

                                      COMMTOUCH SOFTWARE LTD.

                                      By:   /s/ DEVYANI PATEL
                                      ------------------------------------
                                            Devyani Patel
                                            Vice President, Finance

Pursuant to the  requirements of the Securities Act of 1933,  this  Registration
Statement has been signed by the following  persons in the capacities and on the
dates indicated.


Name                         Title                                     Date
-------------------------    --------------------------------------    ------------------------
                                                                  

/s/ GIDEON MANTEL*           Chief Executive Officer and Director      January 7, 2005
-------------------------    (Principal Executive Officer)
Gideon Mantel


/s/ DEVYANI PATEL*           Vice President, Finance                   January 7, 2005
-------------------------    (Principal Financial 
Devyani Patel                and Accounting Officer)


/s/ IAN BONNER*              Chairman of the Board                     January 7, 2005
-------------------------
Ian Bonner


/s/ CAROLYN CHIN*            Director, Chairman of the Board           January 7, 2005
-------------------------
Carolyn Chin


/s/ AMIR LEV*                Director                                  January 7, 2005
-------------------------
Amir Lev


/s/ OFER SEGEV*              Director                                  January 7, 2005
-------------------------
Ofer Segev


/s/ NAHUM SHARFMAN*          Director                                  January 7, 2005
-------------------------
Nahum Sharfman


/s/ LLOYD E. SHEFSY*         Director                                  January 7, 2005
-------------------------
Lloyd E. Shefsky


*/s/ DEVYANI PATEL           *Individually and as                      January 7, 2005
-------------------------    Attorney-in-fact and Authorized 
Devyani Patel                U.S. Representative





                                  Exhibit Index

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


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

    23.1       Consent  of Kost,  Forer,Gabbay  & Kasierer , a Member of Ernst &
               Young Global.

    23.2       Consent of Naschitz, Brandes & Co. (contained in Exhibit 5.1).

    24.1       Power of  Attorney  of  directors  and  certain  officers  of the
               Registrant.

    99.1       Redemption,  Amendment and Exchange  Agreement  dated October 31,
               2004  and  form  of  warrant  relating  thereto,  by and  between
               Commtouch  Software Ltd. and each Investor thereto  (incorporated
               by reference to Exhibits 99.5 and 99.6,  respectively,  to Report
               of Foreign  Private  Issuer on Form 6-K for the month of November
               2004 (File No. 000-26495).