<PAGE>   1
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER   , 1999
 
                                                    REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                    FORM F-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                            COMMTOUCH SOFTWARE LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<S>                                    <C>                                    <C>
                ISRAEL                                  7389                              NOT APPLICABLE
   (STATE OR OTHER JURISDICTION OF          (PRIMARY STANDARD INDUSTRIAL                 (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)          CLASSIFICATION CODE NUMBER)                IDENTIFICATION NO.)
</TABLE>

 
                                6 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 SOFTWARE INC.
                   JAMES E. COLLINS, CHIEF FINANCIAL OFFICER
                         3945 FREEDOM CIRCLE, SUITE 400
                         SANTA CLARA, CALIFORNIA 95054
                                 (408) 653-4358
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                        OF AGENT FOR SERVICE OF PROCESS)
 
                                   COPIES TO:
 

<TABLE>
<S>                                    <C>                                    <C>
            LIOR O. NUCHI                         AARON M. LAMPERT                    FRANCIS J. FEENEY, JR.
             DAWN L. JUDD                     NASCHITZ, BRANDES & CO.                    DAVID M. BARBASH
          VENRICE R. PALMER                        5 TUVAL STREET                  HUTCHINS, WHEELER & DITTMAR
        IRENE SONG SHARKANSKY                  TEL AVIV 67897 ISRAEL                A PROFESSIONAL CORPORATION
          MCCUTCHEN, DOYLE,                                                             101 FEDERAL STREET
         BROWN & ENERSEN, LLP                                                         BOSTON, MASSACHUSETTS
          3150 PORTER DRIVE                                                                   02110
         PALO ALTO, CA 94304
</TABLE>

 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
     From time to time after the Registration Statement becomes effective.
 
    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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
 
                        CALCULATION OF REGISTRATION FEE
 

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
    TITLE OF EACH CLASS                                   PROPOSED MAXIMUM             PROPOSED
       OF SECURITIES               AMOUNT TO BE            OFFERING PRICE          MAXIMUM AGGREGATE            AMOUNT OF
      BEING REGISTERED              REGISTERED               PER UNIT(2)            OFFERING PRICE         REGISTRATION FEE(3)
<S>                           <C>                      <C>                      <C>                      <C>
--------------------------------------------------------------------------------------------------------------------------------
 ordinary shares, NIS 0.05
   nominal value per
   share....................       1,344,086(1)                $21.25                 $28,561,828                $7,940
--------------------------------------------------------------------------------------------------------------------------------
 warrant to purchase
   1,136,000 ordinary
   shares...................            --                       --                       --                       --
--------------------------------------------------------------------------------------------------------------------------------
 ordinary shares issuable
   upon exercise of
   warrant..................         1,136,000                 $21.25                 $24,140,000                $6,711
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

 
-------------------------
 
(1) Consists of 896,057 ordinary shares being registered on behalf of Go2Net,
    Inc. and 448,029 ordinary shares being registered on behalf of Vulcan
    Ventures Incorporated as Selling Securityholders hereunder. In addition, a
    warrant to purchase 1,136,000 ordinary shares, and the shares underlying the
    warrant, are being registered on behalf of Go2Net, the holder of the
    warrant, as Selling Securityholder.
(2) Estimated solely for the purpose of computing the amount of the registration
    fee pursuant to Rule 457(c) and (g) based on the average of the high and low
    prices of the Company's ordinary shares as reported on the Nasdaq National
    Market System on October 19, 1999. In addition to the ordinary shares and
    warrant set forth in the table, the amount to be registered includes an
    indeterminate number of ordinary shares issuable upon exercise of or in
    respect of the warrant, as such number may be adjusted as a result of stock
    splits, stock dividends and antidilution provisions (including adjustments
    to the exercise price) in accordance with Rule 416.
(3) Pursuant to Rule 457(c) and (g), calculated on the basis of 1,344,086 shares
    offered by the Selling Securityholders plus 1,136,000 shares issuable upon
    exercise of the warrant being registered hereby.
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>   2
 
COMMTOUCH SOFTWARE LTD.
 
1,344,086 ORDINARY SHARES
WARRANT TO PURCHASE 1,136,000 ORDINARY SHARES
1,136,000 ORDINARY SHARES ISSUABLE UPON EXERCISE OF WARRANT
 
                                                                            LOGO
--------------------------------------------------------------------------------
 
     As we describe further below under "Plan of Distribution," Go2Net, Inc. and
Vulcan Ventures Incorporated, the Selling Securityholders identified in this
prospectus, are selling up to 1,344,086 of our ordinary shares. Go2Net is also
selling a warrant and 1,136,000 ordinary shares which may be acquired upon
exercise of the warrant. These securities may be offered from time to time by
the Selling Securityholders through public or private transactions, on or off
the Nasdaq National 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. We will pay the
expenses of registration of this offering. The Company has agreed to indemnify
the Selling Securityholders against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
sold hereby and the shares issuable upon exercise of the warrant are subject to
a lock-up period which expires January 13, 2000. Because of this lock-up period,
the Selling Securityholders have no present intention to sell the ordinary
shares, or the warrant, until after expiration of the lock-up period.
 
     The ordinary shares and warrant are being offered by the Selling
Securityholders subject to prior sale and subject to their right to reject
offers in whole or in part and to certain other conditions.
 
     Our ordinary shares are currently traded on the Nasdaq National Market
under the symbol "CTCH." On October 25, 1999, the last reported sales price of
an ordinary share on the Nasdaq National Market was $25.8125 per share.
 
     The Selling Securityholders may be deemed to be "underwriters" within the
meaning of the Securities Act and any profits realized by them may be deemed to
be underwriting commissions. Any broker-dealers that participate in the
distribution of ordinary shares or the warrant also may be deemed to be
"underwriters," as defined in the Securities Act, and any commissions or
discounts paid to them, or any profits realized by them upon the resale of any
securities purchased by them as principals, may be deemed to be underwriting
commissions or discounts under the Securities Act. The sale of the ordinary
shares and the warrant is subject to the prospectus delivery requirements of the
Securities Act.
 
     The ordinary shares and the warrant offered hereby have been registered
pursuant to registration rights granted to the Selling Securityholders by the
Company.
 
     Our initial public offering occurred on July 16, 1999.
--------------------------------------------------------------------------------
 
     THIS INVESTMENT INVOLVES RISK.  SEE "RISK FACTORS" BEGINNING ON PAGE 6.
 
--------------------------------------------------------------------------------
 
     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
 
     The Israel Securities Authority has granted CommTouch an exemption from the
obligation to publish an Israeli prospectus relating to this offering. This
exemption shall not be construed as a determination that this prospectus is
truthful or complete or as an expression of opinion as to the securities
offered.
 
              THE DATE OF THIS PROSPECTUS IS  __________  , 1999.

<PAGE>   3
 
     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, ORDINARY SHARES AND THE WARRANT ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR ORDINARY SHARES OR THE WARRANT.
 
                           -------------------------
 
                               TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Summary.....................................................    1
Risk Factors................................................    6
Use of Proceeds.............................................   17
Market for Ordinary Shares..................................   17
Dividend Policy.............................................   17
Capitalization..............................................   18
Selling Securityholders.....................................   19
Selected Consolidated Financial Information.................   20
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   22
Business....................................................   34
Management..................................................   51
Certain Transactions........................................   61
Principal Shareholders......................................   65
Description of Share Capital................................   68
Shares Eligible for Future Sale.............................   74
U.S. Tax Considerations Regarding Ordinary Shares Acquired
  by U.S. Taxpayers.........................................   76
Israeli Taxation and Investment Programs....................   80
Conditions In Israel........................................   85
Plan of Distribution........................................   87
Legal Matters...............................................   88
Experts.....................................................   88
ISA Exemption...............................................   88
Where You Can Find More Information.........................   89
Enforceability of Civil Liabilities.........................   89
Index to Consolidated Financial Statements..................  F-1
</TABLE>

 
                                        i

<PAGE>   4
 
                                    SUMMARY
 
     The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider in making an
investment. Therefore, you should also read the more detailed information set
out in this prospectus, including the Consolidated Financial Statements and the
Notes thereto.
 
COMMTOUCH
 
     We are a leading global provider of email and other messaging services. Our
flexible and highly customizable solutions enable us to satisfy the different
email and messaging needs of a wide range of business partners, including
websites of all sizes and businesses worldwide. We provide a full-featured,
branded Web-based email service that enhances online brand image, promotes
website usage and creates the opportunity to generate additional revenues from
advertising and direct marketing online. For businesses, we provide email and
communication services to employees and online customers, thereby increasing
communication, brand awareness and revenue opportunities.
 
     Email is one of the most widely used applications on the Internet and has
become a significant communications medium. International Data Corporation, or
IDC, projects that email traffic in the United States will increase from 1.2
billion messages per day in 1997 to 8.0 billion messages per day in 2002.
Further, Web-based email, which is email accessed over the Internet using a
browser program, is one of the fastest growing categories of email. With the
dramatic growth of international Internet usage, websites and businesses
worldwide are seeking to differentiate themselves online.
 
     We have been providing our Web-based email and other messaging services
since January 1998. As of June 30, 1999, we had over 109 business partners
offering our Web-based email from their sites. Our business partners include
Excite, Go2Net, FortuneCity, Talk City and Nippon Telephone and Telegraph.
Through our business partners' sites we serve approximately 4.9 million
emailboxes. In November 1998, we launched our ZapZone Network service, which
enables sites to provide email to their end users at no cost. As of June 30,
1999, we had registered approximately 103,000 sites through the ZapZone Network
service, and were serving approximately 658,000 ZapZone Network emailboxes. Our
comprehensive email and messaging services offer the following benefits:
 
     - Extensive email features. Our services are easy to use, and include a
       broad set of email capabilities.
 
     - Ability to support hundreds of millions of emailboxes. We can support
       hundreds of millions of emailboxes across millions of domains while
       maintaining a highly reliable service.
 
     - Customization. Our business partners use our proprietary customization
       tool to make the look and feel of their Web-based email interface
       consistent with their own brand image.
 
     - Increased website usage. Our services increase the frequency and duration
       of users' visits to our partners' websites.
 
     - Online marketing capabilities. Our business partners and third parties
       selling goods and services online can leverage our services and the
       demographic information of our end users to conduct one-to-one direct
       marketing and targeted advertising campaigns.
 
     - Rapidly deployable and cost-effective solutions. Our solutions can be
       quickly implemented and can save our partners the significant costs of
       developing and maintaining an email service in-house.
                                        1

<PAGE>   5
 
     - Extensive Language Capabilities. Our email services are available in 15
       languages. Additionally, we can support more than one language on any of
       our business partners' websites.
 
     Our initial public offering occurred on July 16, 1999. In that offering, we
sold to the public a total of 3,450,000 of our ordinary shares including the
exercise of the underwriters' overallotment option to acquire 450,000 ordinary
shares. At the same time, in a private transaction we sold 896,057 shares to
Go2Net and 448,029 shares to Vulcan Ventures Incorporated at a price equal to
the initial public offering price less the underwriting discount. In addition,
we issued a warrant to Go2Net to purchase 1,136,000 ordinary shares at an
exercise price of $12.80 per share. The shares and the warrant are being offered
for sale by their holders under this prospectus.
 
OFFICE LOCATION
 
     Our principal executive offices are located at 6 Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and 3945 Freedom Circle, Santa Clara, California 95054,
where our telephone number is (408) 653-4330. Our website addresses are
www.commtouch.com, www.zzn.com and www.prontomail.com. The information contained
on our websites is not a part of this prospectus.
                                        2

<PAGE>   6
 
                                  THE OFFERING
 
Ordinary shares offered.......   1,344,086 shares
 
Warrant to purchase 1,136,000
  shares
 
Shares available on exercise
of warrant....................   1,136,000
 
Ordinary shares to be
outstanding after the public
  offering....................   14,655,914 shares
 
Use of Proceeds...............   The Company will not receive any of the
                                 proceeds from the sale of the shares or the
                                 warrant by the Selling Securityholders in this
                                 offering.
 
NASDAQ National Market
  Symbol......................   CTCH
 
     Except as set forth in the Consolidated Financial Statements included as
part of this prospectus and as otherwise specified, all information in this
prospectus (including the information set forth above regarding the ordinary
shares offered and the ordinary shares to be outstanding after the offering) is
based on the number of shares outstanding as of June 30, 1999, and:
 
     - includes the sale of 1,344,086 ordinary shares to Go2Net and Vulcan
       Ventures in the private placement which occurred concurrently with the
       initial public offering on July 16, 1999 at a private placement price of
       $14.88 per share;
 
     - gives effect to the 20-for-one split of the ordinary shares which was
       effected prior to the initial public offering;
 
     - gives effect to the conversion of each of CommTouch's convertible
       preferred shares into 20 ordinary shares upon the closing of the initial
       public offering;
 
     - assumes the issuance of 258,328 ordinary shares upon the assumed net
       exercise of outstanding in-the-money warrants as of June 30, 1999 to
       purchase 300,600 ordinary shares at a weighted average exercise price of
       $2.25 per share;
 
     - assumes the issuance of 227,200 ordinary shares upon the assumed net
       exercise of the in-the-money warrant to purchase 1,136,000 ordinary
       shares issued to Go2Net, concurrently with the initial public offering,
       at an exercise price of $12.80 per share subject to adjustment as set
       forth in the warrant;
 
     - with respect to financial information, is reported in U.S. dollars;
 
and does not include:
 
     - 954,020 ordinary shares issuable upon exercise of outstanding options
       under our stock option plans and stock option agreements as of June 30,
       1999 at a weighted average exercise price of $4.12 per share;
 
     - 3,374,460 ordinary shares available for future grant or issuance under
       our stock option plans as of June 30, 1999; and
 
     - 215,000 ordinary shares issuable upon exercise of options granted to
       officers and directors as of June 30, 1999 at a weighted average exercise
       price of $15.76 per share.
                                        3

<PAGE>   7
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following tables set forth our summary consolidated financial data. The
information set forth for the three and six months ended June 30, 1998 and 1999
is unaudited. You should read the following information together with our
Consolidated Financial Statements and the Notes thereto beginning on page F-1 of
this prospectus, the information under "Selected Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." See Note 1 of the Notes to our Consolidated
Financial Statements for an explanation of the weighted average number of shares
used in computing per-share data.
 

<TABLE>
<CAPTION>
                                                                    THREE MONTHS           SIX MONTHS
                                         YEAR ENDED                    ENDED                 ENDED
                                        DECEMBER 31,                  JUNE 30,              JUNE 30,
                                -----------------------------    ------------------    ------------------
                                 1996       1997       1998       1998       1999       1998       1999
                                -------    -------    -------    -------    -------    -------    -------
                                                                     UNAUDITED             UNAUDITED
<S>                             <C>        <C>        <C>        <C>        <C>        <C>        <C>
Consolidated Statement of
  Operations Data:
Revenues:
  Email services..............  $    --    $    --    $   389    $    59    $   553    $    91    $   899
  Software licenses,
    maintenance and
    services..................    3,134        899         --         --         --         --         --
                                -------    -------    -------    -------    -------    -------    -------
         Total revenues.......    3,134        899        389         59        553         91        899
  Operating loss..............   (1,237)    (3,405)    (4,025)      (982)    (3,624)    (1,874)    (5,664)
  Net loss....................   (1,282)    (3,473)    (4,351)    (1,041)    (3,618)    (1,960)    (5,929)
  Net loss per share -- basic
    and diluted...............    (0.66)     (2.40)     (3.00)     (0.72)     (1.66)     (1.35)     (3.17)
  Weighted average number of
    shares -- basic and
    diluted...................    1,934      1,450      1,450      1,450      2,178      1,450      1,869
  Pro forma net loss per share
    -- basic and diluted
    (unaudited)...............                        $ (0.78)              $ (0.44)              $ (0.76)
  Pro forma weighted average
    number of shares -- basic
    and diluted (unaudited)...                          5,594                 8,317                 7,830
</TABLE>

 
     The following data is presented:
 
     - on an actual basis;
 
     - on a pro forma basis to give effect to the automatic conversion of all of
       CommTouch's convertible preferred shares into 7,109,800 ordinary shares
       upon the closing of the initial public offering; and
 
     - on a pro forma as adjusted basis to give effect to (1) the sale of
       3,000,000 ordinary shares in the initial public offering, at an initial
       public offering price of $16.00 per share, (2) the exercise of the
       underwriters' overallotment option to acquire 450,000 ordinary shares,
       and (3) the sale in the private placement of 1,344,086 ordinary shares at
       $14.88 per share, resulting in aggregate net cash proceeds of
       approximately $66,177,000 from the public offering and the private
       placement, (4) the issuance of 258,328 ordinary shares, upon the assumed
       net exercise of outstanding in-the-money warrants as of June 30, 1999 to
       purchase 300,600 ordinary shares at a weighted average exercise price of
       $2.25 per share, and (5) the issuance of 227,200 ordinary shares,
       assuming the net exercise of an in-the-money warrant to purchase
       1,136,000 ordinary shares issued to Go2Net at an exercise price of $12.80
       per share subject to adjustment as set forth in the warrant.
                                        4

<PAGE>   8
 

<TABLE>
<CAPTION>
                                                                         JUNE 30, 1999
                                                              -----------------------------------
                                                                                       PRO FORMA
                                                              ACTUAL     PRO FORMA    AS ADJUSTED
                                                              -------    ---------    -----------
                                                                          (UNAUDITED)
<S>                                                           <C>        <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................  $11,663     $11,663       $77,840
Working capital.............................................   11,602      11,602        77,779
Total assets................................................   16,094      16,094        88,121
Long-term liabilities.......................................      564         564           564
Shareholders' equity (deficit)..............................   13,466      13,466        85,493
</TABLE>

 
                                        5

<PAGE>   9
 
                                  RISK FACTORS
 
     You should carefully consider the following risk factors before you decide
to buy our ordinary shares or the warrant. 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.
 
RISKS RELATING TO THE COMPANY
 
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A WEB-BASED EMAIL SERVICE
PROVIDER, IT IS DIFFICULT TO EVALUATE OUR PROSPECTS
 
     We commenced operations in 1991, but we began commercially selling
Web-based email services only in 1998 after changing our strategic focus from
the sale and service of stand-alone email client software products for mainframe
and personal computers. This change required us to adjust our business processes
and to restructure CommTouch to become a Web-based email service provider.
Therefore, we have only a limited operating history as a provider of Web-based
email services upon which you can evaluate our business and prospects.
 
WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE PROFITABILITY
 
     We incurred net losses of approximately $1.3 million in 1996, $3.5 million
in 1997 and $4.4 million in 1998 and $5.9 million in the six months ended June
30, 1999. As of June 30, 1999, we had an accumulated deficit of approximately
$17.6 million. We have not achieved profitability in any period, and we expect
to continue to incur net losses for the foreseeable future.
 
     We have invested heavily in technology and infrastructure development. We
expect to continue to spend substantial financial and other resources on
developing and introducing new service offerings and expanding our sales and
marketing organizations, strategic relationships and operating infrastructure.
We expect that our expenses will continue to increase in absolute dollars. If
our revenues do not correspondingly increase, our operating results and
financial condition will be negatively affected. We may never attain sufficient
revenues to achieve profitability. If we do achieve profitability, we may not
sustain or increase profitability in the future. This may, in turn, cause our
stock price to decline.
 
WE HAVE A STRATEGIC ALLIANCE RELATIONSHIP WITH GO2NET PURSUANT TO WHICH WE
ISSUED THE WARRANT TO GO2NET WHICH DILUTED OUR SHAREHOLDERS, BUT WE MAY NOT
REALIZE SUBSTANTIAL REVENUES OR OTHER BUSINESS BENEFITS FROM THIS TRANSACTION
 
     We have a strategic alliance which was entered into between Go2Net and our
U.S. subsidiary, CommTouch Software, Inc., simultaneously with the closing of
the initial public offering. Pursuant to this transaction, we entered into a
Customized Web-Based Email Service Agreement with Go2Net pursuant to which we
share revenues from advertising and premium services offered to Go2Net's end
users through our email service. The terms of this agreement are substantially
the same as our commercial agreements with other business partners except that
we have agreed to share a materially greater portion of our advertising revenues
with Go2Net than we are sharing under other similar agreements. As part of this
transaction, we issued to Go2Net a warrant to purchase up to 1,136,000 ordinary
shares at an exercise price of $12.80 per share. This warrant is exercisable at
any time until it expires on July 16, 2004. We agreed to register these shares,
the warrant and the shares issuable upon exercise of the warrant with the
Securities and Exchange Commission within 180 days
 
                                        6

<PAGE>   10
 
after the closing of the initial public offering. Exercise of the warrant will
cause existing investors significant dilution. However, we may not realize any
revenues or any other business benefits from this strategic alliance transaction
with Go2Net because we and Go2Net may not be able to sell significant amounts of
advertising and premium services to Go2Net's end users pursuant to our Web-
based email services. In the future, we may have to issue in the money warrants
to acquire our ordinary shares to business partners who provide us with a large
base of potential end users. We may also have to provide these business partners
with more favorable commercial terms than we have previously provided to our
business partners. The issuance of in the money warrants and the grant of more
favorable terms to business partners may further dilute our shareholders,
increase our operating loss in the future and cause our stock price to fall.
 
OUR FUTURE EMAIL SERVICES REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING
RESULTS MAY FLUCTUATE AND FLUCTUATIONS COULD ADVERSELY AFFECT THE VALUE OF YOUR
INVESTMENT
 
     Because we have a limited operating history in the provision of Web-based
email services and because of the emerging nature of the markets in which we
compete, our revenue is unpredictable. Our current and future expense levels are
to a large extent fixed. We may be unable to adjust spending quickly to
compensate for any revenue shortfall, and any significant revenue shortfall
would have an immediate negative effect on our results of operations and stock
price.
 
     A number of factors, many of which are enumerated in this "Risk Factors"
section, are likely to cause fluctuations in our operating results. Other
factors which may cause such fluctuations include:
 
     - the size, timing and fulfillment of orders for our email services;
 
     - our mix of service offerings, including our ability to successfully
       implement new services;
 
     - pricing of our services; and
 
     - effectiveness of our customer support.
 
     Because of these factors, period-to-period comparisons of our operating
results are not a good indication of our future performance. It is likely that
our operating results in some quarters will be below market expectations.
 
IF THE MARKET FOR OUR WEB-BASED EMAIL SERVICES DOES NOT GROW RAPIDLY, WE WILL
FAIL TO GENERATE REVENUES
 
     Our success will depend on the widespread acceptance and use of Web-based
email by our customers as a means to increase the value of their services or as
a means of communication. The market for Web-based email services is new and
rapidly evolving. We cannot estimate the size or growth rate of the potential
market for our service offerings. If the market for Web-based email fails to
grow or grows more slowly than we currently anticipate, our business will suffer
dramatically. Even if that market grows, our service may not achieve broad
market acceptance. Since we have only recently introduced our services, we do
not have sufficient experience to evaluate whether they will achieve broad
market acceptance. Also, because all of our revenue is derived directly or
indirectly from our Web-based email solutions, if that market does not grow, our
business will likely fail.
 
EVEN IF OUR EMAIL SERVICES ARE SUCCESSFUL WITH OUR BUSINESS PARTNERS, WE MAY NOT
DERIVE REVENUE FROM THE USERS OF THE EMAILBOXES, WHICH WOULD PREVENT OUR
BUSINESS FROM GROWING
 
     Even if our services are a success with our business partners, we will not
succeed if we do not derive revenue from the email users that our business
partners give us access to. We plan to derive
 
                                        7

<PAGE>   11
 
revenue from these email users by selling advertisements that the email users
will see, by selling premium email services to the users and by selling access
to the email users for direct marketing purposes. If one or more of these
revenue sources is not successful, we will not succeed. To date, we have
generated little revenue from these potential revenue sources and they may not
be successful. Advertisers and direct marketers may not accept email as a means
of placing advertisements and conducting direct marketing. Email users may not
want to receive direct marketing materials. Also, email users may not want to
pay for premium services, especially since some of these services may be
obtained elsewhere for free. Additionally, in order for these potential revenue
streams to be successful, our business partners will have to successfully market
them to their end users who use our emailboxes. Many of these business partners
have little or no experience with such marketing and may not be successful at
it.
 
     Our ability to generate revenues from the emailbox base that our business
partners bring to us also depends on the emailboxes being used on a regular
basis. On an ongoing basis, many of our end users will not regularly use their
emailboxes, and a significant number will cease using our service each month.
For example, approximately 1.1 million of the emailboxes we host were
established under a program in which one of our business partners issued
emailboxes to all of its users on an unsolicited basis, rather than having the
end users register for emailboxes. Accordingly, the figure of 6.6 million
emailboxes used throughout this prospectus does not necessarily reflect the
number of emailboxes from which we will be able to generate revenues.
 
WE DEPEND ON OUR BUSINESS PARTNER RELATIONSHIPS, WHICH ARE BASED ON RELATIVELY
SHORT TERM, NONEXCLUSIVE AGREEMENTS, AND THE LOSS OF ONE OR MORE BUSINESS
PARTNERS COULD HARM OUR BUSINESS
 
     Our ability to increase revenues depends upon successful marketing of our
services through new and existing business partners. Our agreements with our
business partners generally can be terminated for any or for no reason after the
first year. The agreements with our business partners are non-exclusive and do
not restrict them from introducing competing services. Also, some of our
relationships allow termination earlier than one year if we do not provide a
specified level of service. Loss of one or a few key business partners to a
competitive solution could damage our reputation and hurt our ability to develop
new relationships. This could prevent new relationships with business partners
as well as with marketing partners. If we fail to develop new relationships or
if our business partners terminate or do not renew their contracts with us, our
business will suffer, as we will lose potential revenue from the lost business
partners and from their underlying base of email users. One of our business
partners, Talk City, accounts for 20 percent of the emailboxes we currently
host. Another business partner, Excite, accounted for 54 percent of our revenues
in 1998.
 
WE HAVE MANY ESTABLISHED COMPETITORS WHO ARE OFFERING THE SAME OR SIMILAR
SERVICES, INCLUDING MICROSOFT, AND WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY
AGAINST THEM IF THEY PROVIDE SUPERIOR SERVICES AT BETTER PRICES
 
     The market for Web-based email services is intensely competitive and we
expect it to be increasingly competitive. Increased competition could result in
pricing pressures, reduced operating margins and loss of market share, any of
which could cause our business to suffer. Many of our current and potential
competitors have longer operating histories, larger end user bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we do. These competitors may enter into strategic or commercial
relationships with larger, more established and better-financed companies. In
addition to competing with companies that develop and maintain in-house
services, we compete with email service providers, such as USA.NET, Mail.com and
Critical Path, and email software companies, such as Microsoft, Software.com,
Inc. and Lotus
 
                                        8

<PAGE>   12
 
Development Corporation. Microsoft currently offers free Web-based email through
its Hotmail website and has a dominant market share. In addition, Internet
service providers, such as AOL (and its subsidiary, Netscape), provide Web-based
email services to a large number of end users.
 
     Some of our competitors provide a variety of Web-oriented services, such as
Internet access, browser software, homepage design and hosting, in addition to
email. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us in
accessing customers, meeting customer needs and minimizing the effect that
performance of a single product will have on their business. Some of our
competitors may offer services at or below cost. In the future, as we expand our
service offerings, we expect to encounter increased competition in the
development and delivery of these services.
 
IF WE DO NOT EXPAND OUR SALES AND MARKETING ORGANIZATION WE WILL NOT BE ABLE TO
INCREASE OUR REVENUES
 
     Our ability to increase our revenues will depend on our ability to
successfully expand our sales and marketing organization. The complexity of our
Internet messaging services and the emerging nature of the Web-based email
market require highly trained sales and marketing personnel to educate
prospective business partners regarding the use and benefits of our services.
The majority of our sales and marketing personnel have only recently joined
CommTouch and have limited experience working together. Our Vice President,
Marketing has only worked with us since March 1999. It will take time for these
employees to learn how to market our solutions and to be integrated into our
sales organization. Some of them may not succeed in making this transition.
Additionally, we are beginning to roll out a significant number of services that
we have no experience marketing and will rely on these services to produce a
substantial portion of our revenues in the future. As a result of these factors,
our sales and marketing organization may not be able to compete successfully
against the bigger and more experienced sales and marketing organizations of our
competitors.
 
WE ARE EXPERIENCING RAPID INTERNAL GROWTH WHICH HAS AND LIKELY WILL STRAIN OUR
MANAGEMENT RESOURCES
 
     We recently began to expand our operations rapidly and intend to continue
this expansion. The number of our employees increased from 36 on June 30, 1998
to 45 on December 31, 1998 and to 86 on June 30, 1999. This expansion has
placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. To manage any further growth,
we will need to improve or replace our existing operational, customer service
and financial systems, procedures and controls.
 
THE LOSS OF OUR KEY EMPLOYEES WOULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR
BUSINESS, THEREFORE CAUSING OUR OPERATING RESULTS TO SUFFER AND THE VALUE OF
YOUR INVESTMENT TO DECLINE
 
     Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only a
short period of time. The loss of the services of any of our senior management
or other key personnel, including Gideon Mantel, our Chief Executive Officer,
Isabel Maxwell, the President of our subsidiary, and Amir Lev, our Chief
Technical Officer, could materially and adversely affect our business. We do not
have long-term employment agreements with any of our senior management or other
key personnel. We cannot prevent them from leaving at any time. We do not
maintain key-person life insurance policies on any of our employees.
 
                                        9

<PAGE>   13
 
BECAUSE OUR BUSINESS IS BASED ON COMMUNICATIONS AND MESSAGING SERVICES, WE ARE
SUSCEPTIBLE TO SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS, WHICH COULD HARM
OUR BUSINESS AND REPUTATION
 
     Our ability to successfully receive and send our end users' email messages
and provide acceptable levels of service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems and those of our outsourced hosting service. We do not possess insurance
to cover losses caused by unplanned system interruptions and software defects.
In the past, we have experienced some interruptions in our email service. We
believe that these interruptions will continue to occur from time to time. These
interruptions may be due to hardware failures, unsolicited bulk email (also
known as "spam"), operating system failures, inadequate Internet infrastructure
capacity, and other mechanical and human causes. We expect to experience
occasional, temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation in levels of customer service. If we experience
frequent or long system interruptions that reduce our ability to provide email
services, we may have fewer users of our email services. In addition, we have
entered into service agreements with some of our business partners that require
minimum performance standards. If we fail to meet these standards, our business
partners could terminate their relationships with us.
 
     We must continue to expand and adapt our network infrastructure to changing
requirements and increasing numbers of end users. The expansion and adaptation
of our network infrastructure will require substantial financial, operational
and managerial resources. The ability of our network to continue to connect and
manage an expanding number of partners, end users and messages at high
transmission speeds is unproven and uncertain. We face risks related to our
network's ability to operate with higher use levels while maintaining expected
performance levels.
 
WE ARE A RELATIVELY SMALL COMPETITOR IN THE ELECTRONIC MESSAGING INDUSTRY, AND
AS A RESULT, WE MAY NOT HAVE THE RESOURCES TO ADAPT TO THE CHANGING
TECHNOLOGICAL REQUIREMENTS AND THE SHIFTING CONSUMER PREFERENCES OF OUR INDUSTRY
 
     The Internet messaging industry is characterized by rapid technological
change, changes in end user requirements and preferences, and the emergence of
new industry standards and practices that could render our existing services and
proprietary technology obsolete. Our success depends, in part, on our ability to
continually enhance our existing email and messaging services and to develop new
services, functions and technology that address the increasingly sophisticated
and varied needs of our prospective business partners. The development of
proprietary technology and necessary service enhancements entails significant
technical and business risks and requires substantial expenditures and lead
time. We may not be able to keep pace with the latest technological
developments. We may not be able to use new technologies effectively or adapt
our services to business partner or end user requirements or emerging industry
standards. Also, in addition to addressing changing technologies and end user
needs, we must also do so more quickly than our competition.
 
OUR SERVICES MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS, WHICH COULD CAUSE
OUR BUSINESS PARTNERS OR END USERS TO STOP USING OUR SERVICES
 
     Our service offerings depend on complex software. Complex software often
contains defects, particularly when first introduced or when new versions are
released. Although we conduct extensive testing, we may not discover software
defects that affect our new or current services or enhancements until after they
are deployed. Although we have not experienced any material software defects to
date, it is possible that, despite testing by us, defects may exist in the
software we use. These defects
 
                                       10

<PAGE>   14
 
could cause service interruptions that could damage our reputation or increase
our service costs, cause us to lose revenue, delay market acceptance or divert
our development resources, any of which could cause our business to suffer. Some
of our services are based on software provided by third parties. We have no
control over the quality of such software.
 
WE RELY ON THE INTEGRITY OF OUR NETWORK SECURITY, WHICH MAY BE SUSCEPTIBLE TO
BREACHES THAT COULD HARM OUR REPUTATION AND BUSINESS
 
     A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Third parties may
attempt to breach our security or that of our business partners. Despite our
implementation of third party encryption technology and network security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays or
loss of data. We may be liable to our business partners and their end users for
any breach in our security. Also, such a breach could harm our reputation and
consequently our business. We may also be required to expend significant capital
and other resources to license encryption technology and additional technologies
to protect against security breaches or to alleviate problems caused by any
breach. Our failure to prevent security breaches could have a material adverse
effect on our business and operating results. To our knowledge, we have not
experienced a security breach of our system.
 
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
 
     We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees and business partners to protect our proprietary
rights. Third parties may infringe or misappropriate our copyrights, trademarks
and similar proprietary rights. Although we have not filed any patent
applications, we may seek to patent certain software or other technology in the
future. Any such future patent applications may not be issued with the scope of
the claims we seek, or at all. We cannot be certain that our software does not
infringe issued patents that may relate to our software products. In addition,
because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which relate to our
software products.
 
     Despite our precautions, unauthorized third parties may copy certain
portions of our technology or reverse engineer or obtain and use information
that we regard as proprietary. End user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program may
be unenforceable under the laws of some jurisdictions and foreign countries. In
addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the United States. Our means of protecting
our proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
 
     Our ZapZone Network service allows webmasters to select the email service
name of their choice (although we reserve the right to eliminate their account
or to change their email service name). There is, therefore, the possibility
that they will select email service names that may infringe the rights of
others. We have received several complaints about ZapZone Network service
webmasters' registered email service names and we have referred these
complainants directly to the ZapZone Network service subscribers who are
allegedly engaging in the infringing activities.
 
                                       11

<PAGE>   15
 
WE MAY HAVE LIABILITY FOR EMAIL CONTENT AND WE MAY NOT HAVE ADEQUATE LIABILITY
INSURANCE
 
     As a provider of email services, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials transmitted via email.
We do not and cannot screen all of the content generated by end users, and we
could be exposed to liability with respect to this content. Some foreign
governments, such as the government of Germany, have enforced laws and
regulations related to content distributed over the Internet that are more
strict than those currently in place in the United States. Although we carry
general liability insurance, our insurance may not adequately protect us from
such claims. Any imposition of liability, particularly liability that is not
covered by insurance, or is in excess of insurance coverage, could damage our
reputation and hurt our business and operating results, or could result in
criminal penalties.
 
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF DOING
BUSINESS
 
     There are currently few laws and regulations directly applicable to the
Internet and commercial email services. However, a number of laws have been
proposed involving the Internet, including laws addressing user privacy,
pricing, content, copyright, antitrust, distribution and characteristics and
quality of products and services. Further, the growth and development of the
market for email may prompt calls for more stringent consumer protection laws
that may impose additional burdens on companies conducting business online.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
The adoption of additional laws or regulations, or the application of existing
laws or regulations to the Internet, may impair the growth of the Internet or
commercial online services. This could decrease the demand for our services and
increase our cost of doing business, or otherwise harm our business and
operating results.
 
     On October 20, 1999, The Federal Trade Commission ("FTC") issued the final
rule to implement the Children's Online Privacy Protection Act of 1998 (COPPA).
The main goal of the COPPA and the rule is to protect the privacy of children
using the Internet. Publication of the rule means that, as of April 21, 2000,
certain commercial Web sites must obtain parental consent before collecting,
using, or disclosing personal information from children under 13.
 
     The statute and rule apply to commercial Web sites and online services
directed to, or that knowingly collect information from, children under 13. To
inform parents of their information practices, these sites will be required to
provide notice on the site and to parents about their policies with respect to
the collection, use and disclosure of children's personal information. With
certain statutory exceptions, sites will also have to obtain "verifiable
parental consent" before collecting, using or disclosing personal information
from children. The rule will become effective on April 21, 2000, giving Web
sites six months to come into compliance with the rule's requirements. A Web
site operator must post a clear and prominent link to a notice of its
information practices on its home page and at each area where personal
information is collected from children. The notice must state the name and
contact information of all operators, the types of personal information
collected from children, how such personal information is used, and whether
personal information is disclosed to third parties. The notice also must state
that the operator is prohibited from conditioning a child's participation in an
activity on the child's disclosing more personal information than is reasonably
necessary. In addition, the notice must state that the parent can review and
have deleted the child's personal information, and refuse to permit further
collection or use of the child's information. The COPPA regulations could reduce
our ability to engage in direct marketing.
 
                                       12

<PAGE>   16
 
WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING SHAREHOLDERS
 
     We believe that our existing capital resources will enable us to maintain
our current and planned operations for at least the next 12 months. However, we
may be required to raise additional funds due to unforeseen circumstances. If
our capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Such financing may not be
available in sufficient amounts or on terms acceptable to us and may cause
dilution to existing shareholders. Also, we may raise additional capital in the
future by issuing securities that have superior rights and preferences to our
ordinary shares. We have issued registration rights for the shares and warrant
being offered in this prospectus. If we are unable to cause the registration
statement for this offering to become effective as of the expiration of the
180-day lock-up period, the exercise price for the warrant shares will be
reduced to $10.51 per share. If the exercise price is reduced, upon exercise of
the warrant our shareholders will experience additional dilution, as more shares
will be issued for less consideration.
 
IF WE OR ANY OF OUR VENDORS DO NOT ADEQUATELY ADDRESS "YEAR 2000" ISSUES, WE MAY
INCUR SIGNIFICANT UNANTICIPATED EXPENSES TO REMEDY ANY RESULTING PROBLEMS, AND
OUR BUSINESS AND REPUTATION COULD SUFFER
 
     The "Year 2000" issue is the result of computer programs and embedded
hardware systems having been developed using two digits rather than four to
define the applicable year. These computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations, causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. As a result, many companies' computer systems may
need to be upgraded or replaced in order to comply with the Year 2000
requirements. We have preliminarily tested our internally developed software and
are in the process of revising it to make it Year 2000 compliant. Many of our
business partners maintain their Internet operations on commercially available
operating systems that may be impacted by Year 2000 complications. In addition,
we rely on third-party vendors for certain software and hardware included within
our services, which may not be Year 2000 compliant. Where we are aware that such
software or hardware is not Year 2000 compliant, we are working with those
vendors to address these issues and to ensure that those systems will be Year
2000 compliant. Failure of our internal computer systems or third-party
equipment or software, or of systems maintained by our suppliers, to operate
properly with regard to the year 2000 and thereafter, could require us to incur
significant unanticipated expenses to remedy any problems and could cause system
interruptions and loss of data. Any of these events could harm our reputation,
business and operating results. We have not yet developed a comprehensive
contingency plan to address the issues that could result from Year 2000
complications.
 
AFTER THE LOCK-UP AGREEMENTS EXPIRE, A SIGNIFICANT NUMBER OF ADDITIONAL SHARES
WILL BECOME FREELY TRADABLE, WHICH MAY REDUCE THE PER SHARE TRADING PRICE OF OUR
STOCK
 
     We had 14,655,914 ordinary shares outstanding as of June 30, 1999
(including net exercise of all in-the-money outstanding warrants at the time of
the initial public offering and assuming net exercise of the warrant issued to
Go2Net). All the shares sold in the initial public offering, including shares
issued upon the exercise of the underwriters' overallotment option, are freely
tradable. The remaining 11,205,914 ordinary shares outstanding, including the
ordinary shares and the warrant shares being offered in this prospectus and the
warrants outstanding (assuming net exercise of such warrants) are subject to
lockup agreements that prohibit the sale of the shares for 180 days after the
date of the
 
                                       13

<PAGE>   17
 
initial public prospectus. That prospectus was dated July 13, 1999 and the 180
day period expires January 13, 2000. Immediately after the 180-day lockup
period, 6,839,948 of the outstanding ordinary shares will become available for
sale. The remaining ordinary shares will become available at various times
thereafter upon the expiration of one-year holding periods. Sales of a
substantial number of ordinary shares in the public market after this offering
or after the expiration of the lockup and holding periods could cause the market
price of our ordinary shares to decline.
 
PURCHASERS OF OUR ORDINARY SHARES MAY SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
 
     The offering price of the shares may be substantially higher than the book
value per share of our ordinary shares. Some elements of our market value do not
originate from measurable transactions. Therefore, there is not a corresponding
rise in "book," or historical cost accounting, value for our rise in market
value, if any. Examples of these elements include the perceived growth prospects
of our core commercial market, perceived growth prospects of our Web-based email
services and our perceived competitive position within the market for Web-based
email services. Purchasers of the ordinary shares or the warrant will experience
immediate dilution to the extent the purchase price of the shares, or the
exercise price of the warrant, is lower than the pro forma net tangible book
value per share of ordinary shares. Purchasers may also experience additional
dilution upon the exercise of outstanding stock options.
 
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 own over five percent of our ordinary shares
beneficially own approximately 48.9 percent of our outstanding ordinary shares.
If they vote together, these shareholders will be able to exercise significant
influence over all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership could also delay or prevent a change in control of
CommTouch.
 
     Go2Net and Vulcan Ventures beneficially own approximately 17% of our
outstanding ordinary shares (assuming exercise of all warrants, including the
warrant offered in this prospectus). Vulcan Ventures is a significant
shareholder of Go2Net. Accordingly, Go2Net will be able to significantly
influence and possibly exercise control over most matters requiring approval by
our shareholders, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control. Go2Net and Vulcan
also have the right to name one director to our Board as long as they continue
to hold at least 25% of the shares being offered under this prospectus and the
shares available on exercise of the Go2Net warrant. They have named Thomas Camp
to the Board under this provision. In addition, conflicts of interest may arise
as a consequence of Go2Net's control relationship with us, including:
 
     - conflicts between Go2Net, as our controlling shareholder, and our other
       shareholders, whose interests may differ with respect to, among other
       things, our strategic direction or significant corporate transactions;
 
     - conflicts related to corporate opportunities that could be pursued by us,
       on the one hand, or by Go2Net, on the other hand; or
 
     - conflicts related to existing or new contractual relationships between
       us, on the one hand, and Go2Net and its other affiliates, on the other
       hand.
 
                                       14

<PAGE>   18
 
RISKS RELATING TO OPERATIONS IN ISRAEL
 
WE HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL, WHICH HAS
HISTORICALLY EXPERIENCED SEVERE ECONOMIC INSTABILITY AND MILITARY AND POLITICAL
UNREST
 
     We are incorporated under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although
substantially all of our sales currently are being made to customers outside
Israel, we are nonetheless directly influenced by the political, economic and
military conditions affecting Israel. Any major hostilities involving Israel, or
the interruption or curtailment of trade between Israel and its present trading
partners, could significantly harm our business, operating results and financial
condition.
 
     Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. Since the establishment of the State of Israel in 1948, a
state of hostility has existed, varying in degree and intensity, between Israel
and the Arab countries. In addition, Israel and companies doing business with
Israel have been the subject of an economic boycott by the Arab countries since
Israel's establishment. Although Israel has entered into various agreements with
certain Arab countries and the Palestinian Authority, and various declarations
have been signed in connection with efforts to resolve some of the economic and
political problems in the Middle East, we cannot predict whether or in what
manner these problems will be resolved.
 
     In addition, certain of our officers and employees are currently obligated
to perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. CommTouch has operated
effectively under these requirements since its inception. We cannot predict the
effect of these obligations on CommTouch in the future.
 
     Inflation in Israel and devaluation of the NIS could impact our financial
results. Although Israel has substantially reduced the rates of inflation and
devaluation in recent years, they are still relatively high and we could be
harmed by inflation or devaluation. If inflation rates in Israel increase again
and hurt Israel's economy as a whole, our operations and financial condition
could suffer. Moreover, non-residents of Israel are subject to income tax on
certain income (including cash dividends) derived from sources in Israel. The
tax treaty between Israel and the United States provides for a maximum tax of 25
percent on dividends paid to residents of the United States and for withholding
at a rate of 15 percent with respect to dividends paid by an Approved
Enterprise, as discussed below.
 
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
prospectus reside outside of the United States. Therefore, you might not be able
to enforce any judgment obtained in the U.S. against us or any of such persons.
You might not be able to bring civil actions under U.S. securities laws if you
file a lawsuit in Israel. However, we have been advised by our Israeli counsel
that, subject to certain limitations, Israeli courts may enforce a final
judgment of a U.S. court for liquidated amounts in civil matters after a hearing
in Israel. We have appointed CommTouch Software Inc., our U.S. subsidiary, as
our agent to receive service of process in any action against us arising out of
this offering. 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 will be payable in Israeli
currency.
                                       15

<PAGE>   19
 
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 STOCK
 
     Certain provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
CommTouch. The Israeli Companies Ordinance, which governs Israeli corporations,
does not contain provisions that deal specifically with a merger that allows for
the elimination of minority shareholders. Various provisions that deal with
"arrangements" between a company and its shareholders have been used, however,
to effect squeeze-out mergers. These generally require that the merger be
approved by at least 75 percent of the shareholders present and voting on the
proposed merger, at a shareholders meeting that has been called on at least 21
days' advance notice. In addition to shareholder approval, court approval of the
merger is required, which entails further delay and the need to obtain a
discretionary approval. Alternatively, the acquiror can cause minority
shareholders to sell their shares if it acquires at least 90 percent of all
outstanding shares (excluding shares held by the acquiror prior to the
acquisition) and none of the minority shareholders successfully seeks to block
the acquisition in court. The new Israeli Companies Law, which will come into
effect on February 1, 2000, does address squeeze-out mergers but does not
significantly modify these requirements.
 
     The new Israeli Companies Law also provides that an acquisition of shares
in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company.
This rule does not apply if there is already another 25% shareholder of the
company. Similarly, the new Israeli Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the
company. Here too there is an exception, if someone else is already a majority
shareholder of the company. Since regulations implementing these new rules have
not yet been promulgated, we do not know to what extent or how these rules will
apply to Israeli companies that are publicly traded outside of Israel.
 
     Finally, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his CommTouch shares for shares in a foreign
corporation to immediate taxation.
 
                                       16

<PAGE>   20
 
                                USE OF PROCEEDS
 
     We will not receive any proceeds from the sale of the shares and warrant by
the Selling Securityholders in this offering.
 
                           MARKET FOR ORDINARY SHARES
 
     The Company's ordinary shares are quoted on the Nasdaq National Market
under the symbol CTCH. There is no non-United States trading market for the
shares. There are 83 record holders of ordinary shares, of which approximately
44 represented United States record holders holding approximately 18% of the
outstanding ordinary shares of the Company. The Company believes that some
beneficial holders of its ordinary shares hold in nominee or street name, and
that there may be more than 4,653 beneficial holders. On October 25, 1999, the
last reported sales price of an ordinary share on the Nasdaq National Market was
$25.8125 per share.
 
                                DIVIDEND POLICY
 
     We have never paid cash dividends to our shareholders and we currently do
not intend to pay dividends for the foreseeable future. We intend to reinvest
earnings in the development and expansion of our business. We may only pay cash
dividends in any fiscal year out of profits, as determined under Israeli law.
The declaration of any final cash dividend requires shareholder approval.
Shareholders may reduce, but not increase, the amount of dividends from the
amount proposed by the Board of Directors.
 
     Because of CommTouch's investment programs' Approved Enterprise status, the
payment of dividends by CommTouch may subject CommTouch to certain Israeli taxes
to which it would not otherwise be subject. The tax exempt income attributable
to the Approved Enterprise can be distributed to shareholders without subjecting
CommTouch to taxes only upon the complete liquidation of CommTouch. If CommTouch
decides to distribute cash dividends out of income that has been exempt from
tax, the income out of which the dividend is distributed will be subject to
Israeli corporate tax (currently 25%). We have decided to reinvest the amount of
tax exempt income derived from our Approved Enterprise and not to distribute
such income as dividends. (For a description of our Approved Enterprise status,
please see "Israeli Taxation and Investment Programs.")
 
                                       17

<PAGE>   21
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of CommTouch as of June
30, 1999:
 
     The following data is presented:
 
     - On an actual basis.
 
     - On a pro forma basis to give effect to the automatic conversion of all of
       CommTouch's convertible preferred shares into 7,109,800 ordinary shares
       upon the closing of the initial public offering.
 
     - On a pro forma as adjusted basis to give effect to (1) the sale of
       3,000,000 ordinary shares in the initial public offering, at a price of
       $16.00 per share, (2) the exercise of the underwriters' overallotment
       option to acquire 450,000 ordinary shares at a price of $14.88 per share,
       (3) the sale of 1,344,086 ordinary shares to Go2Net and Vulcan Ventures
       in the private placement concurrent with the initial public offering at a
       price of $14.88 per share resulting in aggregate net cash proceeds from
       the private placement of approximately $19.2 million, (4) the issuance of
       258,328 ordinary shares, upon the assumed net exercise of outstanding
       in-the-money warrants as of June 30, 1999 to purchase 300,600 ordinary
       shares at a weighted average exercise price of $2.25 per share, and (5)
       the issuance of 227,200 ordinary shares, assuming the net exercise of an
       in-the-money warrant to purchase 1,136,000 ordinary shares issued to
       Go2Net at an exercise price of $12.80 per share subject to adjustment as
       set forth in the warrant.
 

<TABLE>
<CAPTION>
                                                                         JUNE 30, 1999
                                                              -----------------------------------
                                                                          (UNAUDITED)
                                                                        (IN THOUSANDS)
                                                              -----------------------------------
                                                                                       PRO FORMA
                                                               ACTUAL    PRO FORMA    AS ADJUSTED
                                                              --------   ---------    -----------
<S>                                                           <C>        <C>          <C>
Long-term liabilities less current portion..................  $    564   $    564      $    564
                                                              --------   --------      --------
Shareholders' equity:
  Convertible Preferred Shares, NIS 1 nominal value; 565,820
    shares authorized; 355,490 shares issued and outstanding
    actual; no shares issued and outstanding pro forma and
    pro forma as adjusted...................................       107         --            --
  Ordinary shares, NIS 0.05 par value; 12,000,000 shares
    authorized, 2,266,500 shares issued and outstanding
    actual, 9,376,300 shares issued and outstanding pro
    forma; 14,655,914 shares issued and outstanding, pro
    forma as adjusted.......................................        36        143           204
  Additional paid-in capital................................    39,421     39,421       111,387
  Deferred compensation.....................................    (7,528)    (7,528)       (7,528)
  Notes receivable from shareholders........................      (964)      (964)         (964)
  Accumulated deficit.......................................   (17,606)   (17,606)      (17,606)
                                                              --------   --------      --------
      Total shareholders' equity............................    13,466     13,466        85,493
                                                              --------   --------      --------
      Total capitalization..................................  $ 14,030   $ 14,030      $ 86,057
                                                              ========   ========      ========
</TABLE>

 
     The number of ordinary shares to be outstanding after this offering does
not include the following:
 
     - 954,020 ordinary shares issuable upon exercise of stock options
       outstanding under our stock option plans and stock option agreements as
       of June 30, 1999 at a weighted average exercise price of $4.12 per share;
 
     - 3,374,460 ordinary shares available for future grant or issuance under
       our stock option plans as of June 30, 1999; and
 
     - 215,000 ordinary shares issuable upon exercise of options granted to
       officers and directors prior to June 30, 1999 at a weighted average price
       of $15.76.
 
                                       18

<PAGE>   22
 
                            SELLING SECURITYHOLDERS
 
     The following table sets forth the names of the Selling Securityholders,
the number of ordinary shares owned by each Selling Securityholder prior to this
offering, the number of ordinary shares and the warrant being offered for the
account of each Selling Securityholder and the number of ordinary shares to be
owned by each Selling Securityholder after completion of this offering. This
information is based upon information provided by the Selling Securityholders.
Because the Selling Securityholders may offer all, some or none of their
ordinary shares, no definitive estimate as to the number of shares that will be
held by the Selling Securityholders after such offering can be provided.
 

<TABLE>
<CAPTION>
                             SHARES BENEFICIALLY                                SHARES BENEFICIALLY
SELLING SECURITYHOLDER(1)  OWNED PRIOR TO OFFERING    SHARES BEING OFFERED    OWNED AFTER OFFERING(3)
-------------------------  -----------------------    --------------------    -----------------------
<S>                        <C>                        <C>                     <C>
Go2Net...................         2,032,057(2)             2,032,057(2)                  0
Vulcan Ventures..........           448,029                  448,029                     0
</TABLE>

 
-------------------------
(1) Neither of the Selling Securityholders has, or within the past three years
    has had, any position, office, or other material relationship with the
    Company or any of its predecessors and affiliates. However, see
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations -- Strategic Transaction" and "Certain
    Transactions -- Relationship with Go2Net" for a discussion of Go2Net's
    customer relationship with the Company.
 
(2) Figure includes 896,057 ordinary shares held directly and 1,136,000 ordinary
    shares available upon exercise of a warrant.
 
(3) Assumes the sale of all shares and the warrant and underlying shares offered
    hereby.
 
                                       19

<PAGE>   23
 
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
     The selected consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the selected consolidated balance sheet
data as of December 31, 1997 and 1998 have been derived from the Consolidated
Financial Statements of CommTouch included elsewhere in this prospectus. The
selected consolidated statement of operation data for the years ended December
31, 1994 and 1995 and the selected consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 have been derived from the Consolidated
Financial Statements of CommTouch not included elsewhere in this prospectus. The
selected consolidated statement of operations data for the three and six months
ended June 30, 1998 and 1999 and the consolidated balance sheet data at June 30,
1999 have been derived from unaudited financial statements included elsewhere in
this prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that CommTouch considers
necessary for a fair presentation of its financial position at such dates and
the results of operations for those periods. Operating results for the three and
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. In addition, our
historical results are not necessarily indicative of results to be expected for
any future period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this prospectus.
 

<TABLE>
<CAPTION>
                                                                                            THREE MONTHS         SIX MONTHS
                                                     YEAR ENDED DECEMBER 31,               ENDED JUNE 30,      ENDED JUNE 30,
                                          ---------------------------------------------   -----------------   -----------------
                                           1994     1995     1996      1997      1998      1998      1999      1998      1999
                                          ------   ------   -------   -------   -------   -------   -------   -------   -------
                                                                                              UNAUDITED           UNAUDITED
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>      <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>
Consolidated Statement of Operations
  Data:
Revenues
  Email services........................  $   --   $   --   $    --   $    --   $   389   $    59   $   553   $    91   $   899
  Software licenses, maintenance and
    services............................     699    1,733     3,134       899        --        --        --        --        --
                                          ------   ------   -------   -------   -------   -------   -------   -------   -------
      Total revenues....................     699    1,733     3,134       899       389        59       553        91       899
Cost of revenues
  Email services........................      --       --        --        --       569        85       797       144     1,202
  Software licenses, maintenance and
    services............................     109      327       463       165        --        --        --        --        --
      Total cost of revenues............     109      327       463       165       569        85       797
Gross profit (loss).....................     590    1,406     2,671       734      (180)      (26)     (244)      (53)     (303)
                                          ------   ------   -------   -------   -------   -------   -------   -------   -------
Operating expenses
  Research and development, net.........     197      463     1,478     1,108     1,149       305       407       571       714
  Sales and marketing, net..............     956      832     1,965     2,202     2,001       506     1,180       965     1,661
  General and administrative............     287      369       465       829       604       137       780       275     1,587
  Amortization of stock-based employee
    deferred compensation...............      --       --        --        --        91         8     1,013        10     1,399
      Total operating expenses..........   1,440    1,664     3,908     4,139     3,845       956     3,380     1,821     5,361
                                          ------   ------   -------   -------   -------   -------   -------   -------   -------
Operating loss..........................    (850)    (258)   (1,237)   (3,405)   (4,025)     (982)   (3,624)   (1,874)   (5,664)
Interest and other expense, net.........     (65)     (62)      (45)      (68)     (326)      (59)        6       (86)     (265)
                                          ------   ------   -------   -------   -------   -------   -------   -------   -------
Net loss................................  $ (915)  $ (320)  $(1,282)  $(3,473)  $(4,351)  $(1,041)  $(3,618)  $(1,960)  $(5,929)
                                          ======   ======   =======   =======   =======   =======   =======   =======   =======
Net loss per share -- basic and
  diluted...............................  $(0.43)  $(0.11)  $ (0.66)  $ (2.40)  $ (3.00)  $ (0.72)  $ (1.66)  $ (1.35)    (3.17)
                                          ======   ======   =======   =======   =======   =======   =======   =======   =======
Weighted average shares -- basic and
  diluted...............................   2,113    2,885     1,934     1,450     1,450     1,450     2,178     1,450     1,869
                                          ======   ======   =======   =======   =======   =======   =======   =======   =======
Pro forma net loss per share (unaudited)
  Net loss per share -- basic and
    diluted.............................                                        $ (0.78)            $ (0.32)            $ (0.76)
                                                                                =======             =======             =======
  Weighted average shares -- basic and
    diluted.............................                                          5,594               7,313               7,830
                                                                                =======             =======             =======
</TABLE>

 
                                       20

<PAGE>   24
 
     The following data is presented:
 
     - on an actual basis;
 
     - on a pro forma basis to give effect to the automatic conversion of all of
       CommTouch's convertible preferred shares into 7,109,800 ordinary shares
       upon the closing of the initial public offering; and
 
     - on a pro forma as adjusted basis to give effect to (1) the sale of
       3,000,000 ordinary shares in the initial public offering, at a public
       offering price of $16.00 per share, (2) the exercise of the underwriters'
       overallotment option to acquire 450,000 ordinary shares at a price of
       $14.88 per share, (3) the sale of 1,344,086 ordinary shares to Go2Net and
       Vulcan Ventures, in a private placement concurrent with the initial
       public offering at a price of $14.88 per share resulting in aggregate net
       cash proceeds from the public offering and the private placement of
       approximately $66,177,000, (4) the issuance of 258,328 ordinary shares
       upon the assumed net exercise of outstanding in-the-money warrants as of
       June 30, 1999 to purchase 300,600 ordinary shares at a weighted average
       exercise price of $2.25 per share, and (5) the issuance of 227,200
       ordinary shares, assuming the net exercise of an in-the-money warrant to
       purchase 1,136,000 ordinary shares to be issued to Go2Net rat an exercise
       price of $12.80 per share, subject to adjustment as set forth in the
       warrant.
 

<TABLE>
<CAPTION>
                                                                                          JUNE 30, 1999
                                                                                           (UNAUDITED)
                                                  DECEMBER 31,                  ---------------------------------
                                   ------------------------------------------                          PRO FORMA
                                   1994    1995     1996     1997      1998     ACTUAL    PRO FORMA   AS ADJUSTED
                                   -----   -----   ------   -------   -------   -------   ---------   -----------
                                                 (IN THOUSANDS)
<S>                                <C>     <C>     <C>      <C>       <C>       <C>       <C>         <C>
Consolidated Balance Sheet Data:
  Cash and cash equivalents......  $   4   $  54   $  690   $   324   $   834   $11,663    $11,663      $77,840
  Working capital (deficit)......   (555)   (734)     539    (1,264)   (1,440)   11,602     11,602       77,779
  Total assets...................    497     773    2,180     1,065     2,366    16,094     16,094       88,121
  Long-term liabilities..........    352     324      371       366       530       564        564          564
  Shareholders' equity
    (deficit)....................   (554)   (650)     777    (1,018)     (815)   13,466     13,466       85,493
</TABLE>

 
                                       21

<PAGE>   25
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this prospectus. 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 "believes," "anticipates,"
"plans," "expects," "intends" 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 discussed in "Risk Factors" and elsewhere in this prospectus.
 
OVERVIEW
 
     We are a leading global provider of outsourced email and messaging
solutions. Our flexible and highly customizable solutions enable us to satisfy
the unique email and messaging needs of a wide range of customers, including
Web-based companies, small websites and businesses worldwide. As of June 30,
1999, we had over 109 business partners offering our Web-based email from their
sites. Our business partners include Excite, Go2Net, FortuneCity, Talk City and
Nippon Telephone and Telegraph. Through our business partners' sites we serve
approximately 4.9 million emailboxes. In November 1998, we launched our ZapZone
Network service, which enables small sites to provide email to their end users.
As of June 30, 1999, we had registered approximately 103,000 sites through the
ZapZone Network service, and were serving approximately 658,000 ZapZone Network
emailboxes. Business partners may provide us with a large number of users but
pay a relatively small minimum annual service fee. Consumers have historically
been reluctant to pay for services on the Internet, and therefore end users may
not be willing to pay for premium services. Since untargeted advertising on the
Internet has not shown a significant success rate, advertisers may not be
willing to pay us to provide banner advertising or direct e-marketing.
 
Business History and Transition
 
     Email Client Software Business (1991 - 1997). From 1991 to 1997, we
generated all of our revenue from sales of software licenses, maintenance and
service for stand-alone email client software for both mainframes and personal
computers. In 1996, we generated approximately $3.1 million in revenues from
such software licenses.
 
     Transition to Web-Based Email Services (1997). During 1996, the popularity
of email at home and at work began to increase rapidly. Microsoft began bundling
Outlook, its email client software, in "office suite" packages. At the same
time, Netscape began to provide its email client software bundled in its
Internet browser software. The entrance into the email client software market by
both Microsoft and Netscape resulted in the rapid adoption of email as a
mass-market communications channel. At the same time, use of the World Wide Web
(Web) began to expand rapidly, and the market for stand-alone email client
software began to be dominated by companies which bundled such software with
operating systems and/or browsers. We recognized an opportunity to leverage our
technology and experience in developing email software to pursue the market
created by these two rapidly growing phenomena: email and the Web. As a result,
we redeployed the efforts of our existing research and development personnel and
independent contractors to adapt the technology embedded in Pronto 96 for use as
a Web-based email service. We ceased all stand-alone email software license
sales during 1997, and as a result, revenues in 1997 decreased to $899,000. To
further support our
 
                                       22

<PAGE>   26
 
transition to providing Web-based email services, in 1997 we opened a marketing,
sales and support office in Silicon Valley in order to have better access to
Web-based business partners.
 
     Web-Based Email Service Business (January 1998 - Present). In January 1998,
we began to offer email services to business partners. Our services allow our
business partners to provide free Web-based email to their end users, thus
enhancing the business partner's online presence, increasing the frequency and
duration of visits to the partner's website and creating an opportunity for the
business partner and us to generate advertising and direct e-marketing revenue
through email. Meanwhile, we recognized that webmasters on small sites were
seeking a method to promote their sites and offer email to their users. In
November 1998, we launched our ZapZone Network service which enables small sites
to provide email to their end users at no cost in a matter of minutes.
 
Revenue Sources
 
     Email Service Revenues. In 1998, our email service revenue was derived from
service fees and setup and installation fees. Approximately 60.5% of our email
service revenue resulted from contracts that provide for business partners to
pay us minimum annual service fees. These agreements also typically provide for
the business partner to pay us a share of revenues generated from the sale of
banner advertisements on their email site. The minimum annual service fee is
credited against the shared portion of the advertising revenue. Revenue from
minimum annual service fees is recognized ratably over the contract term from
the launch of the email site.
 
     Some of our contracts with business partners provide for email service fees
based solely on a share of banner advertising revenue, with no minimum annual
commitment. In 1998, revenues from these contracts represented approximately
21.0% of our email service revenue. Revenues from sharing advertising are
recognized when such revenues are earned by our business partner.
 
     We anticipate that revenues from advertising will increase both in absolute
dollars and as a percentage of total revenues. This is because we have recently
attained a platform of approximately 4.9 million emailboxes through our business
partners and we believe that we now have a large enough user base to be
attractive to advertisers and to generate additional advertising revenues by
targeting the user demographic objectives of the advertiser. In addition, by
aggregating demographic information garnered from small websites, the ZapZone
Network service is providing us with an additional opportunity to focus
advertising efforts in a targeted manner. We anticipate that combined service
fees and advertising revenues shared by business partners will continue to be
our major source of revenue in the future.
 
     The remaining 18.5% of email service revenues in 1998 consisted of setup
and installation fees. We charge these fees in instances where the scope and
complexity of the solution warrant such a fee. These revenues are recognized
upon installation of the email site to which they relate. We expect that these
revenues will increase in absolute dollars as such installations increase in
number, but will decrease as a percentage of email service revenue in the
future, because service fees and advertising revenues are expected to increase
at a proportionally greater rate.
 
     Premium Services. In March 1999, we launched our premium service offerings.
These services enhance our core service and include features such as:
 
     - Off-line email client access;
 
     - Unified messaging;
 
     - Additional disk storage space;
 
     - Automated, user-defined email forwarding;
 
                                       23

<PAGE>   27
 
     - Automated, rules-based pager notification; and
 
     - Email-by-phone.
 
     These services will be paid for by emailbox users. To date we have not
generated any revenues from premium services but we anticipate that these
revenues will be a meaningful component of our revenues in the future.
 
     Direct E-Marketing. In December 1998, we began to offer direct e-marketing
opportunities to ecommerce vendors. Ecommerce vendors seek channels through
which they can market goods and services. Because of our installed user base and
our agreements with our business partners, we can assist ecommerce companies in
marketing their products to end users who have opted to receive offers by email.
We share with our business partners the revenues from this direct e-marketing,
which are earned either on a per-message basis or as a commission on products
sold. To date we have made these offerings available to only a limited number of
users. However, we anticipate that direct e-marketing revenues will be a
meaningful component of our revenues in the future.
 
STRATEGIC TRANSACTION
 
     Concurrently with the sale of the shares in the initial public offering we
entered into an agreement with Go2Net, a network of branded, technology- and
community-driven websites focused on personal finance, commerce, and games.
Go2Net also develops Web-related software. Pursuant to the agreement we will
offer Go2Net's end users with a private label email service, including our
email, calendaring and other services. The services will be customized to the
look and feel of Go2Net's websites. The terms of this agreement are
substantially the same as our commercial agreements with other business partners
except that we have agreed to share a materially greater portion of our
advertising revenues with Go2Net than we are sharing under other similar
agreements. In addition, in connection with the agreement, we issued to Go2Net a
warrant to purchase 1,136,000 ordinary shares at a per share exercise price of
$12.80, subject to adjustment as set forth in the warrant. The warrant is fully
vested and non-forfeitable. The warrant will expire on July 16, 2004, the fifth
anniversary of the public offering. The fair value of the warrant, estimated at
$5.8 million, will be amortized to operating expenses ratably over the minimum
term of the agreement, or one year. Simultaneously with the sale of the shares
in the initial public offering, we sold 1,344,086 ordinary shares to Go2Net and
Vulcan Ventures Incorporated at $14.88 per share in a private placement which
was not registered with the Securities and Exchange Commission at the time of
the initial public offering. In the future, we may have to issue in-the-money
warrants to acquire our ordinary shares to business partners who provide us with
a large base of potential end users. We may also have to provide these business
partners with more favorable commercial terms than we have previously provided
to our business partners. The issuance of in-the-money warrants and the grant of
more favorable terms to business partners may further dilute our shareholders,
increase our operating loss in the future and cause our stock price to fall.
 
                                       24

<PAGE>   28
 
RESULTS OF OPERATIONS
 
     The following table sets forth financial data for the years ended December
31, 1996, 1997 and 1998 and for the three and six months ended June 30, 1998 and
1999 (in thousands):
 

<TABLE>
<CAPTION>
                                  YEAR ENDED              THREE MONTHS         SIX MONTHS
                                 DECEMBER 31,            ENDED JUNE 30,      ENDED JUNE 30,
                          ---------------------------   -----------------   -----------------
                           1996      1997      1998      1998      1999      1998      1999
                          -------   -------   -------   -------   -------   -------   -------
                                                           (UNAUDITED)         (UNAUDITED)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues:
  Email services........  $    --   $    --   $   389   $    59   $   553   $    91   $   899
  Software licenses,
     maintenance and
     services...........    3,134       899        --        --        --        --        --
                          -------   -------   -------   -------   -------   -------   -------
       Total revenues...    3,134       899       389        59       553        91       899
                          -------   -------   -------   -------   -------   -------   -------
Cost of revenues:
  Email services........       --        --       569        85       797       144     1,202
                          -------   -------   -------   -------   -------   -------   -------
  Software licenses,
     maintenance and
     services...........      463       165        --        --        --        --        --
       Total cost of
          revenues......      463       165       569        85       797        --        --
  Gross profit (loss)...    2,671       734      (180)      (26)     (244)      (53)     (303)
                          -------   -------   -------   -------   -------   -------   -------
Operating expenses:
  Research and
     development, net...    1,479     1,108     1,149       305       407       571       714
  Sales and marketing...    1,965     2,202     2,001       506     1,180       965     1,661
  General and
     administrative.....      465       829       604       137       780       275     1,587
  Amortization of stock-
     based employee
     deferred
     compensation.......       --        --        91         8     1,013        10     1,399
       Total operating
          expenses......    3,908     4,139     3,845       956     3,428     1,821     5,361
                          -------   -------   -------   -------   -------   -------   -------
  Operating loss........   (1,237)   (3,405)   (4,025)     (982)   (3,624)   (1,874)   (5,664)
  Interest expense and
     other, net.........      (45)      (68)     (326)      (59)        6       (86)     (265)
  Net loss..............  $(1,282)  $(3,473)  $(4,351)  $(1,041)  $(3,618)  $(1,960)  $(5,929)
                          =======   =======   =======   =======   =======   =======   =======
</TABLE>

 
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
 
     Revenues. Email service revenues increased from $59,000 for the three
months ended June 30, 1998 to $553,000 for the three months ended June 30, 1999.
We began providing email services during the three months ended March 31, 1998.
Our business partners have grown from 13 at June 30, 1998 to over 109 business
partners at June 30, 1999. Revenues from one customer, Excite, amounted to
$55,000 and $110,000, or 9.9% and 12.2% of total revenues for the three and six
months ended June 30, 1999, respectively. In the future, we expect revenues from
Excite to decrease substantially as a percentage of email services revenue.
 
                                       25

<PAGE>   29
 
     Cost of Revenues. Our cost of revenues increased from $85,000 for the three
months ended June 30, 1998 to $797,000 for the three months ended June 30, 1999
and increased from $144,000 for the six months ended June 30, 1998 to $1,202,000
for the six months ended June 30, 1999 because of the growth of the number of
business partners. Cost of revenues consisted primarily of costs related to
Internet data center services from a third-party provider, depreciation of
equipment, Internet access, personnel and related costs. We expect cost of
revenues to increase on an absolute basis, primarily as a result of an increase
in our email service revenues, but to decrease as a percentage of email service
revenues due to economies of scale.
 
     Research and Development Costs, Net. Research and development costs consist
primarily of personnel and related costs, depreciation of equipment, supply
costs and royalties paid to the Israeli Government for grants received in prior
years for research and development activities. These royalties are paid at rates
ranging from 3% to 5% of total revenues. We do not expect to receive further
grants from the Israeli Government. At June 30, 1999, our outstanding contingent
obligation was approximately $524,000. Research and development expense are
charged to operations as incurred. Our research and development costs increased
from $305,000 for the three months ended June 30, 1998 to $407,000 for the three
months ended June 30, 1999, and from $571,000 for the six months ended June 30,
1998 to $714,000 for the six months ended June 30, 1999, due primarily to higher
personnel and related costs. We expect that research and development costs, net,
will increase in absolute dollar amounts due to increases in personnel costs
related directly to new employees being hired to develop new service offerings,
however such costs will decrease as a percentage of revenues.
 
     Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related costs, public relations, direct sales efforts, including
travel expenses and royalties paid to the Israeli Government for grants received
in prior years for marketing activities. We have a contingent obligation to pay
royalties to the Israeli Government for grants received in prior years for
marketing activities at a rate of 3% of total revenues. At June 30, 1999, our
outstanding contingent obligation was approximately $121,000. Our sales and
marketing expenses increased from $506,000 for the three months ended June 30,
1998 to $1,180,000 for the three months ended June 30, 1999, and increased from
$965,000 for the six months ended June 30, 1998 to $1,661,000 for the six months
ended June 30, 1999, due primarily to marketing and other costs to support the
growth of our email service revenues. We expect sales and marketing expenses to
significantly increase in the future in absolute dollar amounts due to increases
in personnel costs related directly to new employees being hired to conduct
sales to business partners and the related market support to further develop our
brand. We expect that for the next several quarters, the increase in sales and
marketing will be somewhat proportionate to the increase in revenues. Once we
achieve significant revenue growth, we expect that sales and marketing expenses
will start to decline as a percentage of total revenues as we hire additional
personnel and continue to support and develop the email service business.
 
     General and Administrative. General and administrative costs consist
primarily of personnel and related costs, professional services and facility
costs. Our general and administrative expenses increased from $137,000 for the
three months ended June 30, 1998 to $780,000 for the three months ended June 30,
1999, and increased from $275,000 for the six months ended June 30, 1998 to
$1,587,000 for the six months ended June 30, 1999, due primarily to
substantially higher personnel and related costs, facility costs, higher fees
for outside professional services and other costs to support the growth of our
email service revenues. We expect general and administrative costs to increase
on an absolute basis due to increased personnel and related costs, higher
facility costs associated with additional personnel and other costs necessary to
support and develop the email service business. We expect that general and
administrative expenses as a percentage of total revenues will start to decline
in the next several quarters.
 
                                       26

<PAGE>   30
 
     Amortization of Stock-based Employee Deferred Compensation. Our stock-based
employee compensation expenses increased from $8,000 for the three months ended
June 30, 1998 to $1,013,000 for the three months ended June 30, 1999, and from
$10,000 for the six months ended June 30, 1998 to $1,399,000 for the six months
ended June 30, 1999 due to the amortization of the aggregate of $1.3 million and
$8.5 million in deferred compensation recorded during the three months and the
six months ended June 30, 1999. The deferred compensation is being amortized
using the sum-of-digits method over the vesting schedule, generally four years
and will be slightly higher in the third quarter of 1999, then decreasing in
each successive quarter.
 
     Interest Income/(Expense) and Other Expense, Net. Our interest
income/(expense) and other expense, net, increased from a net expense of $59,000
for the three months ended June 30, 1998 to a net income of $6,000 for the three
months ended June 30, 1999 and from a net expense of $86,000 for the six months
ended June 30, 1998 to a net expense of $265,000 for the six months ended June
30, 1999, due primarily to increased recognized costs of warrants granted to the
Bank Lepituach Ha Taasia B'Israel Ltd. (Bank Lepituach Ha Taasia) net of
interest income earned from cash and cash equivalents. In April 1999, we fully
repaid the short-term bank line of credit to Bank Lepituach Ha Taasia.
 
     Income Taxes. As of December 31, 1998, we had approximately $5.7 million of
Israeli net operating loss carryforwards and $4.7 million of U.S. federal net
operating loss carryforwards available to offset future taxable income. The U.S.
net operating loss carryforwards will expire in various amounts in the years
2010 to 2016. The Israeli net operating loss carryforwards have no expiration
date.
 
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
     Revenues. In 1997, we ceased all sales of stand-alone email client software
licenses, maintenance and services. Accordingly, revenue comparisons between
1996, 1997 and 1998 are not meaningful. In 1998, our email service revenues were
$389,000, of which one customer, Excite, represented 54%. In the future, we
expect revenues from Excite to decrease substantially as a percentage of email
service revenue because the 1998 revenues from Excite included one-time payments
for setup and installation. We had no email service revenue in 1997. Our
revenues from software licenses and maintenance fees decreased from $3.1 million
in 1996 to $899,000 in 1997 due to the change in our business model and the
phasing out of our stand-alone email client software business.
 
     Cost of Revenues. In 1998, our cost of revenues was $569,000 and consisted
primarily of costs related to Internet data center services from a third-party
provider, depreciation of equipment, Internet access, personnel and related
costs. We expect cost of revenues to increase on an absolute basis, primarily as
a result of an increase in our email service revenues, but to decrease as a
percentage of email service revenues due to economies of scale. We had no email
service costs in 1996 and 1997. In 1996 and 1997, our costs of revenues were
$463,000 and $165,000. These costs consisted of expenses related to the
stand-alone email software business, including personnel and related costs,
media duplication and product packaging. The decrease in cost of revenues in
1997 from 1996 was due to the change in our business model as we phased out our
stand-alone email client software business.
 
     Research and Development Costs, Net. Research and development costs
decreased from $1.5 million in 1996 to $1.1 million in 1997 because of $288,000
in off-setting royalty-bearing grants from the Israeli Government, recorded as a
reduction of research and development costs. We have a contingent obligation to
pay royalties at the rate of 3%-5% of total revenues. Our outstanding contingent
obligation was approximately $411,000 as of December 31, 1998. Research and
 
                                       27

<PAGE>   31
 
development costs in 1998 remained relatively unchanged from 1997. However, in
1998 we transferred several key research and development personnel into our
operations group to support and maintain our newly developed Web-based email
services infrastructure. Costs relating to these personnel were included in cost
of revenues in 1998. We expect that research and development costs, net, will
increase due to increased personnel and related costs associated with the
accelerated development of new email service offerings.
 
     Sales and Marketing. Sales and marketing expenses were $2.0 million in
1996, $2.2 million in 1997 and $2.0 million in 1998. We have a contingent
obligation to pay royalties to the Israeli Government for grants received in
prior years for marketing activities at a rate of 3% of total revenue. This
contingent obligation was approximately $121,000 at December 31, 1998.
 
     General and Administrative. General and administrative costs were $465,000
in 1996, $829,000 in 1997 and $604,000 in 1998. The increase in 1997 was
primarily due to the write-off of $171,000 for receivables related to the
phasing out of our stand-alone email client software license sales.
 
     Interest Expense and Other, Net. Interest expense and other, net, consists
of interest payments and fair value of warrants granted in 1997 and 1998 in
connection with a short-term bank line of credit. Interest expense and other
expense, net, increased from $45,000 in 1996 to $68,000 in 1997 and to $326,000
in 1998. This increase in 1998 was due to a higher level of borrowing and change
in the terms of the agreement with Bank Lepituach Ha Taasia to include the grant
of warrants in addition to customary interest payments. In April 1999, we fully
repaid that short-term bank line of credit.
 
     Income Taxes. As of December 31, 1998, we had approximately $5.7 million of
Israeli net operating loss carryforwards and $4.7 million of U.S. federal net
operating loss carryforwards available to offset future taxable income. The U.S.
net operating loss carryforwards will expire in various amounts in the years
2010 to 2016. The Israeli net operating loss carryforwards have no expiration
date.
 
                                       28

<PAGE>   32
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth certain unaudited quarterly statements of
operations data for the five quarters ended June 30, 1999. This information has
been derived from CommTouch's consolidated unaudited financial statements,
which, in management's opinion, have been prepared on the same basis as the
audited Consolidated Financial Statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. This information
should be read in conjunction with our audited Consolidated Financial Statements
and the Notes thereto included elsewhere in this prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period. Given the relatively small absolute dollar amounts in the
operating results for each quarter presented below, non-periodic amounts accrued
in one quarter cause significant fluctuations.
 

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                      --------------------------------------------------------------
                                      JUNE 30,   SEPTEMBER 30,   DECEMBER 31,   MARCH 31,   JUNE 30,
                                        1998         1998            1998         1999        1999
                                      --------   -------------   ------------   ---------   --------
                                                              (IN THOUSANDS)
                                                               (UNAUDITED)
<S>                                   <C>        <C>             <C>            <C>         <C>
Total email service revenues........  $    59       $   130        $   168       $   346    $   553
Cost of email service revenues......       85           166            259           405        797
                                      -------       -------        -------       -------    -------
Gross profit (loss).................      (26)          (36)           (91)          (59)      (244)
                                      -------       -------        -------       -------    -------
Operating expenses:
  Research and development..........      305           308            270           307        407
  Sales and marketing...............      506           509            527           481      1,180
  General and administrative........      137           151            178           807        780
                                      -------       -------        -------       -------    -------
Amortization of stock-based employee
  deferred compensation.............        8            18             63           386      1,013
     Total operating expenses.......      956           986          1,038         1,981      3,380
                                      -------       -------        -------       -------    -------
Operating loss......................     (982)       (1,022)        (1,129)       (2,040)    (3,624)
Interest expense and other, net.....      (59)          (28)          (212)         (271)         6
Net loss............................  $(1,041)      $(1,050)       $(1,341)      $(2,311)   $(3,618)
                                      =======       =======        =======       =======    =======
</TABLE>

 
FLUCTUATIONS IN QUARTERLY RESULTS
 
     We have incurred operating losses since inception, and we cannot be certain
that we will achieve profitability on a quarterly or annual basis in the future.
Our results of operations have fluctuated and are likely to continue to
fluctuate significantly from quarter to quarter as a result of a variety of
factors, many of which are outside of our control. A relatively large expense in
a quarter could have a negative effect on our financial performance in that
quarter. Additionally, as a strategic response to a changing competitive
environment, we may elect from time to time to make certain pricing, service,
marketing or acquisition decisions that could have a negative effect on our
quarterly financial performance. Other factors that may cause our future
operating results to fluctuate include, but are not limited to:
 
     - continued growth of the Internet and of email usage;
 
     - demand for Web-based email services;
 
     - our ability to attract and retain customers and maintain customer
       satisfaction;
 
     - our ability to upgrade, develop and maintain our systems and
       infrastructure;
 
                                       29

<PAGE>   33
 
     - the amount and timing of operating costs and capital expenditures
       relating to expansion of our business and infrastructure;
 
     - technical difficulties or system outages;
 
     - dollar/NIS exchange rate fluctuations;
 
     - the announcement or introduction of new or enhanced services by our
       competitors;
 
     - our ability to attract and retain qualified personnel with Internet
       industry expertise, particularly sales and marketing personnel;
 
     - the pricing policies of our competitors;
 
     - failure to increase our sales; and
 
     - governmental regulation relating to the Internet, and email in
       particular.
 
     In addition to the factors set forth above, our operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     We have financed our operations principally from the sale of equity
securities and to a lesser extent from bank loans and research and development
and royalty-bearing marketing grants from the Israeli government. As of June 30,
1999, we had $11,663,000 in cash and cash equivalents.
 
     Net cash provided by financing activities was $2.4 million in 1996, $2.3
million in 1997, $4.5 million in 1998 and $17.1 million in the six months ended
June 30, 1999. Net cash used in operating activities was $1.3 million in 1996,
$2.6 million in 1997, $3.6 million in 1998 and $4.6 million in the six months
ended June 30, 1999. Net cash used in operating activities in 1996, 1997, and
1998 and the six months ended June 30, 1999 is comprised of net loss for each of
the years partially offset by depreciation and amortization expenses and in
1996, 1997. The six months ended June 30, 1999 was also impacted by changes in
trade receivables in addition to an increase in prepaid expenses partially
offset by depreciation, amortization expenses, increases in other accounts
receivable and prepaid expenses, which primarily relate to costs incurred in
connection with the initial public offering. Net cash used in investing
activities was $427,000 in 1996, $93,000 in 1997, $442,000 in 1998 and
$1,659,000 for the six months ended June 30, 1999. These investing activities
consisted of purchases of property and equipment. During 1998, we entered into
capital leases of $328,000.
 
     As of June 30, 1999, we had net working capital of $11,602,000. We had a
short-term bank line of credit agreement collateralized by all our assets and
share capital, allowing us to borrow up to $1.3 million. The short-term bank
line of credit was repaid in April 1999. Interest under the terms of the
short-term bank line of credit agreement was a combination of warrants for
ordinary shares at an exercise price equal to the par value, calculated based on
the outstanding utilized line of credit, and an additional annual interest
payment at a rate of LIBOR plus 3% (LIBOR plus 8% for overdrawn amounts).
Through April 30, 1999, we issued to the bank warrants to purchase 92,340
ordinary shares. The bank exercised the warrant in the second quarter of 1999.
 
     In the first quarter of 1999, we issued Series C Convertible Preferred
Shares to investors resulting in net proceeds of $5.3 million. In the second
quarter of 1999, we issued to investors Convertible Promissory Notes which have
since converted into 42,081 Series D Convertible Preferred Shares, resulting in
net proceeds of approximately $13.2 million. All of our convertible preferred
shares automatically converted into ordinary shares upon the closing of our
initial public offering.
 
                                       30

<PAGE>   34
 
     On July 16, 1999, the Company raised $66,177,000, net of underwriters
commission, from the public offering (including the exercise of the
underwriters' overallotment option) and the private placement from the strategic
partnership with Go2Net and Vulcan Ventures.
 
     We believe that the net proceeds from the initial public offering and the
private placement concurrent with the initial public offering, together with
existing cash and our other financing arrangements, provide us with sufficient
funds to finance operations and make the necessary capital expenditures to
support growth through the next 12 months.
 
YEAR 2000 ISSUE
 
     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations, causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. As a result, many companies' computer systems may need to
be upgraded or replaced in order to avoid Year 2000 issues.
 
     We are a comparatively new enterprise, and, accordingly, the majority of
the software and hardware we use to manage our business has been purchased or
developed by us within the last 24 months. While this fact does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology (IT) we use to manage our business is
not based upon "legacy system" hardware and software. "Legacy system" is a term
often used to describe hardware and software systems which were developed in
previous decades when there was less awareness of Year 2000 issues. Generally,
hardware and software design in this decade and the past several years in
particular has given greater consideration to Year 2000 issues. All of the
software code we have internally developed to manage our network traffic, for
example, uses four digits to define the applicable year.
 
     We are in the process of testing our internal IT and non-IT systems. To
date, we have only completed preliminary testing of our internally developed IT
and non-IT systems. All of the testing we have completed has been performed by
our own personnel; to date, we have not retained any outside service or
consultants to test or review our systems for Year 2000 compliance. Based on the
testing we have performed, we believe that such software is Year 2000 compliant;
however, we intend to complete more extensive testing in the third and fourth
quarters of 1999.
 
     In addition to our internally developed software, we utilize software and
hardware developed by third parties for both our network and internal
information systems. To date, we have not done any testing of such third-party
software or hardware to determine Year 2000 compliance. We have, however,
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers that such hardware and networking equipment is
Year 2000 compliant. Additionally, we have received assurances from the
providers of key software applications for our internal operations that their
software is Year 2000 compliant. Based upon an initial evaluation of our broader
list of software and hardware providers, we believe that all of these providers
are reviewing and implementing their own Year 2000 compliance programs, and we
will work with these providers to address the Year 2000 issue and continue to
seek assurances from them that their products are Year 2000 compliant.
 
     In addition, we rely on third party network infrastructure providers to
gain access to the Internet. If such providers experience business interruptions
as a result of their failure to achieve Year 2000
 
                                       31

<PAGE>   35
 
compliance, our ability to provide Internet connectivity could be impaired,
which could have a material adverse effect on our business, results of
operations and financial condition.
 
     Our customers' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenues and execute our business plan.
We currently derive revenue by charging a fixed fee per month for each mailbox
we host, by charging a service fee plus advertising sharing or by sharing
advertising revenues with our customers. In either case, interruptions in our
customers' services and online activities caused by Year 2000 problems could
have a material, adverse effect on our revenues to the extent that such
interruptions limit or delay our customers' ability to expand their base of
email users.
 
     We have not incurred any significant expenses to date, and we do not
anticipate that the total costs associated with our Year 2000 remediation
efforts, including both expenses already incurred and any to be incurred in the
future, will exceed $100,000. However, if we, our customers, our providers of
hardware and software, or our third party network providers fail to remedy any
Year 2000 issues, our service could be interrupted and we could experience a
material loss of revenues that could have a material adverse effect on our
business, results of operations, and financial condition. We would consider such
an interruption to be the most reasonably likely unfavorable result of any
failure by us, or the third parties upon whom we rely, to achieve Year 2000
compliance. Presently, we believe we are unable to reasonably estimate the
duration and extent of any such interruption, or quantify the effect it may have
on our future revenues. We have yet to develop a comprehensive contingency plan
to address the issues which could result from such an event. We are prepared to
develop such a plan if our ongoing assessment leads us to conclude we have
significant exposure based upon the likelihood of such an event.
 
EFFECTIVE CORPORATE TAX RATES
 
     Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to corporate tax at the rate of 36% of taxable income. The majority of
our income, however, is derived from our company's capital investment program
with Approved Enterprise status under the Law for the Encouragement of Capital
Investments in two separate plans, and is therefore eligible for certain tax
benefits. Pursuant to these benefits, we will enjoy a tax exemption on income
derived during the first two years in which such investment plans produce
taxable income (provided that we do not distribute such income as a dividend)
and a reduced tax rate of 10% to 25% for an additional period of eight years
depending on the level of foreign investment in CommTouch. All of these tax
benefits are subject to various conditions and restrictions. There can be no
assurance that we will obtain approval for additional Approved Enterprise
programs, or that the provisions of the law will not change. Moreover,
notwithstanding these tax benefits, to the extent we receive income from
countries other than Israel, such income may be subject to withholding tax.
 
     Since we have incurred tax losses through December 31, 1998, we have not
yet used the tax benefits for which we are eligible.
 
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
 
     Most of our sales are in dollars. However, a large portion of our costs
relates to our operations in Israel. A substantial portion of our operating
expenses, primarily our research and development expenses, is denominated in
NIS. For the purposes of our financial statements, costs not effectively
denominated in dollars are translated to dollars when recorded, at prevailing
exchange rates and will increase if the rate of inflation in Israel exceeds the
devaluation of the NIS as compared to the dollar
 
                                       32

<PAGE>   36
 
or if the timing of such devaluations lags considerably behind inflation.
Consequently, we are and will be affected by changes in the prevailing
NIS/dollar exchange rate. We might also be affected by the dollar exchange rate
to the major European and Asian currencies, due to the fact that we derive
revenues from business partners in Europe and Asia.
 
     In recent years (until 1997), inflation in Israel exceeded the devaluation
of the NIS against the dollar and the Company experienced increases in the
dollar cost of its operations in Israel. For example, in 1995 and 1996, the rate
of inflation in Israel was 8.1% and 10.6%, and the devaluation of the NIS
against the dollar was 3.9% and 3.7%. This trend was reversed during 1997 and
1998 (when the rate of inflation was 7.0% and 8.6%, and the rate of devaluation
was 8.8% and 17.6%). The reversal experienced in 1997 and 1998 may not continue
and we may be materially adversely affected in the future if inflation in Israel
exceeds the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind increases in inflation in Israel.
 
     Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on our profitability and period-to-period comparisons of our
results. The effects of foreign currency remeasurements are reported in the
Consolidated Financial Statements in current operations. In the fourth quarter
of 1998 the rate of exchange between the NIS and the dollar fluctuated more
significantly than in prior periods.
 
     The representative exchange rate, as reported by the Bank of Israel, was
NIS 4.076 for one dollar on June 30, 1999 (NIS 4.160 on December 31, 1998, NIS
3.536 on December 31, 1997 and NIS 3.251 on December 31, 1996).
 
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
 
     We develop our technology in Israel and provide our services in North
America, India, Europe and the Far East. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. As most of our sales are
currently made in U.S. dollars, a strengthening of the dollar could make our
services less competitive in foreign markets. Our interest expense on our
capital lease obligations with a U.S. leasing company is sensitive to changes in
the general level of U.S. interest rates. Due to the nature and level of our
debts, we have concluded that there is currently no material market risk
exposure. Therefore, no quantitative tabular disclosures are required.
 
                                       33

<PAGE>   37
 
 
                                   BUSINESS
 
COMPANY OVERVIEW
 
     We are a leading global provider of email and other messaging solutions.
Our flexible and highly customizable solutions enable us to satisfy the unique
email and messaging needs of a wide range of business partners, including
websites of all sizes and businesses worldwide. As of June 30, 1999, we had over
109 business partners offering our Web-based email from their sites. Our
business partners include Excite, Go2Net, FortuneCity, Talk City and Nippon
Telephone and Telegraph. Through our business partners' sites we serve
approximately 4.9 million emailboxes. In November 1998, we launched our ZapZone
Network service, which enables sites to provide email to their end users at no
cost. As of June 30, 1999, we had registered approximately 103,000 sites through
the ZapZone Network service, and were serving approximately 658,000 ZapZone
Network emailboxes.
 
INDUSTRY BACKGROUND
 
GROWTH OF THE INTERNET WORLDWIDE AND PROLIFERATION OF EMAIL
 
     The Internet has become a vitally important global medium for
communication, commerce, content distribution and advertising. International
Data Corporation, or IDC, estimates that as of December 1998, there were over 28
million Web users in the United States and over 83 million users worldwide. IDC
projects that, by the end of 2002, these numbers will increase to over 90
million Web users in the United States and over 282 million users worldwide.
This growth in the global usage of the Web provides significant opportunities
for emerging Web-based businesses and other companies developing an online
presence.
 
     Email is one of the most widely used applications on the Internet and has
become a primary platform for business and personal communication. According to
Forrester Research, over 80 percent of Internet users access their email while
online, making this activity the most popular use of the Internet. IDC projects
that email traffic in the United States will increase from 1.2 billion messages
per day in 1997 to 8.0 billion messages per day in 2002.
 
EMERGENCE OF WEB-BASED EMAIL
 
     Until recently, most email systems were provided by employers, Internet
service providers (ISPs) or universities to individuals or closed groups of end
users through software applications located on the users' desktops or local area
networks. Such email systems, however, only permit access through the computer
or network on which the email software resides or through cumbersome remote
access systems. The recent emergence of email systems that use Internet browsers
as the application for sending and receiving email has resulted in tremendous
advances in email access, functionality and ease of use. This new email standard
is commonly referred to as "Web-based email."
 
     Web-based email offers the following benefits over traditional closed
systems:
 
     - anytime, anywhere (universal) access to both business and personal email
       accounts;
 
     - advanced integrated communication services over the Web, such as unified
       messaging (receiving faxes and voicemail via email) and integrated
       calendars and directories; and
 
     - easy to use registration, setup and administration.
 
                                       34

<PAGE>   38
 
     With the dramatic growth of international Internet usage, businesses
worldwide are seeking to differentiate themselves online. Email is an optimal
solution to address this business need because it increases brand awareness,
builds and reinforces a loyal, connected member base and facilitates commerce in
the following ways:
 
     - Companies embracing Web-based email can enhance their brand identity by
       controlling the look and feel of their Web-based email interface and also
       by providing end users with distinctive branded email addresses such as
       user@companyname.com.
 
     - Web-based email significantly enhances the frequency and duration of
       website visits, commonly referred to as the website's "stickiness." The
       personalized nature of email and the ability to bundle it with additional
       services, such as calendaring, scheduling and unified messaging,
       establishes an important one-to-one relationship with email users.
 
     - Email is emerging as an effective application for direct marketing
       online, as email users provide important demographic data when they
       register for and use email services. This information can be used to
       create highly targeted marketing campaigns with minimal distribution
       costs.
 
THE OPPORTUNITY TO PROVIDE OUTSOURCED WEB-BASED EMAIL SERVICES
 
     While many organizations worldwide recognize the advantages of Web-based
email services, they often lack the infrastructure, expertise and resources to
fully realize these benefits through internal development. Due to the growing
complexity of in-house email systems and the increasing levels of infrastructure
investment and management resources needed to provide comprehensive email
services, organizations around the world are seeking to outsource email
services. Businesses worldwide seek to partner with a dedicated provider of
Web-based email to provide high quality, feature-rich email services without
having to invest internally in email management and systems. Small websites,
such as affinity sites and personal homepages, seek free, easy to implement
email services for their end users.
 
THE COMMTOUCH SOLUTION
 
     We are a leading global provider of email and other messaging services. Our
flexible and highly customizable solutions enable us to satisfy the different
email and messaging needs of a wide range of customers worldwide, including
websites of all sizes and businesses of all types.
 
BENEFITS OF THE COMMTOUCH SOLUTION
 
     Extensive Email Features. Our core solution is easy to use and provides a
broad range of industry-standard functionality. This includes the ability for
end users to collect email from other email accounts, to create folders, to
attach electronic documents, to store messages, to maintain a contact center, to
create distribution lists and to establish user profiles and signatures. Our
core service uses IMAP4, an advanced email protocol, which allows email folders
to be accessed from multiple email environments.
 
     The value of our solution is increased by our provision of premium
services, which allow end users to send and receive faxes, voicemail and pages
from the emailbox; access the Web-based emailbox from an off-line client (such
as Microsoft Outlook); and have email forwarded to other addresses. We believe
that, by providing a single platform which integrates multiple communication
services and devices, the Web-based emailbox we provide has the potential to
become our end users' primary online communications center.
 
                                       35

<PAGE>   39
 
     Ability to Support Hundreds of Millions of Emailboxes. Our modular
technology architecture enables the rapid set up of full-service hosting
facilities and enables us to rapidly and easily expand our system as our user
base grows. In addition, we utilize redundant servers and server load balancing
to re-direct traffic to prevent service interruptions. Our system architecture
and software platform have been designed to provide high quality service to
hundreds of millions of emailboxes across millions of domains. We believe that
our robust and flexible technology platform enables us to maintain one of the
highest service performance levels in the industry.
 
     Customization. Our solutions enable our business partners to leverage their
email as a brand building tool. Business partners offer our email and messaging
services to their end users with the partner's domain name. For example, a
business partner can provide email at its website with an address such as:
user@companyname.com. This repeated visibility of the partner's name on every
email message promotes brand awareness and customer loyalty. In addition, our
business partners can use our proprietary customization tool to design the look
and feel of their Web-based email interface so that it reflects their own brand
image.
 
     Increased Website Usage. Our solutions increase the potential for our
partners to generate revenue by increasing the stickiness of their websites. We
believe that traffic to our partners' websites increases as end users frequently
visit the website to check their email. Thus, business partners may have many
opportunities to expose their end users to repeated and/or fresh content every
time they send or receive email. The benefits of increased website stickiness
include more frequent communication with end users, enhanced customer loyalty
and the opportunity to generate revenues from advertising, direct marketing and
ecommerce transactions.
 
     Online Marketing Capabilities. Our business partners can leverage our email
solutions along with the demographic information of their end users to conduct
one-to-one marketing and targeted advertising campaigns. We collect demographic
information from end users when they register for their emailbox. We believe
this information provides a powerful platform on which to design targeted
marketing campaigns. To enhance our business partners' marketing capabilities,
we provide our MailTarget tool which enables them to select and deliver tailored
messages to targeted segments of their user population.
 
     Rapidly Deployable and Cost-Effective Solutions. Our solutions for business
partners can be implemented in as little as several days, while solutions for
small websites can be implemented in a matter of minutes. We believe that this
rapid time to market is critical to our business partners, who desire to realize
the benefits of Web-based email as quickly as possible. Our flexible technology
and economies of scale enable us to provide email solutions in a cost-effective
manner, allowing businesses to achieve significant economic advantages. We also
provide comprehensive maintenance and administration of our email service, which
eliminates the need for our business partners to undertake the significant
burden of developing and maintaining an in-house email system.
 
     Extensive Language Capabilities. We provide email services in the following
15 languages: English, Chinese, Japanese, Spanish, French, German, Portuguese,
Dutch, Finnish, Danish, Norwegian, Swedish, Russian, Hebrew and Italian.
Additionally, we can support multiple languages on the same site for any of our
business partners and offer spell-checking in many of these languages. Our
multi-lingual capabilities enable us to serve the needs of businesses worldwide
as well as multinational organizations.
 
                                       36

<PAGE>   40
 
COMMTOUCH STRATEGY
 
     Our objective is to be the leading global provider of integrated email and
other messaging services. We plan to achieve this goal by pursuing the following
key strategies:
 
EXPAND USER BASE BY ADDING BUSINESS PARTNERS
 
     We are building our base of email users by partnering with companies
worldwide that want to offer their online customers a branded email service. As
of June 30, 1999, we had over 109 business partners offering our Web-based email
from their sites. Through these business partners, we serve approximately 4.9
million emailboxes worldwide. These partners include Web-based companies, such
as Excite, Talk City, Go2Net, FortuneCity and Nippon Telephone and Telegraph.
Concurrently with the closing of the initial public offering we entered into an
agreement with Go2Net to provide its end users with a customized, private label
email service. We plan to continue to recruit top-tier partners and to position
ourselves as a leading provider of state-of-the-art email services that are
critical to our partners' online business strategy. We believe recruiting more
business partners and end users will provide us with greater revenue
opportunities from service fees, advertising, premium services and direct
e-marketing possibilities as well as greater brand recognition.
 
EXTEND INTERNATIONAL LEADERSHIP
 
     We plan to continue to aggressively market our solutions to business
partners worldwide. We have focused on marketing our international email
services in countries which we believe will experience the largest growth in Web
users. We have developed multiple language interfaces for our email services to
be used in the world's most widely used non-English languages, such as Chinese,
Japanese, Russian, French, Spanish and German. We have also established a
marketing group in Israel, because of its proximity to both Europe and Asia, and
a marketing group in the United States to market to North America, Canada and
Latin America. We believe that we have a strong advantage in providing Web-based
email services in many major foreign markets.
 
EXPAND OUR EMAIL SERVICE FOR SMALL WEBSITES THROUGH THE ZAPZONE NETWORK SERVICE
 
     Small websites, online affinity groups and personal homepages represent a
significant and growing segment of the market for Web-based email
communications. We recognized that this market was under-served, and as a result
we developed our ZapZone Network service solution, which we launched in November
1998. By June 30, 1999, we had registered approximately 103,000 sites through
this service, and are currently serving approximately 658,000 ZapZone Network
service emailboxes. Our objective is to make the ZapZone Network service the
premier brand of choice for small sites. Every email sent and received contains
the ZapZone Network domain name, and the "powered by CommTouch" logo. We believe
that this produces a powerful viral marketing effect and promotes the ZapZone
Network brand quickly, efficiently and at a low cost. We plan to generate
revenues from our ZapZone Network service by selling premium and direct
marketing services to end users and also by selling advertising and sponsorship
packages to third parties.
 
EXPLOIT PRICE-PER-EMAILBOX OFFERING TO BUSINESSES
 
     We believe that as more businesses seek to outsource their email services
and develop a need for creative messaging solutions, there is an opportunity for
us to provide our price-per-emailbox outsourcing solutions. We intend to
aggressively market our outsourcing solution by increasing our direct sales and
marketing personnel and resources in this market segment. Additionally, we
intend to
 
                                       37

<PAGE>   41
 
partner with businesses that have traditionally offered goods and services to
the small office/home office (SOHO) market to offer the price-per-emailbox
option to that market.
 
DRIVE MULTIPLE REVENUE STREAMS
 
     We plan to continue to generate multiple revenue streams from our email and
messaging services. We are currently focused on the following revenue sources:
 
     - Service fees. We plan to continue to charge service fees for delivering
       outsourced email solutions to business partners.
 
     - Advertising. We plan to continue to sell advertising and sponsorships on
       our global email network to both business partners and third party
       vendors.
 
     - Premium services. We plan to continue to market and upsell premium
       services to end users.
 
     - Direct online marketing. We plan to continue to offer business partners
       and other third parties the opportunity to send targeted messages to
       select segments of our business partners' user base and our ZapZone
       Network user base, and share in the revenue that these parties generate
       from online selling.
 
EXTEND TECHNOLOGY LEADERSHIP IN EMAIL SERVICES
 
     We intend to leverage our core technology, software platform and expertise
in developing and managing a comprehensive Web-based email service to deliver
industry-leading functionality and advanced messaging services. We are currently
planning to add new services that we believe end users and webmasters desire,
including calendar integration, webmaster administration tools, message boards
and list server features, HTML editing and email message language translation.
We intend to continue to work closely with our business partners to identify new
trends and functionality that will be popular with end users.
 
LEVERAGE OUR COST-EFFECTIVE TECHNOLOGY PLATFORM
 
     Our open, scalable architecture gives us the flexibility to use servers
that provide us with the best cost-quality combination and to leverage
third-party hosting providers. This enables us to achieve a low service
cost-per-emailbox while maintaining a high level of service quality. This
combination of economic advantage and service quality enables us to price our
services attractively to our business partners and end users. We believe that
the price performance of our solution enables us to compete aggressively, expand
market share and build our brand name.
 
SERVICES
 
     We provide outsourced email and messaging services to customers of all
sizes. Our solutions enable these organizations to attract, retain, communicate
and conduct ecommerce with their end users.
 
     We provide our email and messaging solutions through a variety of licensing
arrangements. These arrangements typically consist of one of the following:
 
     - a minimum annual service fee plus advertising revenue sharing;
 
     - advertising revenue sharing only; or
 
     - price-per-emailbox.
 
                                       38

<PAGE>   42
 
     For our ZapZone Network service members, we provide our core email and
messaging services free of charge. We currently derive revenue from this network
through advertising and we plan to upsell our premium services to users in the
ZapZone Network.
 
CORE SERVICE
 
     Our core service provides the following features:
 

<TABLE>
<CAPTION>
                 FEATURE                                     DESCRIPTION
                 -------                                     -----------
<S>                                         <C>
ELECTRONIC MAILBOX                          Includes a full range of industry-standard
                                            functionality, such as the ability for end
                                            users to create folders, attach electronic
                                            documents, store messages, maintain a contact
                                            center, distribute lists, establish user
                                            profiles and signatures.
PARTNER-BRANDED ELECTRONIC MAIL INTERFACE   Business partners offer our email services to
                                            their end users with the business partner's
                                            name included in the domain address. This
                                            repeated visibility of the business partner's
                                            name promotes brand awareness and customer
                                            loyalty. Additionally, our business partners
                                            can design the look and feel of their Web-
                                            based email interface with our proprietary
                                            customization wizard tool.
ENHANCED MANAGEMENT FEATURES                Includes advanced email functionality such as
                                            the ability to collect email from other email
                                            accounts, sort email and access a sent
                                            messages folder. Also includes a draft folder
                                            option, message notification upon login and
                                            IMAP4 support, which allows email folders to
                                            be accessed from multiple email environments.
CONTACT CENTER                              Enhanced address book functionality that
                                            includes integrated third-party instant
                                            messaging and chat.
CALENDAR INTEGRATION                        Online calendars and group scheduling are
                                            integrated with the end user's email interface
                                            and contact center, as well as to applications
                                            such as Microsoft Outlook and Palm Pilot
                                            software. (Completed in the third quarter of
                                            1999).
SPAM PROTECTION                             Advanced anti-spamming controls and email
                                            filtering.
MULTIPLE LANGUAGE CAPABILITY                Our email services are provided in 15
                                            languages: English, Chinese, Japanese,
                                            Spanish, French, German, Portuguese, Dutch,
                                            Finnish, Danish, Norwegian, Swedish, Russian,
                                            Hebrew and Italian. Additionally, we provide
                                            spell-checking in many of these languages and
                                            can support more than one language on any of
                                            our customer websites, except Hebrew.
KIDS' EMAIL                                 An email option that enables parents to
                                            control who may correspond electronically with
                                            their children.
</TABLE>

 
                                       39

<PAGE>   43
 
PREMIUM SERVICES
 
     We introduced our premium services in March 1999.  These services are
designed to transform the end user's emailbox into an integrated primary
communications center. We currently offer the following premium services to end
users for a fee:
 

<TABLE>
<CAPTION>
                 FEATURE                                     DESCRIPTION
                 -------                                     -----------
<S>                                         <C>
OFF-LINE EMAIL CLIENT ACCESS                End users can access their emailbox using
                                            either a Web browser or their off-line client
                                            software, such as Microsoft Outlook.
UNIFIED MESSAGING                           This service enables the emailbox to become an
                                            integrated communications platform through
                                            which the user can access email and send and
                                            receive voicemail messages, faxes, and pages.
ADDITIONAL DISK SPACE STORAGE               End users can increase their storage capacity
                                            up to an additional ten megabytes of disk
                                            space to maintain more folders and messages in
                                            their emailbox.
AUTOMATED, USER-DEFINED EMAIL FORWARDING    Incoming emails can be automatically forwarded
                                            to an alternate emailbox based on the end
                                            user's pre-set criteria.
AUTOMATED, RULES-BASED PAGER NOTIFICATION   Incoming emails can be automatically forwarded
                                            to the end user's pager based on the end
                                            user's pre-set criteria.
EMAIL-BY-PHONE                              End users can call to have their email
                                            messages read to them using text-to-speech
                                            technology. End users have the option to reply
                                            with a voicemail message that is sent as a
                                            voice attachment, fax the email or can delete
                                            the message.
INTERNET PROTOCOL (IP) TELEPHONY ACCESS     Enables voice communication over the Internet
                                            that is integrated with the end user's
                                            emailbox.
WEBMASTER ADMINISTRATION TOOLS              Provides webmasters with enhanced website
                                            administration functionality, including
                                            opening and deleting accounts online, enhanced
                                            tracking and reporting features, and
                                            Lightweight Directory Application Protocol
                                            (LDAP) support, which provides remote enhanced
                                            administrative and control capabilities.
EMAILBOX ENHANCEMENT                        Enhancements such as message search features,
                                            HTML editing and enhanced secure login
                                            interface were added in the second quarter of
                                            1999.
</TABLE>

 
     The unified messaging, email-by-phone and IP telephony premium services
integrate third party technology.
 
                                       40

<PAGE>   44
 
PLANNED SERVICES
 
     We are developing new messaging services to complement our existing
services. We actively monitor the email and communication needs of our business
partners and end users and work to develop new features and enhancements to meet
their evolving requirements. The following services are currently in, or planned
for, development:
 

<TABLE>
<CAPTION>
                 FEATURE                                     DESCRIPTION
                 -------                                     -----------
<S>                                         <C>
ENHANCED EMAIL SECURITY                     Support for SSL encryption and technologies
                                            with enhanced anti-virus and anti-vandal
                                            security measures. (Anticipated in the fourth
                                            quarter of 2000).
 
COMMUNITY-BUILDING APPLICATIONS             Additional functionality such as message
                                            boards and list servers, which enable frequent
                                            communication among end users. (Anticipated in
                                            the third quarter of 2000).
 
EMAIL MESSAGE LANGUAGE TRANSLATION          Email messages will be automatically
                                            translated between languages according to
                                            pre-defined user preferences. Anticipated in
                                            the fourth quarter of 2000).
</TABLE>

 
     Direct online marketing services. We have a large and growing network of
end users. As of June 30, 1999, through our business partners we serve
approximately 6.6 million emailboxes and through our ZapZone Network service,
which has over 103,000 sites registered, we were serving approximately 658,000
emailboxes. This extensive user network, along with our advanced technologies
and strategic relationships, will allow us to offer value-added direct marketing
services to our business partners and third parties. We are currently planning
the following services:
 
     Deal Me In (also known as Opt-in). Users can elect to receive promotions
     from third-party vendors for pre-selected product categories such as books,
     music, toys, computers and gifts. Whenever end users choose to purchase one
     of these items, we would earn a percentage of the revenue generated from
     the transaction.
 
     MailTarget. We provide our business partners with a Web-based tool which
     enables webmasters to select and send tailored messages to targeted
     segments of their end user base. We would earn revenues by charging
     business partners a fee for each message sent with this tool.
 
     Third-party marketing programs. In addition to our own internal opt-in
     program, we also provide other third-party direct marketing companies with
     the opportunity to leverage our extensive user base to market their
     products. We would earn revenues by charging third-party direct marketing
     companies a fee for each message sent.
 
     The statements in this prospectus regarding planned service offerings and
anticipated features of such offerings are forward-looking statements. Actual
service offerings and benefits could differ materially from those projected. We
provide some of our features and services by integrating our technology with
what we believe to be best of breed, third-party providers.
 
THE ZAPZONE NETWORK EMAIL SERVICE
 
     Our ZapZone Network service delivers email messaging solutions to small
websites and homepages, which we believe represent a large and growing market of
end users. Our ZapZone
 
                                       41

<PAGE>   45
 
Network service enables individuals and website administrators to set up
Web-based email online, often in under ten minutes. ZapZone Network-enabled
sites are able to provide our core Web-based email services to their end users
in multiple languages. Our ZapZone Network service enables websites to collect
valuable user demographic information, which facilitates their ability to
conduct targeted marketing campaigns with their members. Webmasters can then
communicate with and market to those users. In addition, we plan to sell premium
services to these end users in the near future.
 
PRONTOMAIL
 
     We provide a Web-based email service directly to end users under the name
ProntoMail. Individuals can register for this service through our corporate
website. We use ProntoMail for beta testing of new service offerings and have no
plans to actively market this service.
 
CUSTOMERS
 
BUSINESS PARTNERS
 
     We offer email and messaging communications services to over 109 global
business partners. The following is a list of companies with which we have email
service agreements and which have the greatest number of mailboxes within their
respective categories:
 
COMMUNITY SITE:
Talk City (chat rooms)
FortuneCity (general)
Colleges.com (student information)
Deseret (Mormon community site)
 
INTERNATIONAL SITE:
Excite (portal)
GOO (Nippon Telephone and Telegraph)
Yupi (Spanish portal)
SoHu (Chinese portal)
MonCourrier (French Canadian portal)
 
NEWSPAPERS/PUBLISHING:
Canoe (Canadian news)
The Irish Times
Hollinger Group (Jerusalem Post)
The Times of India
News Corp. (Chinabyte)
DIGITAL MEDIA COMPANY:
Primedia (seventeen.com)
Discovery Channel Online
Prolaunch (personal media)
Medscape (Medical)
ZD Net (online media)
 
ENTERTAINMENT SITE:
Warner Bros. (acmecity.com)
Jokes.com
Garfield.com (cartoon site)
Music.com
Headbone.com (kids site)
 
     At the closing of the initial public offering we entered into a strategic
relationship with Go2Net, a network of branded, technology- and community-driven
websites, pursuant to which we provide our Web-based email services to Go2Net's
various branded websites, including Go2Net, Metacrawler, Hypermat, Virtual
Avenue, Silicon Investor and Playsite.
 
                                       42

<PAGE>   46
 
ZAPZONE NETWORK MEMBERS
 
     We meet the email and messaging needs of small websites and home pages
through our ZapZone Network (ZZN). This service enables our members to offer
Web-based email and messaging to their end users and allows us to increase our
membership base. The following is a sampling of ZapZone Network member sites:
 

<TABLE>
<CAPTION>
                 ZZN MEMBER                                     SITE DESCRIPTION
                 ----------                                     ----------------
<S>                                            <C>
Access Bollywood (jaan.zzn.com)                Information on Indian films and celebrities.
Baby.com (baby.zzn.com)                        Community site that aggregates parenting
                                               information and sells baby-related products.
Bboy.com (bboy.zzn.com)                        Music-oriented website that aggregates "hip hop"
                                               information.
Citrus Cool Kids (citrus.zzn.com)              Children's portal that offers book reviews, a
                                               newsletter, and information about games and the
                                               Internet.
Diabetes.com (diabetes.zzn.com)                Health-oriented site for diabetes information.
OilLink (oillink.zzn.com)                      Oil industry news site.
Soccer Club (soccerclub.zzn.com)               Website for soccer fans around the world.
The Tom Green Show (tomgreenshow.zzn.com)      Fan club for the MTV talk show host Tom Green.
</TABLE>

 
SALES AND MARKETING
 
SALES STRATEGY
 
     Our flexible and highly customizable solutions enable us to satisfy the
email and messaging needs of a wide range of customers worldwide, from Web-based
companies to small websites and businesses. Our sales strategy is to target
these market segments through a combination of direct, indirect and online
selling initiatives. Our direct sales force is responsible for targeting large
companies, online businesses and hosting sites throughout the world. While our
salespeople are responsible for selling our solutions in a geographic area, they
often collaborate to recruit new business partners, particularly when dealing
with multinational organizations. Our sales offices are located in Santa Clara,
California, and Netanya, Israel. We plan to extend our sales force into Europe
and Asia within the next 12 months. As our sales force grows, it will focus not
only on acquiring new partners worldwide, but also on continuing to sell premium
and direct e-marketing services to existing clients.
 
     We also plan to enter into agreements with select third parties, who will
package our messaging solution as part of a comprehensive service offering that
they will sell to their business customers. We expect to share revenues and/or
receive fees from these third parties.
 
     We will continue to actively promote our ZapZone Network service to small
websites and businesses. A key part of our ZapZone Network strategy will be for
us to mobilize our direct and indirect sales forces to sell premium and direct
online marketing services to ZapZone Network members.
 
MARKETING STRATEGY
 
     Our marketing strategy is focused on increasing global awareness of our
solution and building our brand as a leading international provider of email and
messaging services. We plan to market our
 
                                       43

<PAGE>   47
 
solution primarily through a mix of print advertising, direct marketing, public
relations and online initiatives. We plan to aggressively promote our premium
services to our business partners and their end users and our direct e-marketing
services to our business partners and third parties. We intend to leverage our
direct sales force and develop co-branding and marketing opportunities with
other online organizations to augment our marketing efforts. Our ZapZone Network
service logo is featured on every ZapZone Network service member homepage and we
believe that as more members join the ZapZone Network service and use zzn.com as
their email suffix, its brand will be strengthened.
 
BUSINESS PARTNER SUPPORT
 
     CommTouch provides its business partners rapid callback technical support
24 hours a day, seven days a week. We have also developed a proprietary software
tool that provides end users with immediate online support without intervention
from customer service representatives or technical staff. We believe that this
technical support model enables us to provide high quality and cost effective
support service to our business partners and end users.
 
TECHNOLOGY
 
     We leverage our eight years of email and technology experience to create
world-class, robust, full-featured, reliable email solutions. We believe we
possess three major advantages over other Web-based email solutions:
 
SCALABLE AND MODULAR SYSTEM ARCHITECTURE
 
     Our Web-based email system is designed to provide maximum flexibility. We
have developed a system architecture consisting of three main components: Web
servers, mail servers and database servers. Web servers are responsible for the
front-end email application, mail servers are responsible for the storage and
transmittal of email messages and database servers are responsible for storing
all other important end user and partner information. These servers interact
through standard communications protocols such as HTTP, IMAP4, POP3 and SMTP and
ODBC.
 
                                       44

<PAGE>   48
 
                                      LOGO
 
     The modularity of our network architecture provides several key
technological advantages:
 
     - Rapidly deployable and cost-effective. The design of our system enables
       us to significantly reduce our deployment time as well as costs to
       support each mailbox.
 
        - We outsource server hosting and Internet backbone access to third
          party providers because they are able to offer such services at bulk
          rates. In addition, there are numerous third-party providers from whom
          we can obtain these services, so our capacity is not limited and we
          are able to obtain favorable rates. This significantly reduces our
          Internet connectivity and server maintenance costs.
 
        - The modularity of our system architecture allows us to choose from
          among a broad range of industry-standard mail servers, and select the
          servers with optimal price/performance characteristics. Again, we are
          able to obtain these servers from a number of vendors, so our capacity
          is not limited.
 
        - The outsourcing of our server needs enables us to focus on the rapid
          deployment of applications for our clients rather than on the costly
          and time-consuming maintenance and development of an internal hardware
          infrastructure.
 
        - Because third-party mail servers are constantly upgraded with the most
          advanced features (LDAP support, HTML messaging, etc.), we are able to
          reduce our development time by leveraging existing off-the-shelf
          technology and immediately integrating these features into our service
          offerings.
 
                                       45

<PAGE>   49
 
     - Scalable and reliable. Our modular technology architecture enables the
       rapid setup of full-service email hosting facilities and enables us to
       quickly and seamlessly expand our system as our user base grows. In
       addition, we utilize redundant servers and server load balancing
       capabilities to re-direct traffic if a server malfunctions. Our system
       architecture and software platform have been designed to provide
       excellent service to hundreds of millions of emailboxes across millions
       of domains. We believe that our robust and flexible technology platform
       enables us to maintain one of the highest service performance levels in
       the industry.
 
     - Portable. As the market for outsourced email systems evolves, some
       organizations may demand their own in-house hosting facility. The highly
       modular nature of our system architecture provides us with the ability to
       duplicate a system in another location within a period of several days.
       As a result, we are well-equipped to rapidly deploy email services to
       this growing subset of the outsourced email systems market.
 
PROPRIETARY DEVELOPMENT LANGUAGE
 
     We have custom-built a proprietary software development language called
Application Dynamic Markup Language (ADML) in order to maximize the flexibility
and minimize the development time of our email solutions.
 
     The ADML environment encapsulates the functionality and layout of a generic
Web-based email interface, while allowing our developers to rapidly customize a
business partner's email system with specific features. All external resources,
such as text strings, images and site-dependent parameters are stored in various
databases. When a new site is built, the ADML code is compiled into ASP
(Microsoft's Active Server Pages technology) code which runs on the web servers
and translates the ADML code into HTML. This enables the developer to build an
email interface for a business partner without having to write a single line of
HTML code. This provides us with a competitive advantage for several reasons:
 
     - we can add new functionality and features (languages, premium and direct
       marketing services, etc.) to any business partner's existing email system
       in as little as a few hours;
 
     - we can simultaneously upgrade more than one email system (for example,
       immediately making additional languages available to any end user of a
       ZapZone Network service email site); and
 
     - we can offer automated email customization tools to our end users. For
       example, the ZapZone Network service takes advantage of the flexibility
       provided by ADML to allow webmasters to build, customize and deploy
       ready-to-use email sites in very little time.
 
                                       46

<PAGE>   50
 
                                ADML FLOW CHART
 
                               [ADML Flow Chart]
 
ADVANCED PROPRIETARY TECHNOLOGIES
 
     We have developed the following proprietary technologies:
 
     - Complex Foreign Language Support. Currently, our system is fully
       double-byte-enabled to handle intricate character languages such as
       Chinese and Japanese. We are currently in the final stages of developing
       the technology to enable right-to-left reading/writing capabilities to
       support languages like Arabic and Urdu.
 
     - Integrated Open Platform Interface. We have developed an integrated
       platform and series of application programming interfaces that enable us
       to rapidly and fully integrate additional communications features and
       functionality into our service offering.
 
     - Automated Customer Service. We have developed a proprietary software tool
       that allows us to field most end users' technical questions with an
       automated email feedback system.
 
     - Advanced Direct Marketing Technology. Our MailTarget service is a
       Web-based tool which provides business partners with a user-friendly
       method of selecting and delivering tailored messages to a targeted
       segment of their user population.
 
     - Customization Wizard Tool. We have developed a proprietary technology
       tool which enables customers to design the look and feel of their
       Web-based email interface so that it is consistent with their own brand
       images.
 
                                       47

<PAGE>   51
 
COMPETITION
 
     The market for email and messaging services is intensely competitive and we
expect it to be increasingly competitive. In addition to competing with
companies that develop and maintain in-house email solutions, we directly
compete with Web-based email service providers, including USA.NET, Mail.com and
Critical Path. We also compete with software companies that provide email,
including Microsoft, Software.com and Lotus Development Corporation. Microsoft
currently offers free Web-based email through its Hotmail website. We face
further competition from websites that offer email services, ISPs, including
America Online (and its subsidiary, Netscape), Yahoo and Lycos, and other
service providers, such as telecommunications companies.
 
     Some of our competitors provide a variety of Web-based services in addition
to email, such as Internet access, browser software, homepage design and
hosting. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us. Some of
our competitors may offer services at or below cost. Many of our current and
potential competitors have longer Web-based email operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships with larger, more established and better-financed
companies.
 
     We believe that our solution has the following competitive advantages:
 
     - highly customizable and flexible;
 
     - rapidly deployable;
 
     - available in 15 languages;
 
     - designed to integrate numerous messaging applications; and
 
     - has the ability to effectively address multiple market needs.
 
     However, despite our competitive positioning, we may not be able to compete
successfully against current and future competitors.
 
INTELLECTUAL PROPERTY
 
     We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have the following registered trademarks: COMMTOUCH
(registered in the U.S.); PRONTO (U.S. and other countries); COMMTOUCH SOFTWARE
(Australia and New Zealand); PRONTO FAMILY, PRONTO SECURE (Japan); PRONTO MAIL
(Japan and New Zealand). We also have the following pending trademark
applications: ZAPZONE NETWORK, ZZN (U.S., Israel and other countries) and PRONTO
(Canada, Mexico, European Community and India). It may be possible for
unauthorized third parties to copy or reverse engineer certain portions of our
products or obtain and use information that we regard as proprietary. Certain
end user license provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program may be unenforceable under the
laws of certain jurisdictions and foreign countries. In addition, the laws of
some foreign countries do not protect proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology.
 
                                       48

<PAGE>   52
 
     Other parties may assert infringement claims against us. We may also be
subject to legal proceedings and claims from time to time in the ordinary course
of our business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by us and our licensees.
Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
 
     Our ZapZone Network service allows webmasters to select the email service
name of their choice. There is, therefore, the possibility that they will select
email service names that may infringe the rights of others under U.S. state
and/or federal or foreign trademark and/or anti-dilution or similar laws.
ZapZone Network service's placement of ZapZone Network service icons and
advertisements on ZapZone Network service webmasters' web pages may contribute
to our perceived liability for any allegedly infringing acts. We do not audit
webmasters' email service name choices for compliance with any intellectual
property rights of others. However, in our current webmaster license agreements,
we require webmasters to indemnify us for claims resulting from their chosen
email service names; we also require users to indemnify us in their license
agreements. Furthermore, in our license agreements with webmasters and users, we
expressly reserve the right to eliminate their account or to change their email
service names, in our sole discretion. We have received complaints from several
parties that email service names chosen and registered by ZapZone Network
service users are similar or identical to domain names and/or trademarks in
which the complainants claim an interest. We responded by referring the
complainants to the webmasters who registered those email service names, as it
is our policy to do.
 
     We also intend to continue to strategically license certain technology from
third parties, including our mail server and SSL encryption technology. In the
future, if we add certificate technology to our systems, we may license
additional technology from third-party vendors. We cannot be certain that these
third-party content licenses will be available to us on commercially reasonable
terms or that we will be able to successfully integrate the technology into our
products and services. These third-party in-licenses may expose us to increased
risks, including risks associated with the assimilation of new technology, the
diversion of resources from the development of our own proprietary technology
and our inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. The inability to obtain any of
these licenses could result in delays in product and service development until
equivalent technology can be identified, licensed and integrated. Any such
delays in services could cause our business, financial condition and operating
results to suffer.
 
GOVERNMENT REGULATION
 
     Although there are currently few laws and regulations directly applicable
to the Internet and commercial email services, it is possible that a number of
laws and regulations may be adopted with respect to the Internet or commercial
email services covering issues such as user privacy, pricing, content,
copyright, distribution, antitrust and characteristics and quality of products
and services. Further, the growth and development of the market for online email
may prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business online. The adoption of
additional laws or regulations may impair the growth of the Internet or
commercial online services, which could, in turn, decrease the demand for our
products and services and increase our cost of doing business, or otherwise have
a material adverse effect on our business, operating results and financial
condition. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the application of existing laws and regulations to the Internet could have a
material adverse effect on our business, operating results and financial
condition.
 
                                       49

<PAGE>   53
 
EMPLOYEES
 
     As of June 30, 1999, we had 86 full-time employees. None of our U.S.
employees is covered by a collective bargaining agreement. We believe that our
relations with our employees are good.
 
     Israeli law and certain provisions of the nationwide collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordinating Bureau of Economic Organizations (the Israeli federation of
employers' organizations) apply to CommTouch's Israeli employees. These
provisions principally concern the maximum length of the work day and the work
week, minimum wages, contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment. Furthermore, pursuant to such provisions,
the wages of most of CommTouch's employees are subject to cost of living
adjustments, based on changes in the Israeli Consumer Price Index (CPI). The
amounts and frequency of such adjustments are modified from time to time.
Israeli law generally requires the payment of severance pay upon the retirement
or death of an employee or upon termination of employment by the employer or, in
certain circumstances, by the employee. CommTouch currently funds its ongoing
severance obligations by making monthly payments for insurance policies.
 
     A general practice in Israel followed by CommTouch, although not legally
required, is the contribution of funds on behalf of certain employees to an
individual insurance policy known as "Managers' Insurance." This policy provides
a combination of savings plan, insurance and severance pay benefits to the
insured employee. It provides for payments to the employee upon retirement or
death and secures a substantial portion of the severance pay, if any, to which
the employee is legally entitled upon termination of employment. Each
participating employee contributes an amount equal to 5% of such employee's base
salary, and the employer contributes between 13.3% and 15.8% of the employee's
base salary. Full-time employees who are not insured in this way are entitled to
a savings account, to which each of the employee and the employer makes a
monthly contribution of 5% of the employee's base salary. CommTouch also
provides certain employees with an Education Fund, to which each participating
employee contributes an amount equal to 2.5% of such employee's base salary, and
the employer contributes 7.5% of the employee's base salary.
 
OFFICE LOCATIONS
 
     Our principal executive offices are located at 6 Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and 3945 Freedom Circle, Santa Clara, California 95054,
where our telephone number is (408) 653-4330.
 
                                       50

<PAGE>   54
 
                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     The executive officers and directors of CommTouch and their ages, as of
September 30, 1999, are as follows:
 

<TABLE>
<CAPTION>
              NAME                 AGE                         POSITION
              ----                 ---                         --------
<S>                                <C>   <C>
Gideon Mantel(1).................   40   Chief Executive Officer and Director
Isabel Maxwell...................   49   President, CommTouch Software, Inc.
Amir Lev.........................   39   Chief Technology Officer, General Manager and
                                         Director
James Collins....................   40   Chief Financial Officer and Secretary
Robert "Rip" Gerber..............   36   Vice President, Marketing, CommTouch Software, Inc.
Avner Amram......................   37   Vice President, Operations, CommTouch Software, Inc.
Yael Elish.......................   31   Vice President, Strategic Development, CommTouch
                                         Software, Inc.
Igor Gusak.......................   45   Vice President and General Manager, Custom Mail
                                         (US), a division of CommTouch Software, Inc.
Yuval Neria......................   40   Vice President, International Sales
Ronen Rosenblatt.................   35   Vice President, Research and Development
Thomas McCullough II.............   40   Vice President and General Manager, Biz To Go, a
                                         division of CommTouch Software, Inc.
Ronni Zahavi.....................   33   Vice President, Human Resources
Allan Barkat(1)(2)...............   39   Chairman of the Board of Directors
Yiftah Atir......................   49   Director
Yair Safrai......................   40   Director
Yoseph Sela(1)(2)................   46   Director
Richard Sorkin...................   37   Director
Thomas Camp......................   36   Director
</TABLE>

 
-------------------------
(1) Member of the Compensation Committee
 
(2) Member of the Audit Committee
 
     Gideon Mantel is a co-founder of CommTouch and served as its Chief
Financial Officer from its inception in February 1991 until October 1995, when
he became CommTouch's Chief Operating Officer. In November 1997, he became
CommTouch's Chief Executive Officer. He has also served as a director of
CommTouch since inception. Mr. Mantel received a B.A. in Political Science and
an M.B.A from Tel Aviv University.
 
     Isabel Maxwell has served as the President of CommTouch Software, Inc.
since February 1997. Ms. Maxwell was a co-founder, and from March 1993 to August
1996 served as the Senior Vice President of International Business Development,
Corporate Affairs and Investor Relations, of The McKinley Group Inc., an
Internet search engine company. From August 1996 to October 1996, Ms. Maxwell
was an Executive Vice President of Excite, Inc. Ms. Maxwell received a B.A. and
M.A. in History and Modern Languages from Oxford University.
 
     Amir Lev is a co-founder of CommTouch and has served as its Chief
Technology Officer and as a director since its inception in 1991. Mr. Lev has
also been the General Manager of CommTouch since January 1997. Mr. Lev received
a B.A. in Computer Science and Economics from Hebrew University, Jerusalem.
 
                                       51

<PAGE>   55
 
     James Collins has served as the Chief Financial Officer of CommTouch since
March 1999 and as the Secretary of CommTouch since April 1999. From October 1997
to February 1999, Mr. Collins was a private investor. From March 1992 to
December 1996, Mr. Collins served as the Chief Financial Officer and Secretary,
and from January 1997 to September 1997 as the Vice President of Operations of
Pete's Brewing Company, a specialty brewer. Mr. Collins received a B.S. in
Business Administration from the University of the Pacific and is a Certified
Public Accountant in the State of California.
 
     Robert "Rip" Gerber has served as Vice President, Marketing of CommTouch
Software, Inc. since March 1999. Mr. Gerber was the founder of @once, an email
direct marketing company, and from February 1998 to February 1999 served as its
President. From September 1995 to January 1998, Mr. Gerber served as Managing
Director of Pantheon Consulting Group LLC, a marketing and planning services
company. From August 1992 to August 1995, Mr. Gerber was a consultant for
Deloitte & Touche LLP, a public accounting firm. Mr. Gerber received a B.S. in
Chemical Engineering from the University of Virginia and an M.B.A. from Harvard
Business School.
 
     Avner Amram has served as Vice President, Operations of CommTouch Software,
Inc. since April 1999. Mr. Amram was Director of Operations of CommTouch
Software, Inc. from March 1998 to April 1999 and a Software Team Leader from
March 1996 to March 1998. Mr. Amram received a B.Sc. in Computer Science from
the Technion, Haifa.
 
     Yael Elish has served as the Vice President, Strategic Development of
CommTouch Software, Inc. since April 1999. Ms. Elish was CommTouch's Director of
Business Development from August 1998 to March 1999 and was CommTouch's Director
of Sales from December 1996 to August 1998. From August 1993 to August 1996, Ms.
Elish was a Marketing Manager of Widecom Ltd., a provider of Internet
integration services and software development. Ms. Elish received a B.A. in
International Relations from Hebrew University in Jerusalem.
 
     Igor Gusak has served as the Vice President, Sales of CommTouch Software,
Inc. since April 1999. Dr. Gusak was the Director of Sales and Marketing of
CommTouch from February 1997 to March 1999 and the Director of Original
Equipment Manufacturer Sales for CommTouch from January 1995 to January 1997.
Dr. Gusak received a Ph.D. in Mathematics from Urals University, Ekaterinburg,
Russia.
 
     Yuval Neria has served as the Vice President, International Sales of
CommTouch since April 1999. Mr. Neria was the Director of International
Marketing and Sales for CommTouch from March 1997 to April 1999, the Director of
Pacific Rim Operations for CommTouch from March 1996 to April 1997, a Product
Manager for CommTouch from March 1995 to April 1996, and a Quality Assurance
Manager for CommTouch from March 1993 to April 1995. Mr. Neria received a B.A.
in Computer Science from the City University of New York.
 
     Ronen Rosenblatt has served as the Vice President, Research and Development
of CommTouch since April 1999. Mr. Rosenblatt served as the Director of Research
and Development for CommTouch from November 1994 to March 1999. Mr. Rosenblatt
received a B.Sc. in Electronics and Computer Engineering from Tel Aviv
University.
 
     Tom McCullough joined CommTouch in June 1999 after consulting to various
companies, including the San Jose Sharks, on their e-Commerce initiatives from
August 1998 to June 1999. From April 1997 to July 1998 Mr. McCullough served as
an International Marketing Manager with NEC Systems Laboratory, as Vice
President of Sales and Marketing with Network Information Technology from
October 1996 to March 1997, and as a Business Development Manager with SunSoft
(a Division of Sun Microsystems) from February 1996 to October 1996. Mr.
McCullough
 
                                       52

<PAGE>   56
 
received his B.A. in Economics from the University of Southern California and
his M.S. in Technology Management from Pepperdine University.
 
     Ronni Zehavi has served as a Vice President Human Resources in CommTouch
Software Ltd. since July 1999. From June 1997 to July 1999 Mr. Zehavi was Human
Resources and Training Manager at Mondex -- Electronic Cash, a subsidiary of
Mastercard International. From January 1994 to June 1997 he was an
organizational consultant. Mr. Zehavi received his BA in Educational Psychology
and History from Tel-Aviv University, and received his M.A. in Organizational
Sociology from Bar-Ilan University.
 
     Yiftah Atir has served as a Director of CommTouch since January 1996. From
November 1994 to the present, Mr. Atir has served as Managing Director of
Evergreen Venture Capital, a technology focused venture capital fund. Mr. Atir
received a B.A. from Haifa University and an M.B.A. from Tel Aviv University.
 
     Allan Barkat has served as a Director of CommTouch since February 1996 and
Chairman of the Board of Directors since April 1999. From March 1997 to the
present, Mr. Barkat has been a Managing Director of Apax-Leumi Partners, Ltd.
the investment advisor to Israel Growth Fund, LP, a technology focused venture
capital fund. From January 1995 to March 1997, Mr. Barkat served as an Assistant
Director of Apax-Leumi Partners Ltd. From 1992 to 1994, Mr. Barkat served as
Vice President of Marketing & Sales of DSP Communications Group, Inc., a
wireless semiconductor company. Mr. Barkat has also served as a director of
Fundtech Ltd. Mr. Barkat received a B.Sc. from the Technion, Haifa.
 
     Yair Safrai has served as a Director of CommTouch since January 1999. From
September 1996 to the present, Mr. Safrai has been the Managing Partner of
Concord Ventures, a technology focused venture capital fund. From July 1994 to
September 1996, Mr. Safrai served as Vice President of Nitzanim, a venture
capital fund. Mr. Safrai received a B.A. in Management and Economics from Tel
Aviv University, an M.A. from the University of Pennsylvania, and an M.B.A. from
the Wharton Business School, University of Pennsylvania.
 
     Yoseph Sela has served as a Director of CommTouch since February 1996. From
January 1993 to the present, Mr. Sela has served as Executive Vice President of
Gemini Capital Fund Management, a technology focused venture capital fund. Mr.
Sela received a B.Sc. from the Technion, Haifa and an M.B.A. from Tel Aviv
University.
 
     Richard Sorkin joined the Board immediately following the closing of the
initial public offering. Since June 1998 Mr. Sorkin has served as an advisor to
several early-stage Internet companies and is a director of several private
companies. From June 1998 to April 1999 he was the Chairman of the Board of
Directors of ZIP2, an Internet media company which was sold to Compaq. From May
1996 to June 1998, he was Chief Executive Officer of ZIP2 and from May 1993 to
March 1996 he held various executive positions with Creative Technology, Ltd., a
leading provider of multi-media hardware. Mr. Sorkin received a B.A. with honors
in Economics from Yale University and an M.B.A. from Stanford University.
 
     Thomas Camp joined the Board immediately following the closing of the
initial public offering. Since April 1999, Mr. Camp has served as Vice
President, Business Development at Go2Net, a network of branded, technology-and
community-driven websites. From September 1990 to April 1999, he was an attorney
with the law firm of Hutchins, Wheeler & Dittmar, most recently as a
stockholder. Mr. Camp received a B.A. from Tufts University, an M.B.A. from
Boston College Graduate School of Management and a J.D. from Boston College Law
School. Go2Net and Vulcan Ventures entered into an agreement with us in which
they purchased the shares offered by this prospectus. Under that agreement, they
have the right to name one director to our board, as long as
 
                                       53

<PAGE>   57
 
they continue to hold at least 25% of the combined number of shares being
offered under this prospectus and the shares available to Go2Net upon exercise
of the warrant which is also being offered by this prospectus. Mr. Camp was
appointed to the board pursuant to that agreement.
 
ELECTION OF DIRECTORS
 
     Directors are elected by shareholders at the annual shareholders meeting
and hold office until the next Ordinary General Meeting, which is held at least
once in every calendar year, but not more than fifteen months after the last
preceding Ordinary General meeting. Directors may be removed and other directors
may be elected in their place or to fill vacancies in the Board of Directors at
any time by the holders of a majority of the voting power at a general meeting
of the shareholders. In the intervals between Ordinary General Meetings, the
Board of Directors may appoint new directors temporarily to fill vacancies on
the Board of Directors. The Articles of Association of CommTouch authorize nine
directors. There are no family relationships among any of the directors,
officers or key employees of CommTouch.
 
ALTERNATE DIRECTORS
 
     The Articles of Association of CommTouch provide that any director may
appoint another person to serve as an alternate director and may remove such
alternate. Any alternate director possesses all the rights and obligations of
the director who appointed him, except that the alternate has no standing at any
meeting while the appointing director is present, and the alternate is not
entitled to remuneration. Any individual, whether or not a director, may act as
an alternate director, and the same person may act as the alternate for several
directors and have a corresponding number of votes. Unless the appointing
director limits the time or scope of the appointment, the appointment is
effective for all purposes until the appointing director ceases to be a director
or terminates the appointment. The appointment of an alternate director does not
in itself diminish the responsibility of the appointing director as a director.
 
INDEPENDENT DIRECTORS; AUDIT FUNCTION
 
     Under the requirements for quotation on Nasdaq, CommTouch is required to
have at least two independent directors on its Board and to establish an audit
committee, at least a majority of whose members are independent of management.
Messrs. Barkat and Sela, as independent directors, serve as the members of
CommTouch's Audit Committee.
 
     Under Israeli law, "public" Israeli companies are required to appoint at
least two directors resident in Israel who meet stringent standards of
independence. CommTouch believes that this requirement does not currently apply
to companies that are publicly traded only outside of Israel. Nevertheless,
CommTouch may be required to appoint such independent directors. Moreover, the
new Israeli Companies Law, which will become effective on February 1, 2000,
unequivocally extends the independent director requirement to Israeli companies
that are publicly traded outside of Israel, such as on Nasdaq.
 
     The new Israeli Companies Law also provides that public companies must
appoint an audit committee of the Board of Directors, a certified public
accountant to audit the company's financial statements and to report any
improprieties that the accountant may discover to the Chairman of the Board, and
an internal auditor.
 
                                       54

<PAGE>   58
 
OFFICE HOLDERS
 
     Israeli law codifies the duty of care and fiduciary duties that an Office
Holder (generally, a director or executive officer) owes to a company. An Office
Holder's fiduciary duty includes avoiding any conflict of interest between the
Office Holder's position in CommTouch and his personal affairs, avoiding any
competition with CommTouch, avoiding exploiting any business opportunity of
CommTouch in order to receive personal advantage for himself or others and
revealing to CommTouch any information or documents relating to CommTouch's
affairs which the Office Holder has received due to his position as an Office
Holder.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee, which was established by the Board in January
1996, is responsible for determining salaries, incentives and other forms of
compensation for our directors, officers and other employees and for
administering various incentive compensation and benefit plans. The Compensation
Committee consists of the Chief Executive Officer and two outside directors.
Allan Barkat and Yoseph Sela are currently the two outside directors on our
Compensation Committee.
 
     Conflicts of interest may arise as a consequence of the relationship of one
of our directors, Thomas Camp, with Vulcan and Go2Net, including conflicts
related to corporate opportunities that could be pursued by us, on the one hand,
or by Go2Net, Vulcan or its affiliates, on the other hand, or conflicts related
to existing or new contractual relationships between us, on the one hand, or by
Go2Net, Vulcan or its affiliates, on the other hand. All future transactions
between us and our officers, directors and principal shareholders and their
affiliates will be approved by a majority of the board of directors, including a
majority of the independent and disinterested outside directors.
 
COMPENSATION OF OFFICERS AND DIRECTORS
 
     The directors of CommTouch can be remunerated by CommTouch for their
services as directors to the extent such remuneration is approved by the
CommTouch's shareholders at an annual general meeting. Directors currently do
not receive compensation for their services as directors but are reimbursed for
their expenses for each Board of Directors meeting attended.
 
     The aggregate direct remuneration paid by CommTouch to all directors and
executive officers (11 persons) in 1998 was approximately $500,000. During the
same period CommTouch accrued or set aside approximately $66,000 for the same
group to provide pension, retirement or similar benefits. As of June 30, 1999,
directors and executive officers of CommTouch (16 persons) held stock options to
purchase an aggregate of 664,520 ordinary shares.
 
U.S. STOCK OPTION PLAN
 
     Our 1996 CSI Stock Option Plan, which is the plan for U.S. employees and
consultants, is administered by our Compensation Committee. Our Compensation
Committee consists of at least two directors who are non-employee directors, as
that term is defined in Rule 16b-3. The Board of Directors may amend the option
plan as desired without further action by CommTouch's shareholders, except as
required by applicable law. The plan will continue in effect until terminated by
the Board or until January, 2006.
 
     The consideration for each award under the plan is established by the
Compensation Committee, and in no event shall the exercise price for ISOs be
less than 100% of the fair market value of the underlying stock on the date of
grant. Awards have such terms and are exercisable in such manner
 
                                       55

<PAGE>   59
 
and at such times as the Compensation Committee may determine. Typically, an
option granted under the plan vests with respect to one-fourth of the shares
subject to the option on the first anniversary of the grant date and with
respect to 1/36 of the remaining shares vest each month thereafter. However, the
Compensation Committee may, in its discretion, permit an optionee to exercise
unvested options, provided that such shares are subjected to a right of
repurchase in favor of CommTouch Software, Inc. according to the original
vesting schedule. Each ISO expires not more than 10 years from the date of
grant.
 
     The 1996 CSI Stock Option Plan had originally reserved 1,000,000 shares for
issuance under the plan. In April of 1999, the Board of Directors amended the
Plan to provide for a pool of 5,000,000 shares which may be issued under the
1996 CSI Stock Option Plan, the 1999 Israeli Share Option Plan, and the Israeli
Option Agreements issued to Israeli employees.
 
ISRAELI OPTION AGREEMENTS AND 1999 ISRAELI SHARE OPTION PLAN
 
     To date we have granted options to Israeli employees and consultants
pursuant to individual option agreements (the "Israeli Option Agreements")
rather than pursuant to a stock option plan. Typically, options granted pursuant
to the Israeli Option Agreements vest in four equal annual installments and
expire no later than ten years from the date of grant. Substantially all of the
Israeli Option Agreements provide that only the grantee can exercise options
under the Israeli Option Agreements, and the grantee cannot assign or transfer
the options. Moreover, if a grantee ceases to be employed by CommTouch on a full
time basis, then the grantee will have a limited period from the cessation of
employment in which to exercise any vested options. Grantees are responsible for
paying all taxes and mandatory payments upon the exercise of options.
 
     In connection with the initial public offering, the Board of Directors has
approved the 1999 Section 3(i) Share Option Plan (the "1999 Israeli Share Option
Plan"). The 1999 Israeli Share Option Plan will be administered by the Board of
Directors, or by a Share Option Committee appointed by the Board of Directors
(currently the Compensation Committee). The Board or the committee has full
power to designate the persons entitled to receive options and the terms and
provisions of the option agreements (including the number and price of shares
subject to each grant and the acceleration of the right of an optionee to
exercise in whole or in part any previously granted option). Typically, an
option granted under the plan vests with respect to one-fourth of the shares
subject to the option on the first anniversary of the grant date and with
respect to one-36th of the remaining shares each month thereafter. Options are
exercisable only during the lifetime of the optionee, and are not transferable
other than by will or laws of descent.
 
     As of June 30, 1999, 954,020 stock options had been granted under Israeli
Option Agreements and the 1996 CSI Stock Option Plan. Such options have exercise
prices ranging from $0.01 to $1.45 per share and a weighted average per share
exercise price of $1.25, and were held by 59 persons.
 
     Certain of the option agreements for options granted to employees (pursuant
to the Israeli Option Agreements) and to key employees (pursuant to the 1996 CSI
Stock Option Plan) provide for acceleration of vesting in a change of control.
Pursuant to these agreements, 50 percent of such an employee's unvested options
will vest at the closing of the change of control. In such event, the remainder
of the unvested options, if granted pursuant to an Israeli Option Agreement,
shall be subject to the vesting provisions set forth in the Israeli Option
Agreement, and if granted pursuant to the 1996 CSI Stock Option Plan, shall vest
on the first anniversary of the change of control.
 
     The total number of shares which can be issued under our 1999 Israeli Share
Option Plan, 1996 CSI Stock Option Plan and the Israeli Option Agreements
previously issued to Israeli employees is 5,000,000. Of that number, 954,020
shares are subject to be issued pursuant to outstanding Israeli
 
                                       56

<PAGE>   60
 
Option Agreements and 671,520 shares have been issued upon the exercise of stock
options. The remaining 3,374,460 shares will be allocated from time to time by
the Board of Directors to the 1999 Israeli Share Option Plan and the 1996 CSI
Stock Option Plan.
 
EMPLOYEE STOCK PURCHASE PLAN
 
     Our 1999 Employee Stock Purchase Plan, or ESPP, which was adopted by our
board of directors on April 18, 1999 and was approved by our shareholders on
June 8, 1999, took effect upon the closing of the initial public offering. The
ESPP provides employees with an opportunity to purchase ordinary shares of
CommTouch through accumulated payroll deductions. We have reserved 150,000
ordinary shares for issuance under the ESPP, none of which have been issued. The
number of ordinary shares reserved shall be increased each January 1 by 110
percent of the number of shares purchased under the ESPP in the previous year.
The ESPP is intended to qualify for favorable tax treatment under Section 423 of
the Internal Revenue Code. Generally, the ESPP will be implemented through a
series of offering periods of 24 months' duration, with new offering periods
commencing on the first trading day on or after February 15 and August 15 of
each year. However, the first offering period will commence on the first
business day on which price quotations for CommTouch's ordinary shares are
available on the Nasdaq National Market and will expire on August 14, 2001. Each
24-month Offering Period will contain four six-month Purchase Periods, starting
on each February 15 and August 15. However, the first Purchase Period will
commence on the first trading day after the closing of the offering and will end
on February 14, 2000. Shares may be purchased at the end of each purchase
period.
 
     The ESPP will be administered by a plan administrator appointed by our
Board of Directors. Each employee of ours or of any majority-owned subsidiary of
ours who is customarily employed by us or a majority-owned subsidiary for more
than 20 hours per week and more than five months per calendar year will be
eligible to participate in the ESPP. No employee shall be permitted to
participate in the ESPP:
 
     - if such employee, immediately after his or her election to participate,
       would own shares possessing five percent or more of the total combined
       voting power or value of all classes of stock of the Company; or
 
     - if under the terms of the ESPP the right of the employee to purchase
       shares would accrue at a rate that exceeds $25,000 of the fair market
       value of such shares for each calendar year for which such right is
       outstanding.
 
     The ESPP permits an eligible employee to purchase ordinary shares through
payroll deductions, which may not exceed 15 percent of his or her base
compensation, excluding incentive compensation, commissions and other bonuses.
The shares are purchased at a price equal to 85 percent of the lesser of:
 
     - the fair market value of the ordinary shares at the beginning of the
       offering period (provided, however, in the case of the first offering
       period, this number is the price per share at which the ordinary shares
       were offered to the public in the initial public offering); or
 
     - the fair market value of the ordinary shares at the end of each purchase
       period.
 
     Employees may terminate their participation in the ESPP at any time during
the offering period; they may change their level of participation in the ESPP
only one time during the offering period. Participation in the ESPP terminates
automatically on the participant's termination of employment with us.
 
                                       57

<PAGE>   61
 
     In the event of a merger, consolidation, dissolution or liquidation of the
Company, the ESPP shall terminate unless the plan of merger, consolidation or
reorganization provides otherwise. The Board of Directors shall have the right
to amend, modify or terminate the ESPP at any time, except in cases where
shareholder approval is required by law.
 
1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
 
     Our 1999 Nonemployee Directors Stock Option Plan (Directors Plan), which
was adopted by our board of directors on April 18, 1999 and was approved by our
shareholders on June 8, 1999, took effect upon the closing of the initial public
offering. Under the 1999 Nonemployee Directors Stock Option Plan, nonemployee
members of the board of directors are eligible for automatic option grants. The
Directors Plan will continue in effect until terminated by the Board or until
the tenth anniversary of its effective date.
 
     A maximum of 250,000 ordinary shares has been authorized for issuance under
the Directors Plan. No shares have yet been issued under the Directors Plan. The
Board of Directors, or a committee consisting of at least two nonemployee
directors, will make all administrative determinations under the Directors Plan.
 
     Each individual who first joins the Board of Directors as a nonemployee
director on or after the effective date of the initial public offering will
receive at that time an option grant for 10,000 ordinary shares. In addition, on
the date of the first board meeting immediately following the annual
shareholders meeting, commencing with the annual shareholders meeting held in
2000, the Company shall grant to each nonemployee director then in office (other
than nonemployee directors who received their initial 10,000 share grant under
the plan on or after the record date for such annual meeting) an option to
purchase 10,000 ordinary shares. In 1999, the grant was made on the first
business day on which price quotations for CommTouch's ordinary shares were
available on the Nasdaq National Market, and the fair market value of the
ordinary shares on that day is the price at which ordinary shares were offered
to the public on that day. Each option granted under the Directors Plan shall
become exercisable with respect to one fourth of the number of shares covered by
such option three months after the date of grant and with respect to one third
of the remaining shares subject to the option every three months thereafter.
Each option will have an exercise price equal to the fair market value of the
ordinary shares on the grant date of such option. Each option will have a
maximum term of ten years, but will terminate earlier if the optionee ceases to
be a member of the Board of Directors. In the event of such earlier termination,
an optionee may exercise options held at the date of termination to the extent
then exercisable, within three months after such date, but not thereafter;
provided, however, the optionee has two years from the date of termination to
exercise vested options if such termination is due to death or disability. Each
option will vest automatically upon a change in control.
 
401(K) PLAN
 
     The Company has adopted the CommTouch Software, Inc. 401(k) Savings Plan
(the "401(k) Plan"), which is intended to qualify under Section 401 of the
Internal Revenue Code of 1986, as amended. All full-time employees of CommTouch
Software, Inc. are eligible to participate in the 401(k) Plan at any time after
their date of hire. Participants may make pre-tax contributions to the 401(k)
Plan of up to 20% of their gross wages, subject to a statutory prescribed annual
limit. Each participant will be fully vested in his or her contributions. The
Company may make matching contributions on a discretionary basis to fund the
401(k) Plan. Any employer contributions would be vested under a 6-year graded
schedule. Contributions by the Company, if any, will be generally deductible by
the Company when made. Contributions by the participants or the Company to the
 
                                       58

<PAGE>   62
 
401(k) Plan and the income earned on such contributions will be held in trust as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
 
APPROVAL OF CERTAIN TRANSACTIONS
 
     Israeli law requires that transactions between a company and its Office
Holders (or that benefit its Office Holders) be approved as provided for in the
company's articles of association. Approval by a majority of the disinterested
members of the audit committee and of the board of directors is generally
required, and in certain circumstances shareholder approval may also be
required.
 
     Israeli law requires that an Office Holder of a company first promptly
disclose any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. Once the Office Holder complies with these
disclosure requirements, the company may approve the transaction in accordance
with the provisions of its articles of association. If the transaction is with a
third party in which the Office Holder has a personal interest, the approval
must confirm that the transaction is not adverse to the company's interest.
Furthermore, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or that is likely to have a material impact on the company's
profitability, assets or liabilities), then, in addition to any approval
stipulated by the articles of association, it also must be approved by the
company's audit committee and then by its board of directors. Under certain
circumstances, shareholder approval is required. For example, shareholders must
approve all compensation paid to directors in whatever capacity. An Office
Holder with a personal interest in any matter may not be present at any audit
committee or Board of Directors meeting where such matter is being approved, and
may not vote. For information concerning the direct and indirect personal
interests of certain Office Holders and principal shareholders of CommTouch in
certain transactions with CommTouch, see "Certain Transactions."
 
     The new Israeli Companies Law, which will become effective on February 1,
2000, extends the disclosure requirements applicable to an Office Holder to a
shareholder that holds 25% or more of the voting rights in a public company,
including an Israeli company that is publicly traded outside of Israel such as
on Nasdaq. Certain transactions between a public company and a 25% shareholder,
or transactions in which a 25% shareholder of the company has a personal
interest but which are between a public company and another entity, require the
approval of the Board of Directors and of the shareholders. Moreover, an
extraordinary transaction with a 25% shareholder or the terms of compensation of
a 25% shareholder must be approved by the audit committee, the Board of
Directors and shareholders. The shareholder approval for an extraordinary
transaction must include at least one third of the shareholders who have no
personal interest in the transaction and are present at the meeting; the
transaction can be approved by shareholders without this one third approval, if
the total share holdings of those who vote against the transaction do not
represent more than one percent of the voting rights in the company.
 
INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY
 
     Israeli law permits a company to insure an Office Holder in respect of
liabilities incurred by him 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 monetary liability in
connection with his activities as an Office Holder.
 
                                       59

<PAGE>   63
 
     The Articles of Association of CommTouch allow CommTouch to insure and
indemnify Office Holders to the fullest extent permitted by law. The
Registration Rights Agreement which we entered into with Go2Net and Vulcan
(filed as an exhibit to the registration statement of which this prospectus is a
part), contains certain provisions relating to indemnification of our directors
and officers.
 
     Certain members of our management team are officers of our subsidiary,
CommTouch Software, Inc. a California corporation, or reside in California. The
Articles of Incorporation of CommTouch Software, Inc. provide that the liability
of the directors of CommTouch Software, Inc. 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.
 
                                       60

<PAGE>   64
 
                              CERTAIN TRANSACTIONS
 
RELATIONSHIP WITH GO2NET
 
     Concurrently with the closing of the initial public offering, our U.S.
subsidiary, CommTouch Software, Inc., entered into a Customized Web-based Email
Service Agreement with Go2Net. Under that agreement, we provide customer email
services, including calendaring and other products and services, to end users of
Go2Net's various properties, which may include cable subscribers of Charter
Communications and its affiliates, users of services offered by High Speed
Access Corp. and any browser, website, ISP or similar service that Go2Net
sponsors or provides content to. Under the agreement, CommTouch will host, serve
and maintain the email, calendaring and other services and Go2Net will sell
advertising to be displayed in the products and services. Go2Net will pay
CommTouch a share of revenues from advertising generated from email, calendaring
or other services and related upgrades provided by CommTouch for Go2Net's users.
The agreement between CommTouch and Go2Net has a three year duration, but Go2Net
will have the right on each anniversary to terminate the agreement. Go2Net also
will have the right to terminate the agreement if there are technical problems
with the products or services provided by CommTouch. The performance
specifications set forth in the agreement include requiring us to maintain
certain levels of email system availability and response time, as well as
technical support to Go2Net's email end users and to Go2Net, among other things.
 
     In connection with entering into the email services agreement, we issued to
Go2Net a warrant to purchase 1,136,000 ordinary shares at an exercise price of
$12.80 per share. The warrant is non-forfeitable, fully vested and immediately
exercisable, and will expire five years from the date of the email service
agreement.
 
     Concurrently with our entering into the email services agreement, we issued
$13,333,328 in ordinary shares to Go2Net and $6,666,672 in ordinary shares to
Vulcan Ventures in a private placement at $14.88 per share. Pursuant to the
share purchase agreement, G2Net and Vulcan Ventures have the right to name one
director to our board as long as they continue to hold at least 25% of the
combined number of shares being offered under this prospectus and the shares
available to Go2Net upon exercise of the warrant which are also being offered by
this prospectus. Mr. Camp was appointed to the board pursuant to that agreement.
 
     We agreed to register the shares and warrant described above promptly after
the closing of the initial public offering. If the registration is not effective
as of the expiration of the 180-day lock-up period, the exercise price of the
Go2Net warrant will be reduced to $10.51.
 
     In connection with these transactions, we agreed to pay U.S. Bancorp Piper
Jaffray an advisory fee of $550,000 under the terms of an engagement letter
agreement dated as of July 5, 1999.
 
ORDINARY SHARE FINANCINGS
 
     Mr. Yiftah Atir, a director of CommTouch, is a Managing Director of
Evergreen Canada Management Ltd., the general partner of Harbour Vest-Evergreen
L.P. Pursuant to several Share Purchase Agreements we issued and sold ordinary
shares to Evergreen Canada Israel Investments and Company Ltd., Yarok Ad Fund
Investment Partnership L.P. and Gmul Investment Company Ltd (the "Evergreen
Investors"). These shares were subsequently converted into Series A Convertible
Preferred Shares and certain of these shares were transferred to
HarbourVest-Evergreen L.P.
 
                                       61

<PAGE>   65
 
PREFERRED SHARE FINANCINGS
 
     Series B Convertible Preferred Shares. Mr. Yoseph Sela, a director of
CommTouch, is an Executive Vice President of Gemini Capital Fund Management,
which manages Gemini Israel Fund L.P. ("GIF"), and Mr. Allan Barkat, also a
director of CommTouch, is a Managing Director of Apax-Leumi Partners, which is
the investment advisor to Israel Growth Fund L.P. ("IGF"). Pursuant to a
Preferred Share Purchase Agreement entered into in January 1996, we issued and
sold 51,085 Series B Convertible Preferred Shares and 13,873 warrants for Series
B Convertible Preferred Shares to IGF, GIF, Dr. Ed Mlavsky, Mr. Yoseph Sela, and
certain of the Evergreen Investors for a total investment of approximately
$2,250,000. The Evergreen Investors subsequently transferred their shares to
HarbourVest Evergreen L.P.
 
     Series C Convertible Preferred Shares. Mr. Yair Safrai, a director of
CommTouch, is a Managing Partner of Concord Ventures, which manages the Concord
Funds (as defined below). Pursuant to Preferred Share Letter Agreements entered
into in December 1998 and February 1999, we issued and sold (i) 41,570 Series C
Convertible Preferred Shares to k.t. Concord Venture Fund (Cayman) L.P., k.t.
Concord Venture Fund (Israel) L.P., k.t. Concord Venture Advisors (Cayman) L.P.
and k.t. Concord Venture Advisors (Israel) L.P., (the "Concord Funds") for a
total investment of approximately $3,000,000; (ii) 16,249 Series C Convertible
Preferred Shares to IGF for a total investment of approximately $1,173,000; and
(iii) 12,779 Series C Convertible Preferred Shares to GIF for approximately
$922,000.
 
OPTION EXERCISES AND PURCHASES OF SHARES SUBJECT TO REPURCHASE BY CERTAIN
OFFICERS
 
     Gideon Mantel is the Chief Executive Officer and a Director of CommTouch.
On March 17, 1999, Mr. Mantel exercised certain options granted to him by
CommTouch. In consideration for the Ordinary Shares purchased pursuant to the
exercise of the options, he provided CommTouch with a full-recourse promissory
note dated March 17, 1999 in the original principal amount of $341,272. The
promissory note bears interest at 4.83%, with payments of interest only due on
December 31 of each year and with the balance due and payable on the fourth
anniversary of the date of the promissory note. This loan was used by Mr. Mantel
to purchase 286,120 ordinary shares of CommTouch at a weighted average purchase
price of $1.19 per share. The promissory note is secured by a pledge of the
stock purchased.
 
     Isabel Maxwell is the President of CommTouch Software, Inc. On March 17,
1999, Ms. Maxwell exercised certain options granted to her by CommTouch. As
consideration for the Ordinary Shares purchased pursuant to the exercise of the
options, she provided CommTouch with a full-recourse promissory note dated March
17, 1999 in the original principal amount of $295,858. The promissory note bears
interest at 4.83%, with payments of interest only due on December 31 of each
year and with the balance due and payable on the fourth anniversary of the date
of the promissory note. This loan was used by Ms. Maxwell to purchase 204,040
ordinary shares of CommTouch at a purchase price of $1.45 per share. The
promissory note is secured by a pledge of the stock purchased.
 
     James Collins is the Chief Financial Officer of CommTouch. On March 17,
1999, Mr. Collins exercised certain options granted to him by CommTouch. As
consideration for the Ordinary Shares purchased pursuant to the exercise of the
options, Mr. Collins provided CommTouch with a full-recourse promissory note
dated March 17, 1999 in the original principal amount of $137,112. The
promissory note bears interest at 4.83% with payments of interest only due on
December 31 of each year and with the balance due and payable on the fourth
anniversary of the date of the promissory note. This loan was used by Mr.
Collins to purchase 94,560 ordinary shares of CommTouch at a purchase price of
$1.45 per share. The promissory note is secured by a pledge of the stock
purchased.
 
                                       62

<PAGE>   66
 
     Robert "Rip" Gerber is the Vice President of Marketing of CommTouch
Software, Inc. On March 17, 1999, Mr. Gerber exercised certain options granted
to him by CommTouch. As consideration for the Ordinary Shares purchased pursuant
to the exercise of the options, Mr. Gerber provided CommTouch with a promissory
note dated March 17, 1999 in the original principal amount of $103,617. The
full-recourse promissory note bears interest at 4.83% with payments of interest
only due on December 31 of each year and with the balance due and payable on the
fourth anniversary of the date of the promissory note. This loan was used by Mr.
Gerber to purchase 71,460 ordinary shares of CommTouch at a purchase price of
$1.45 per share. The promissory note is secured by a pledge of the stock
purchased.
 
LOAN TO DR. NAHUM SHARFMAN AND RELATIONSHIP AMONG COMMTOUCH AND DEALTIME.COM
LTD., DR. NAHUM SHARFMAN AND AMIR ASHKENAZI
 
     Dr. Nahum Sharfman was a co-founder of CommTouch and served as a director
and Chairman of the Board of Directors of CommTouch from inception until January
1999. Dr. Sharfman also served as the Chief Executive Officer of CommTouch until
March 31, 1998. On December 31, 1995, CommTouch made a loan of approximately
$58,000 to Dr. Sharfman. The loan plus linkage to the Israeli Consumer Price
Index was to have been repaid within three years, or within 30 days of the
termination of Dr. Sharfman's employment, if earlier. At December 31, 1998 the
outstanding balance of this loan was approximately $55,000, payable in NIS.
 
     In 1997 Dr. Sharfman established DealTime.com Ltd. (formerly known as
Papricom), together with Mr. Amir Ashkenazi, a former employee of CommTouch.
 
     During an interim period in which CommTouch and DealTime.com Ltd. were
negotiating a technology exchange agreement, which ultimately was not signed,
CommTouch provided DealTime.com Ltd. with certain services (office and
secretarial services, computers and other facilities including, without
limitation, all payments made for or on behalf of DealTime.com Ltd.) and access
to certain of CommTouch's technology. At the request of DealTime.com Ltd.,
CommTouch also entered into a Product Distribution Agreement (the "Stock Alert
Agreement") with News Alert Inc. DealTime.com has provided technical support and
services to News Alert Inc. in connection with the Stock Alert Agreement.
CommTouch has entered into three agreements to clarify the rights and
obligations of CommTouch, DealTime.com, Dr. Sharfman and Mr. Amir Ashkenazi.
 
     Under the first agreement, Dr. Sharfman and Mr. Ashkenazi acknowledge that
CommTouch is the sole owner of all of their inventions invented during their
employment with CommTouch and for two years following the termination of their
employment, which inventions relate to CommTouch's business and research
activities as of April 1, 1998 (except in the field of commerce). They also
acknowledge CommTouch's rights to inventions that result from work that they
performed for CommTouch at any time, or which are the subject matter of a
specified patent application. Dr. Sharfman and Mr. Ashkenazi also agreed not to
compete with CommTouch's actual business and research activities as they were on
April 1, 1998 (except in the field of ecommerce), through March 31, 2000.
 
     The second agreement, which is between CommTouch and DealTime.com Ltd.,
confirms that DealTime.com Ltd. shall be solely responsible for all obligations
of CommTouch under the Stock Alert Agreement. DealTime.com Ltd. also
acknowledges that CommTouch is the sole owner of the Multimedia Desktop Software
Technology that CommTouch developed and that was licensed to News Alert Inc.,
and CommTouch grants DealTime.com Ltd. a royalty-free, non-exclusive, limited
license to use that technology to provide support services under the Stock Alert
Agreement. DealTime.com Ltd. also agreed to pay $50,000 to CommTouch for all of
the services rendered by CommTouch and for the license fees that DealTime.com
Ltd. received under the Stock Alert
 
                                       63

<PAGE>   67
 
Agreement, and to divide any future revenues and license fees received under the
Stock Alert Agreement equally with CommTouch. CommTouch, for its part, waived
any claim to an equity interest in DealTime.com Ltd., and agreed that it does
not own intellectual property developed by DealTime.com Ltd. other than in
breach of the agreements with DealTime.com Ltd. and Messrs. Sharfman and
Ashkenazi.
 
     Finally, CommTouch and Dr. Sharfman entered into a Termination of
Employment Agreement requiring the repayment by Dr. Sharfman of CommTouch's loan
to him by December 31, 1999 and the release to Dr. Sharfman of funded and
unfunded severance pay within 20 days of the date of approval of the Termination
of Employment Agreement by our shareholders and containing a waiver by Dr.
Sharfman of any rights under stock options that were granted to him.
 
                                       64

<PAGE>   68
 
                             PRINCIPAL SHAREHOLDERS
 
     The following table sets forth certain information regarding beneficial
ownership of ordinary shares as of June 30, 1999 by:
 
     - each person or entity known to CommTouch to own beneficially more than
       five percent of CommTouch's ordinary shares,
 
     - each of our directors and officers known to CommTouch to own beneficially
       more than one percent of CommTouch's ordinary shares, and
 
     - all executive officers and directors as a group,
 
on a pro forma basis to reflect (1) the issuance of 3,000,000 ordinary shares in
the initial public offering, (2) the exercise of the warrant for 1,136,000
ordinary shares issued to Go2Net and other warrants to purchase 300,600 ordinary
shares, and (3) the automatic conversion upon completion of the initial public
offering of all outstanding preferred shares into ordinary shares.
 

<TABLE>
<CAPTION>
                                                                                PERCENTAGE OF
                                                                                  ORDINARY
                                                                                  SHARES(1)
                                                              TOTAL SHARES   -------------------
                                                              BENEFICIALLY    BEFORE     AFTER
            NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED(1)     OFFERING   OFFERING
            ------------------------------------              ------------   --------   --------
<S>                                                           <C>            <C>        <C>
Go2Net, Inc.(2).............................................   2,032,057       13.9%        0%
  999 3rd Avenue, Suite 4700
  Seattle, WA 98104
Thomas Camp(3)..............................................   2,032,057       13.9%        0%
  c/o Go2Net, Inc.
  999 3rd Avenue, Suite 4700
  Seattle, WA 98104
Yiftah Atir.................................................   1,429,040        9.8%      9.8%
  HarbourVest-Evergreen L.P.(4)
  55 St. Claire Avenue West, Suite 225
  Toronto, Ontario M4V 247
Allan Barkat................................................   1,211,260        8.3%      8.3%
  Israel Growth Fund L.P.(5)
  c/o Apax-Leumi Inc.
  15 Portland Place
  London, England
Yoseph Sela.................................................     838,780        5.7%      5.7%
  Entities affiliated with Gemini Israel Fund L.P.(6)
  11 Galgaley Haplada St. Bldg. 3
  P.O. Box 12226, Herzelia
  46733 Israel
Yair Safrai.................................................     831,400        5.7%      5.7%
  Entities affiliated with Concord Group(7)
  11 Galgaley Haplada St. Bldg. 3
  P.O. Box 12226, Herzelia
  46733 Israel
</TABLE>

 
                                       65

<PAGE>   69
 

<TABLE>
<CAPTION>
                                                                                PERCENTAGE OF
                                                                                  ORDINARY
                                                                                  SHARES(1)
                                                              TOTAL SHARES   -------------------
                                                              BENEFICIALLY    BEFORE     AFTER
            NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED(1)     OFFERING   OFFERING
            ------------------------------------              ------------   --------   --------
<S>                                                           <C>            <C>        <C>
Nahum Sharfman..............................................     788,420        5.4%      5.4%
  22 Hameyasdim St., Karkur
  37064 Israel
Gideon Mantel(8)............................................     501,140        3.4%      3.4%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
Vulcan Ventures, Incorporated(9)............................     448,029        3.1%        0%
  110 110th Avenue N.E., Suite 550
  Bellevue, WA 98004
Amir Lev(10)................................................     407,120        2.8%      2.8%
  c/o CommTouch Software Ltd.
  6 Hazoran Street
  Poleg Industrial Park, P.O. Box 8511
  Netanya 42504, Israel
Isabel Maxwell(11)..........................................     204,040        1.4%      1.4%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
James Collins(12)...........................................      94,560         .6%       .6%
  c/o CommTouch Software, Inc.
  3945 Freedom Circle, Suite 730
  Santa Clara, California 95054
All directors and executive officers as a group (16
  persons)..................................................   5,637,840
</TABLE>

 
-------------------------
 (1) Applicable percentage ownership is based on 14,655,914 ordinary shares
     outstanding as of June 30, 1999. Beneficial ownership is determined in
     accordance with the rules and regulations of the Securities and Exchange
     Commission. Includes shares subject to options exercisable within 60 days
     after June 30, 1999 as if such shares were outstanding on June 30, 1999 and
     assumes that no other person has exercised any outstanding options. Except
     as pursuant to applicable community property laws, each shareholder named
     in the table has sole voting and investment power with respect to the
     shares set forth opposite such shareholder's name.
 
 (2) Includes 896,057 shares purchased in the private placement and 1,136,000
     shares available upon exercise of the warrant issued to Go2Net by the
     Company.
 
 (3) Represents 896,057 shares purchased in the private placement by Go2Net and
     1,136,000 shares exercisable under a warrant granted to Go2Net. Mr. Camp,
     who is a director of the Company, is the Vice President, Business
     Development of Go2Net, and as such, may be deemed to beneficially own such
     shares. Mr. Camp disclaims beneficial ownership of all such ordinary
     shares. Excludes 448,029 shares purchased in the private placement by
     Vulcan Ventures, which beneficially owns 33.95% of Go2Net. William D.
     Savoy, Vice-President of Vulcan Ventures, is a member of the board of
     directors of Go2Net.
 
 (4) Represents 1,429,040 ordinary shares owned by HarbourVest-Evergreen L.P.
     Mr. Atir, a director of the Company, is the Managing Director of Evergreen
     Canada Management Ltd., the general partner of HarbourVest-Evergreen L.P.
     and, as such, may be deemed to beneficially
 
                                       66

<PAGE>   70
 
     own such ordinary shares. Mr. Atir disclaims beneficial ownership of all
     such ordinary shares except to the extent of his proportional interest
     therein.
 
 (5) Represents 1,211,260 ordinary shares owned by Israel Growth Fund, L.P.,
     which is advised by Apax-Leumi Partners, its investment advisor. Such
     figure includes 100,940 shares issuable upon exercise of a warrant at the
     closing of the initial public offering. Mr. Barkat, a director of the
     Company, is the Managing Director of Apax-Leumi Partners and, as such, may
     be deemed to beneficially own such ordinary shares. Mr. Barkat disclaims
     beneficial ownership of all such ordinary shares except to the extent of
     his proportional interest therein.
 
 (6) Represents 660,420 ordinary shares owned by Gemini Israel Fund L.P.
     ("GIF"), 166,280 ordinary shares owned by Gemini Israel II Parallel Fund
     L.P. ("GIPF"), 6,040 ordinary shares owned by Yoseph Sela and 6,040
     ordinary shares owned by Dr. Ed Mlavsky, the President of Gemini Capital
     Fund Management, which manages GIF and GIPF. Mr. Sela, a director of the
     Company, is the Executive Vice President of Gemini Capital Fund Management,
     and, as such, may be deemed to beneficially own such ordinary shares. Mr.
     Sela disclaims beneficial ownership of all of Dr. Mlavsky's ordinary shares
     and of all of the ordinary shares owned by GIF and GIPF except to the
     extent of his proportional interests therein.
 
 (7) Includes 687,280 ordinary shares owned by k.t. Concord Venture Fund
     (Cayman), L.P. ("CVF"), 137,400 ordinary shares owned by k.t. Concord
     Venture Fund (Israel), L.P. ("CVF Israel"), 5,620 ordinary shares owned by
     k.t. Concord Venture Advisors (Cayman), L.P. ("CVA"), and 1,100 ordinary
     shares owned by k.t. Concord Venture Advisors (Israel), L.P. ("CVA
     Israel"). Mr. Safrai, a director of the Company, is the Managing Partner of
     Concord Ventures, which manages CVF, CVF Israel, CVA and CVA Israel, and,
     as such, may be deemed to beneficially own such ordinary shares. Mr. Safrai
     disclaims beneficial ownership of all such ordinary shares except to the
     extent of his proportional interest therein.
 
 (8) Certain of such shares are subject to a right of repurchase in favor of
     CommTouch Software, Inc. Does not include 80,000 ordinary shares subject to
     an option granted to Mr. Mantel under the 1996 CSI Stock Option Plan on
     April 23, 1999, with an exercise price of $15.75 per share. The option will
     vest with respect to one-fourth of the shares on April 23, 2000, and with
     respect to 1/36 of the remaining shares each month thereafter.
 
 (9) Represents 448,029 shares purchased in the private placement.
 
(10) Does not include 50,000 ordinary shares subject to an option granted to Mr.
     Lev under an Israeli Option Agreement on April 23, 1999, with an exercise
     price of $15.75 per share. The option will vest with respect to one-fourth
     of the shares on April 23, 2000, and with respect to 1/36 of the remaining
     shares each month thereafter.
 
(11) Certain of such shares are subject to a right of repurchase in favor of
     CommTouch Software, Inc. Does not include 5,000 ordinary shares subject to
     an option granted to Ms. Maxwell under the 1996 CSI Stock Option Plan on
     April 23, 1999, with an exercise price of $15.75 per share. The option will
     vest with respect to one-fourth of the shares on April 23, 2000, and with
     respect to 1/36 of the remaining shares each month thereafter.
 
(12) Certain of such shares are subject to a right of repurchase in favor of
     CommTouch Software, Inc. Does not include 10,000 ordinary shares subject to
     an option granted to Mr. Collins under the 1996 CSI Stock Option Plan on
     April 23, 1999, with an exercise price of $15.75 per share. The option will
     vest with respect to one-fourth of the shares on April 23, 2000, and with
     respect to 1/36 of the remaining shares each month thereafter.
 
                                       67

<PAGE>   71
 
                          DESCRIPTION OF SHARE CAPITAL
 
DESCRIPTION OF SHARES
 
     Set forth below is a summary of the material provisions governing our share
capital. This summary is not complete and should be read together with our
Memorandum of Association and Articles of Association, copies of which have been
filed as exhibits to the Registration Statement of which this prospectus forms a
part.
 
     As of June 30, 1999, our authorized share capital consisted of 40,000,000
ordinary shares, NIS 0.05 par value and 200,000 Series A Convertible Preferred
Shares, 200,000 Series B Convertible Preferred Shares and 165,820 Series C
Convertible Preferred Shares, (collectively, the Convertible Preferred Shares),
NIS 1.0 par value. As of June 30, 1999, there were 14,655,914 ordinary shares
and no preferred shares issued and outstanding (including the issuance of
3,450,000 shares in the initial public offering, the issuance of 7,109,800
ordinary shares issued on conversion of all outstanding convertible preferred
shares upon the closing of the initial public offering and assuming the issuance
of 258,328 and 227,200 ordinary shares upon the net exercise of the in-the-money
outstanding warrants and the in-the-money warrant issued to Go2Net).
 
DESCRIPTION OF ORDINARY SHARES
 
     All issued and outstanding ordinary shares of CommTouch are, and the
ordinary shares offered hereby when issued and paid for will be, duly authorized
and validly issued, fully paid and nonassessable. The ordinary shares do not
have preemptive rights. Neither the Memorandum of Association or Articles of
Association of CommTouch nor the laws of the State of Israel restrict in any way
the ownership or voting of ordinary shares by non-residents of Israel, except
with respect to subjects of countries which are in a state of war with Israel.
 
DIVIDEND AND LIQUIDATION RIGHTS
 
     The ordinary shares offered by this prospectus, when issued, will be
entitled to their full proportion of any cash or share dividend declared from
the date of the consummation of the offering.
 
     Subject to the rights of the holders of shares with preferential or other
special rights that may be authorized, the holders of ordinary shares are
entitled to receive dividends in proportion to the sums paid up or credited as
paid up on account of the nominal value of their respective holdings of the
shares in respect of which the dividend is being paid (without taking into
account the premium paid up on the shares) out of assets legally available
therefor and, in the event of our winding up, to share ratably in all assets
remaining after payment of liabilities in proportion to the nominal value of
their respective holdings of the shares in respect of which such distribution is
being made, subject to applicable law. Our Board of Directors may declare
interim dividends and recommend a final annual dividend only out of profits and
in such amounts as the Board of Directors may determine. Declaration of the
final annual dividend requires shareholder approval at a general meeting, which
may reduce but not increase such dividend from the amount recommended by the
Board of Directors. See "Dividend Policy."
 
     In case of a share dividend, holders of shares can receive shares of a
class whether such class existed prior thereto or was created therefor or shares
of the same class that conferred upon the holders the right to receive such
dividend.
 
                                       68

<PAGE>   72
 
VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS
 
     Holders of ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. Such rights may be affected by
the future grant of any special voting rights to the holders of a class of
shares with preferential rights. As of the closing of this offering, all of the
outstanding preferred shares will convert into ordinary shares, and there will
be no authorized but unissued shares with preferential rights over the ordinary
shares. Any change in the registered capital of CommTouch, including the
creation of a new class of shares with rights superior or inferior to existing
classes of shares may be adopted by a "special resolution" (the resolution of
the holders of 75 percent or more of the shares participating in a general
meeting). Once the creation of a class of shares with preference rights has been
approved, the Board of Directors may issue preferred shares, unless the Board is
limited from doing so by the Articles of Association or a contractual provision.
 
     An annual general meeting must be held once every calendar year at such
time (not more than 15 months after the last preceding annual general meeting)
and at such place, either within or outside the State of Israel, as may be
determined by the Board of Directors. The quorum required for a general meeting
of shareholders consists of at least two shareholders present in person or by
proxy and holding, or representing, more than one-third of the voting rights of
the issued share capital. A meeting adjourned for lack of a quorum may be
adjourned to the same day in the next week at the same time and place, or to
such time and place as the Chairman may determine with the consent of the
holders of a majority of the shares present in person or by proxy and voting on
the question of adjournment. At such reconvened meeting any two shareholders
present in person or by proxy (and not in default under the articles) will
constitute a quorum.
 
     Most shareholder resolutions, including resolutions for the election of
directors, the declaration of dividends, the appointment of auditors or the
approval of transactions with Office Holders as required by the Companies
Ordinance (See "Management -- Approval of Certain Transactions"), will be deemed
adopted if approved by the holders of a majority of the voting power represented
at the meeting, in person or by proxy, and voting thereon. Certain corporate
actions such as:
 
     - amending the Articles of Association;
 
     - amending the Memorandum of Association;
 
     - changing our name;
 
     - making changes in the capital structure of CommTouch, such as a reduction
       of capital, increase of capital or share split;
 
     - merger or consolidation;
 
     - voluntary winding up; and
 
     - authorizing a new class of shares or changing special rights of a class
       of shares
 
must be approved by a "special resolution" and will be deemed adopted only if
approved by the holders of not less than 75 percent of the voting power
represented in person or by proxy at the meeting and voting thereon, and in some
cases 75 percent of the voting power of the affected class of shares.
 
     Our executive officers, directors, affiliates of directors and five percent
or greater shareholders own beneficially an aggregate of approximately 48.9
percent of the Company's outstanding ordinary shares. See "Principal
Shareholders."
 
                                       69

<PAGE>   73
 
TRANSFER OF SHARES AND NOTICES
 
     Fully paid ordinary shares are issued in registered form and may be
transferred freely. Each shareholder of record is entitled to receive at least
seven days' prior notice of shareholder meetings. A special resolution can be
adopted only if shareholders are given 21 days' prior notice of the meeting at
which such resolution will be voted on (unless all shareholders entitled to vote
agree that the meeting may be held on a shorter notice period). For purposes of
determining the shareholders entitled to notice and to vote at such meeting, the
Board of Directors may fix the record date not exceeding less than 24 days prior
to the date of any general meeting.
 
MODIFICATION OF CLASS RIGHTS
 
     If at any time the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by our
Articles of Association) may be modified or abrogated by CommTouch by a special
resolution subject to the consent in writing of the holders of the issued shares
of the class, or by the adoption of a special resolution passed at a separate
general meeting of the holders of the shares of such class.
 
DESCRIPTION OF WARRANT OFFERED IN THIS PROSPECTUS
 
     In connection with the Customized Web-based Email Service Agreement entered
into between CommTouch's U.S. subsidiary and Go2Net, CommTouch issued to Go2Net
a fully vested, non-forfeitable, warrant to purchase 1,136,000 ordinary shares
at a per-share exercise price of $12.80, subject to adjustment as provided in
the warrant. The warrant is exercisable at any time until it expires on July 16,
2004; however, Go2Net entered into a lock-up agreement in which it agreed not to
sell any shares acquired upon exercise of the warrant for 180 days after July
13, 1999, the date of the prospectus for the initial public offering. The
warrant is exercisable pursuant to a cashless exercise based on the average
closing price of the ordinary shares for the five days preceding the exercise.
Until January 16, 2000, the warrant is transferable only to certain affiliates
of Go2Net (including Vulcan) and to any successor to substantially all its
business or assets (see "Antidilution Provisions" below). The Company extended
registration rights to Go2Net covering the warrant and the shares issuable upon
exercise of the warrant.
 
General
 
     Prior to this offering, there has been no public market for the warrant and
no such market will probably develop upon completion of the offering. The terms
of the warrant were negotiated between the Company and Go2Net. The sale price of
the warrant in this offering will be determined solely by Go2Net in negotiation
with any prospective purchaser. The terms of the warrant are not related to the
Company's asset value, earnings, book value or other such criteria of value.
Further, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holder of the warrant can be
expected to exercise it at a time when the Company would, in all likelihood, be
able to obtain any needed capital on terms more favorable to the Company than
those provided in the warrant.
 
     Go2Net and its transferee(s) may be deemed to be "underwriters" under the
Securities Act with respect to the sale of the shares and the warrant, and any
profit realized upon sale of the shares and warrant may be deemed to be
additional underwriting compensation.
 
                                       70

<PAGE>   74
 
Antidilution Provisions
 
     The holder of the warrant is given the opportunity to profit from a rise in
the market price of the ordinary shares and the warrant. To the extent that the
warrant is exercised, dilution of the interests of the Company's shareholders
will occur. In addition, the warrant includes provisions which adjust the
exercise and price upon the occurrence of certain events.
 
     The warrant provides that Go2Net or its permitted assigns, is entitled to
purchase up to 1,136,000 fully paid and nonassessable ordinary shares at the
price of $12.80 per share. The warrant is exercisable, in whole or in part, at
any time and from time to time on and after July 16, 1999 through July 16, 2004
upon presentation and surrender at the principal office of the Company and
payment of the exercise price.
 
     The warrant has a net exercise feature under which the exercise price may
be paid by authorizing the Company to withhold the number of shares being
exercised whose fair market value equals the aggregate exercise price of the
portion of the warrant being exercised. The net exercise feature is available as
long as the ordinary shares remain publicly traded or in the event of a merger
or consolidation of the Company with or into an unaffiliated entity in which the
shareholders of the Company own less than 50% of the voting securities of the
survivor; or the sale, transfer or lease (except for a transfer or lease by
pledge or mortgage to a bona fide lender) of all or substantially all of the
assets of the Company to an unaffiliated entity.
 
     "Fair market value" means, (i) if the shares are listed on a national stock
exchange or the Nasdaq National Market, the average of the closing prices for
the five trading days immediately prior to the date of determination, or (ii) if
the shares are not so listed, the average of the closing bid and asked prices in
the over-the-counter market for the five trading days immediately prior to the
date of the determination, as furnished by a national quotation service or the
principal broker making a market in the shares. In a merger or consolidation,
fair market value means the merger consideration or other value to be received
by the Company's shareholders.
 
     The holder of the warrant is required to avoid becoming a 10% or greater
shareholder of the Company as a result of any exercise of the warrant. The
holder is also required to cooperate with the Company so as to minimize adverse
Israeli tax consequences.
 
     Both the number of shares issuable upon exercise of the warrant and the
exercise price will be ratably adjusted if any of the following events occur
before the warrant is exercised:
 
     - the Company issues additional ordinary shares or any rights, options,
       warrants or other securities exercisable for or convertible into shares
       at a total consideration per share of less than the warrant exercise
       price per share. Options granted to employees and others under
       compensatory or stock option plans would not trigger such adjustments.
 
     - the Company combines all of the outstanding shares into a smaller number
       of shares, in which case the exercise price will be proportionately
       increased and the number of shares subject to the warrant will be
       proportionately decreased.
 
     - the Company declares a dividend or other distribution payable in shares
       or subdivides its shares into a greater number, in which case the
       exercise price will be proportionately decreased. The number and kind of
       shares available on exercise will be adjusted so that the holder will be
       entitled to receive the same amount and kind of dividend or distribution
       had the holder been a record holder of shares on any record date with
       respect to such dividend or distribution, and on the same terms on which
       the dividend or distribution was made. If the distribution involves
       rights, warrants, options, or any other convertible security and the
       exercise
 
                                       71

<PAGE>   75
 
       or conversion rights would expire prior to exercise of the warrant, the
       holder is entitled to exercise such rights for 30 days after exercising
       the warrant.
 
     - In the event of a merger, a reorganization or reclassification of the
       Company's capital stock or sale of substantially all of the Company's
       assets, the holder will be entitled to the same consideration which he or
       she would have received if the warrant had been exercised and shares
       issued prior to such event.
 
     Go2Net is subject to an agreement not to transfer any ordinary shares of
the Company, including shares available on exercise of the warrant, for a period
of 180 days from the issue date of the warrant. The period expires January 16,
2000. This restriction does not bind a transferee(s) of the warrant in this
offering.
 
     Until January 16, 2000, Go2Net may transfer the warrant only to (a) any
person or persons who are successors in interest to substantially all the
business or assets of the holder and (b) any person which owns 10% or more of
the outstanding voting securities of the holder and is either a qualified
institutional buyer as defined in SEC Rule 144A or an accredited investor as
defined in SEC Rule 501. Transferee(s) of the warrant also will be subject to
the same terms of the warrant as if such transferee(s) were the original holder.
 
     The Company has agreed to file a registration statement with respect to the
warrant and the shares offered under this prospectus as soon as practicable and
in no event later than January 16, 2000, 180 days from the date of the initial
public offering. This registration statement is filed pursuant to that
agreement. If the registration statement is not effective by that date, the
exercise price will be reduced from $12.80 to $10.51, subject to any required
antidilution adjustments described above.
 
     Holders of the warrant are not entitled to vote or receive dividends or be
deemed the holder of ordinary shares or have any other rights of a shareholder
of the Company until the warrant has been exercised and the shares shall have
become deliverable to the holder.
 
DESCRIPTION OF OTHER WARRANTS
 
     As of June 30, 1999, CommTouch had outstanding warrants to purchase 568
Series B Convertible Preferred Shares issued to Imperial Bank and Imperial
Bancorp and warrants to purchase a total of 350 Series B Convertible Preferred
Shares issued to various consultants, which warrants expire on various dates in
2002. We also had outstanding warrants to issue 346 Series C Convertible
Preferred Shares issued to Imperial Bank and Imperial Bancorp, and warrants to
purchase a total of 543 Series C Convertible Preferred Shares issued to various
consultants, of which 300 warrants expire on December 2002 and 243 warrants
expire on July 2005. We granted Bank Lepituach Ha Taasia warrants, exercisable
for three years at the nominal price of NIS 0.05 for each share, with the number
of warrants linked to the amount of the credit made available by the bank under
this warrant. The Bank exercised all warrants prior to June 30, 1999. In April
1999 CommTouch paid in full the outstanding balance under its line of credit
with Bank Lepituach Ha Taasia and does not intend to draw on this line of credit
in the future.
 
REGISTRATION RIGHTS
 
     The holders of convertible preferred shares which were converted into
7,109,800 ordinary shares (the "Registrable Securities") upon effectiveness of
the initial public offering have certain rights to register those shares under
the Securities Act. If requested by holders of a majority of the Registrable
Securities after the second anniversary of the date of the initial public
offering, CommTouch must file a registration statement under the Securities Act
covering all Registrable Securities requested to
 
                                       72

<PAGE>   76
 
be included by all holders of such Registrable Securities. CommTouch may be
required to effect up to two such registrations. CommTouch has the right to
delay any such registration for up to 120 days under certain circumstances, but
not more than once during any 12-month period.
 
     In addition, if CommTouch proposes to register any of its ordinary shares
under the Securities Act other than in connection with a company employee
benefit plan or a corporate reorganization pursuant to Rule 145 under the
Securities Act, or a registration on any registration form that does not permit
secondary sales or does not include substantially the same information as would
be required to be included in a registration statement covering the sale of
Registrable Securities, the holders of Registrable Securities may require
CommTouch to include all or a portion of their shares in such registration,
although the managing underwriter of any such offering has certain rights to
limit the number of shares in such registration.
 
     Further, a majority of the holders of Registrable Securities may require
CommTouch to register all or any portion of their Registrable Securities on Form
F-3 when such form becomes available to CommTouch, subject to certain conditions
and limitations. All expenses incurred in connection with all registrations
(other than fees, expenses and disbursements of counsel retained by the holders
of the Registrable Shares, and underwriters' and brokers' discounts and
commissions) will be borne by CommTouch.
 
     The registration rights described in the preceding three paragraphs expire
five years after the closing date of the initial public offering.
 
     The Company also extended registration rights to Go2Net and to Vulcan
Ventures. These rights allow Go2Net and Vulcan to require the Company to
register the shares and warrant and the shares issuable upon exercise of the
warrant which are being offered in this prospectus. If the Company is unable to
cause a registration statement for these shares to become effective as of the
expiration of the 180-day lock-up period, the exercise price of the warrant will
be reduced to $10.51 per share.
 
     All of the holders of Registrable Securities have agreed that they will not
exercise any right with respect to any registration for a period of 180 days
after the date of the initial public offering, without the prior written consent
of US Bancorp Piper Jaffray which was one of the managing underwriters in the
initial public offering.
 
ACCESS TO INFORMATION
 
     We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders of record and the
number of shares held by each, the identity of the directors and details
regarding security interests on our assets. In addition, CommTouch must file
with the Registrar of Companies its Articles of Association and a copy of any
special resolution adopted by a general meeting of shareholders. The information
filed with the Registrar of Companies is available to the public. In addition to
the information available to the public, our shareholders are entitled, upon
request, to review and receive copies of all minutes of meetings of our
shareholders.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for our ordinary shares is Norwest Bank
Minnesota, N.A.
 
                                       73

<PAGE>   77
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     As of June 30, 1999, as adjusted for the shares issued in the initial
public offering, CommTouch had outstanding 14,655,914 ordinary shares (including
the issuance of 258,328 and 227,200 ordinary shares upon the net exercise of the
in-the-money outstanding warrants and the warrant issued to Go2Net,
respectively). 11,738,206 of these shares are "restricted" shares under the
Securities Act. All restricted shares are subject to lock-up agreements with the
underwriters pursuant to which the holders of the restricted shares have agreed
not to sell, pledge or otherwise dispose of such shares for a period of 180 days
after July 13, 1999 (or January 13, 2000), the date of the initial public
offering. U.S. Bancorp Piper Jaffray may release the shares subject to the
lock-up agreements in whole or in part at any time with or without notice.
However, U.S. Bancorp Piper Jaffray has no current plans to do so.
 
     The following table indicates approximately when the 11,738,206 ordinary
shares of CommTouch that were not sold in the initial public offering but which
were outstanding at the time that offering was completed will be eligible for
sale into the public market:
 
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
 

<TABLE>
<S>                                           <C>
January 13, 2000............................   6,839,948
After January 13, 2000......................   4,898,258
                                              11,738,206
</TABLE>

 
     Most of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date of the initial public
offering will be subject to certain volume and other resale restrictions
pursuant to Rule 144 because the holders are affiliates of CommTouch. The
general provisions of Rule 144 are described below.
 
     In general, under Rule 144, an affiliate of CommTouch, or person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year, will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of
 
     - 1% of the then outstanding ordinary shares (approximately 146,422 shares)
       or
 
     - the average weekly trading volume during the four calendar weeks
       preceding the date on which notice of the sale is filed with the SEC.
 
     Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
CommTouch. A person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of CommTouch any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
two years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above. 1,728,040 of the restricted shares may be
resold under Rule 144(k) beginning 180 days after the effective date of the
initial public offering.
 
     The holders of 7,109,800 ordinary shares which were issued upon conversion
of convertible preferred shares at the time of the initial public offering,
Go2Net and Vulcan Ventures as holders of the 1,344,086 ordinary shares offered
in this prospectus and Go2Net as holder of the warrant for 1,136,000 ordinary
shares offered in this prospectus, have certain rights to register those shares
under the Securities Act, pursuant to registration rights agreements entered
into between CommTouch and those holders. The Registration Statement of which
this prospectus is a part was filed pursuant to the registration rights of
Go2Net and Vulcan.
 
                                       74

<PAGE>   78
 
     In addition to the restriction imposed by the securities laws, 662,680 of
the restricted shares were issued to certain employees of CommTouch pursuant to
restricted stock agreements. Pursuant to the provisions of these agreements,
CommTouch Software, Inc. has a repurchase option on any unvested shares.
CommTouch Software, Inc.'s repurchase option with respect to such shares lapses
ratably over time. At the 180th day after the effective date of the initial
public offering, approximately 420,600 of those shares will remain subject to
the repurchase option.
 
     As of June 30, 1999, 1,000,000 shares were reserved for issuance under our
stock option plans, of which options to purchase 954,020 shares were then
outstanding. Beginning 180 days after the effective date of the initial public
offering, approximately 289,785 shares issuable upon the exercise of vested
options will become eligible for sale.
 
     We intend to file, by January 13, 2000, a Form S-8 registration statement
under the Securities Act to register shares issued in connection with option
exercises and shares reserved for issuance under all stock plans. Ordinary
shares issued upon exercise of options after the effective date of the Form S-8
will be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and to lock-up agreements.
 
                                       75

<PAGE>   79
 
               U.S. TAX CONSIDERATIONS REGARDING ORDINARY SHARES
                           ACQUIRED BY U.S. TAXPAYERS
 
     The following discussion summarizes the material U.S. federal income tax
consequences arising from the purchase, ownership and sale of the ordinary
shares. This summary is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, in effect as of the date of this prospectus, all of
which are subject to change, possibly with retroactive effect. CommTouch will
not seek a ruling from the Internal Revenue Service with regard to the United
States federal income tax treatment relating to investment in the ordinary
shares and, therefore, no assurance exists that the Internal Revenue Service
will agree with the conclusions set forth below. The summary below does not
purport to address all federal income tax consequences that may be relevant to
particular investors. This summary does not address the consequences that may be
applicable to particular classes of taxpayers, including investors that hold
ordinary shares as part of a hedge, straddle or conversion transaction,
insurance companies, banks or other financial institutions, broker-dealers,
tax-exempt organizations and investors who own (directly, indirectly or through
attribution) 10% or more of CommTouch's outstanding voting stock. Further, it
does not address the alternative minimum tax consequences of an investment in
ordinary shares or the indirect consequences to U.S. Holders, as defined below,
of equity interests in investors in ordinary shares. This summary is addressed
only to holders that hold ordinary shares as a capital asset within the meaning
of Section 1221 of the Code, are U.S. citizens, individuals resident in the
United States for purposes of U.S. federal income tax, domestic corporations or
partnerships and estates or trusts treated as "United States persons" under
Section 7701 of the Code ("U.S. Holders").
 
     EACH INVESTOR SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
 
TAX BASIS OF ORDINARY SHARES
 
     A U.S. Holder's tax basis in his or her ordinary shares will be the
purchase price paid therefor by such U.S. Holder. The holding period of each
ordinary share owned by a U.S. Holder will commence on the day following the
date of the U.S. Holder's purchase of such ordinary share and will include the
day on which the ordinary share is sold by such U.S. Holder.
 
SALE OR EXCHANGE OF ORDINARY SHARES
 
     A U.S. Holder's sale or exchange of ordinary shares will result in the
recognition of gain or loss by such U.S. Holder in an amount equal to the
difference between the amount realized and the U.S. Holder's basis in the
ordinary shares sold. Subject to the following discussion of the consequences of
CommTouch being treated as a Passive Foreign Investment Company or a Foreign
Investment Company, such gain or loss will be capital gain or loss if such
ordinary shares are a capital asset in the hands of the U.S. Holder. Gain or
loss realized on the sale of ordinary shares will be long-term capital gain or
loss if the ordinary shares sold had been held for more than one year at the
time of their sale. Long-term capital gains recognized by certain taxpayers
generally are subject to a reduced rate of federal tax (currently a maximum of
20%). If the U.S. Holder's holding period on the date of the sale or exchange
was one year or less, such gain or loss will be short-term capital gain or loss.
Short-term capital gains generally are subject to tax at the same rates as
ordinary income. In
 
                                       76

<PAGE>   80
 
general, any capital gain recognized by a U.S. Holder upon the sale or exchange
of ordinary shares will be treated as U.S.-source income for U.S. foreign tax
credit purposes.
 
     See discussion under "Israeli Taxation and Investment Programs -- Capital
Gains and Income Taxes Applicable to Non-Israeli Shareholders" for a discussion
of taxation by Israel of capital gains realized on sales of capital assets.
 
TREATMENT OF DIVIDEND DISTRIBUTIONS
 
     For U.S. federal income tax purposes, gross dividends (including the amount
of any Israeli taxes withheld therefrom) paid to a U.S. Holder with respect to
his or her ordinary shares will be included in his or her ordinary income to the
extent made out of current or accumulated earnings and profits of CommTouch, as
determined based on U.S. tax principles, at the time the dividends are received
and will be treated as foreign source dividend income for purposes of the
foreign tax credit limitation described below. Such dividends will not be
eligible for the dividends received deduction allowed to U.S. corporations under
Section 243 of the Code. Dividend distributions in excess of CommTouch's current
and accumulated earnings and profits will be treated first as a non-taxable
return of the U.S. Holder's tax basis in his or her ordinary shares to the
extent thereof and then as a gain from the sale of ordinary shares. Dividends
paid in NIS will be includible in income in a U.S. dollar amount based on the
exchange rate at the time of their receipt, and any gain or loss resulting from
currency fluctuations during the period from the date a dividend is paid to the
date such payment is converted into U.S. dollars generally will be treated as
ordinary income or loss.
 
     Any Israeli withholding tax imposed on dividends paid to a U.S. Holder will
be a foreign income tax eligible for credit against such U.S. Holder's U.S.
federal income tax liability subject to certain limitations. Alternatively, a
U.S. Holder may claim a deduction for such amount, but only for a year in which
a U.S. Holder elects to do so with respect to all foreign income taxes. The
overall limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. Dividends distributed by CommTouch
with respect to ordinary shares will generally constitute "passive income".
Foreign income taxes exceeding the credit limitation for the year of payment or
accrual may be carried back for two taxable years and forward for five taxable
years in order to reduce U.S. federal income taxes, subject to the credit
limitation applicable in each of such years. Other restrictions on the foreign
tax credit include a general prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90% and an allowance of foreign tax credits for alternative minimum
tax purposes only to the extent of foreign-source alternative minimum taxable
income. See "Israeli Taxation and Investment Programs -- Capital Gains and
Income Taxes Applicable to Non-Israeli Shareholders."
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     Any dividends paid on, or proceeds derived from a sale of, the ordinary
shares to, or by, U.S. Holders may be subject to U.S. information reporting
requirements and the 31% U.S. backup withholding tax unless the holder (i) is a
corporation or other exempt recipient or (ii) provides a United States taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with any applicable withholding requirements.
Any amounts withheld under the U.S. backup withholding tax rules will be allowed
as a refund or a credit against the U.S. Holder's U.S. federal income tax,
provided the required information is furnished to the U.S. Internal Revenue
Service.
 
                                       77

<PAGE>   81
 
TAX STATUS OF COMMTOUCH FOR U.S. FEDERAL INCOME TAX PURPOSES
 
     Passive Foreign Investment Company. If CommTouch were deemed to be a
passive foreign investment company (a "PFIC") for U.S. federal income tax
purposes, any gain recognized by a U.S. Holder upon the sale of ordinary shares
(or the receipt of certain distributions) generally would be treated as ordinary
income, such income would be allocated over such U.S. Holder's holding period
for such ordinary shares and an interest charge would be imposed on the amount
of deferred tax on such income which is allocated to prior taxable years.
Generally, CommTouch will be treated as a PFIC for any tax year if, in such tax
year or any prior tax year, either (i) 75% or more of its gross income is
passive in nature, or (ii) on average, 50% or more of its assets (by value or,
if CommTouch elects or if CommTouch is treated as a "controlled foreign
corporation" under the Code, by their adjusted basis for computing earnings and
profits) produce or are held for the production of passive income. CommTouch
does not believe it satisfies either of the tests for PFIC status for any tax
year to date and, although CommTouch is acquiring substantial cash in connection
with this Offering, it expects that the majority of its assets will continue to
generate sufficient levels of income to avoid PFIC treatment for U.S. federal
income tax purposes. However, since the determination whether CommTouch is a
PFIC will be made annually based on facts and circumstances that, to some
extent, may be beyond CommTouch's control, there can be no assurance that
CommTouch will not become a PFIC at some time in the future. If CommTouch were
determined to be a PFIC, however, a U.S. Holder could elect to treat his or her
ordinary shares as an interest in a qualified electing fund (a "QEF Election"),
in which case, the U.S. Holder would be required to include in income currently
his or her proportionate share of CommTouch's earnings and profits in years in
which CommTouch is a PFIC whether or not distributions of such earnings and
profits are actually made to such U.S. Holder, but any gain subsequently
recognized upon the sale by such U.S. Holder of his or her ordinary shares
generally would be taxed as a capital gain. Alternatively, a U.S. Holder may
elect to mark the ordinary shares to market annually, recognizing ordinary
income or loss (subject to certain limitations) equal to the difference between
the fair market value of its ordinary shares and the adjusted basis of such
stock. See "U.S. Consequences Regarding ordinary shares Acquired by U.S.
Taxpayers -- Sale or Exchange of Ordinary Shares" above. U.S. Holders should
consult with their own tax advisers regarding the eligibility, manner and
advisability of making a QEF Election if CommTouch is treated as a PFIC.
 
     Controlled Foreign Corporations. Sections 951 through 964 and Section 1248
of the Code relate to controlled foreign corporations ("CFC"). The CFC
provisions may impute some portion of such a corporation's undistributed income
to certain U.S. shareholders on a current basis and convert into dividend income
some portion of gains on dispositions of stock which would otherwise qualify for
capital gains treatment. In general, the CFC provisions will apply to CommTouch
only if U.S. shareholders, who are U.S. Holders and who own, directly or
indirectly, 10% or more of the total combined voting power of all classes of
voting stock own in the aggregate (or are deemed to own after application of
complex attribution rules) more than 50% (measured by voting power or value) of
the outstanding stock of CommTouch. CommTouch does not believe that it will be a
CFC after this Offering. It is possible that CommTouch could become a CFC in the
future. Even if CommTouch were classified as a CFC in a future year, however,
the CFC rules referred to above would apply only with respect to U.S.
shareholders, who are U.S. Holders and who own, directly or indirectly, 10% or
more of the total combined voting power of all classes of voting stock of
CommTouch.
 
     Personal Holding Company/Foreign Personal Holding Company/Foreign
Investment Company. A corporation will be classified as a personal holding
company, or a PHC, if (i) five or fewer individuals at any time during the last
half of a tax year (without regard to their citizenship or residence) directly
or indirectly or by attribution own more than 50% in value of the corporation's
 
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stock and (ii) at least 60% of its ordinary gross income for the taxable year,
as specially adjusted, consists of personal holding company income (defined
generally to include dividends, interest, royalties, rents and certain other
types of passive income). A PHC is subject to a United States federal income tax
of 39.6% on its undistributed personal holding company income (generally
limited, in the case of a foreign corporation, to United States source income).
 
     A corporation will be classified as a foreign personal holding company, or
an FPHC and not a PHC if at any time during a tax year (i) five or fewer
individual United States citizens or residents directly or indirectly or by
attribution own more than 50% of the total combined voting power or value of the
corporation's stock and (ii) at least 60% of its gross income consists of (50%
for years following the first year it becomes a FPHC) FPHC income (defined
generally to include dividends, interest, royalties, rents and certain other
types of passive income). Each United States shareholder in an FPHC is required
to include in gross income, as a dividend, an allocable share of the FPHC's
undistributed foreign personal holding company income (generally the taxable
income of the FPHC, as specially adjusted).
 
     A corporation will be classified as a foreign investment company, or an FIC
if for any taxable year it (i) is registered under the Investment Company Act of
1940, as amended, as a management company or unit investment trust or is engaged
primarily in the business of investing or trading in securities or commodities
(or any interest therein) and (ii) 50% or more of the total value or the total
combined voting power of all classes of the corporation's stock is owned
directly or indirectly (including stock owned through the application of
attribution rules) by United States persons. In general, unless an FIC elects to
distribute 90% or more of its taxable income (determined under United States tax
principles as specially adjusted) to its shareholders, any gain on the sale or
exchange of stock in a foreign corporation, which was a FIC at any time during
the period during which a taxpayer held such stock, is treated as ordinary
income (rather than capital gain) to the extent of such shareholder's ratable
share of the corporation's accumulated earnings and profits.
 
     CommTouch believes that it is not and will not be a PFIC, PHC, FPHC or FIC
after this Offering. However, no assurance can be given as to CommTouch's future
status.
 
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                    ISRAELI TAXATION AND INVESTMENT PROGRAMS
 
     The following discussion summarizes the material Israeli tax consequences
relating to CommTouch, its shareholders and ownership and disposition of its
ordinary shares. This summary does not discuss all aspects of Israeli tax law
that may be relevant to a particular investor in light of his personal
investment circumstances or to certain types of investors subject to special
treatment under Israeli law (for example, traders in securities or persons that
own, directly or indirectly, 10% or more of CommTouch's outstanding voting
shares). The following also includes a discussion of certain Israeli government
programs benefiting various Israeli businesses such as CommTouch. To the extent
that the discussion is based on new legislation yet to be subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. This
discussion does not cover all possible tax consequences or situations, and
investors should consult their tax advisors regarding the tax consequences
unique to their situation.
 
GENERAL CORPORATE TAX STRUCTURE
 
     CommTouch is subject to corporate tax in Israel. Commencing in the tax year
1993 through and including 1996, the regular rate of corporate tax to which
Israeli companies are subject decreased each year, i.e. from 39% in 1993 down to
36% in 1996 and thereafter. However, the effective rate payable by a company
which derives income from an Approved Enterprise (as further discussed below)
may be considerably less. See "Law for the Encouragement of Capital Investments,
1959."
 
     Our tax loss carryforwards were approximately $10.4 million as of December
31, 1998. The amount of our tax loss carryforwards will be reduced by any future
income of CommTouch that would be fully tax exempt.
 
TAXATION UNDER INFLATIONARY CONDITIONS
 
     The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for
Inflation Law") attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Adjustment for Inflation Law was enacted.
Generally, the Adjustment for Inflation Law was designed to neutralize for
Israeli tax purposes the erosion of capital investments in businesses and to
prevent unintended tax benefits resulting from the deduction of inflationary
financing expenses. The Adjustment for Inflation Law applies a supplementary set
of inflationary adjustments to a normal taxable profit computed according to
regular historical cost principles.
 
     The Adjustment for Inflation Law introduced a special adjustment for the
preservation of equity for the tax purpose based on changes in the Israeli CPI,
whereby corporate assets are classified broadly into fixed (inflation resistant)
assets and non-fixed assets. Where shareholders' equity, as defined in the
Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a
corporate tax deduction which takes into account the effect of inflationary
change on such excess is allowed (up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
an inflation-linked basis with no ceiling). If the depreciated cost of fixed
assets exceeds shareholders' equity, then such excess multiplied by the annual
rate of inflation is added to taxable income.
 
     In addition, subject to certain limitations, depreciation on fixed assets
and loss carried forwards are adjusted for inflation based on changes in the
Israeli CPI. The net effect of the Adjustment for Inflation Law on CommTouch
might be that CommTouch's taxable income, as determined for Israeli corporate
tax purposes, will be different from CommTouch's U.S. dollar income, as
reflected in its
 
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financial statements, due to the difference between the annual changes in the
CPI and in the NIS exchange rate with respect to the U.S. Dollar, causing
changes in the actual tax rate.
 
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
 
     CommTouch currently qualifies as an "Industrial Company" within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969 (the "Industry
Encouragement Law"). According to the Industry Encouragement Law, an "Industrial
Company" is a company resident in Israel, at least 90% of the income of which in
any tax year, determined in Israeli currency (exclusive of income from defense
loans, capital gains, interest and dividends) is derived from an "Industrial
Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as
an enterprise whose major activity in a given tax year is industrial production
activity.
 
     Included among the tax benefits for an Industrial Company are deductions of
12.5% per annum of the purchase price of a patent or of know-how, an election
under certain conditions to file a consolidated return and accelerated
depreciation rates on equipment and buildings.
 
     Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. No
assurance can be given that CommTouch will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.
 
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
 
     The Law for the Encouragement of Capital Investments, 1959, as amended (the
"Investment Law"), provides that a capital investment in production facilities
(or other eligible facilities) may, upon application to the Israel Investment
Center, be designated as an Approved Enterprise. Each certificate of approval
for an Approved Enterprise relates to a specific capital investment program
delineated both by its financial scope, including its capital sources, and its
physical characteristics, i.e. the equipment to be purchased and utilized
pursuant to the program. The tax benefits derived from any such certificate of
approval relate only to taxable profits attributable to the specific Approved
Enterprise.
 
     CommTouch's investment plans have been granted the status of an Approved
Enterprise under the Investment Law, in two separate investment programs. These
programs provide CommTouch with certain tax benefits as described below; with
regard to the first program, CommTouch also received long-term loans guaranteed
by the State of Israel. Under the terms of CommTouch's Approved Enterprise
programs, income earned by CommTouch from its Approved Enterprises will be tax
exempt for a period of two years, commencing with the year in which it first
earns taxable income, and subject to a reduced corporate tax rate of 10% to 25%
for an additional period of five to eight years (provided that the total period
of tax benefits will not extend past (i) 12 years from the year of commencement
of production or (ii) 14 years from the year of approval of approved enterprise
status). The reduced corporate tax rate, to which CommTouch's Approved
Enterprise program will be subject is dependent on the level of foreign
investment in CommTouch. In the event a company operates under more than one
approval or only part of its capital investments are approved (a "Mixed
Enterprise"), its effective corporate tax rate is the result of a weighted
combination of the various applicable rates. Notwithstanding these tax benefits,
to the extent CommTouch receives income from countries other than Israel, such
income may be subject to withholding tax.
 
     The implementation of the investments under the first plan was finalized by
CommTouch in 1995. The implementation of the second plan is expected to be
finalized in 1999.
 
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<PAGE>   85
 
     If dividends are distributed out of tax-exempt profit from CommTouch's
Approved Enterprises, CommTouch will be liable for corporate tax at the rate
which would have been applied if it had not chosen the alternative tax benefits
(currently 25% for an Approved Enterprise). Therefore, income derived from
CommTouch's Approved Enterprises would be subject to tax if distributed to
shareholders as a dividend. See Note 8 to the Consolidated Financial Statements.
 
     The dividend recipient will be taxed at the reduced rate applicable to
dividends from Approved Enterprises (currently 15%), if the dividend is
distributed during the tax exemption period or within a specified period
thereafter, or for an unlimited period in the case of a "Foreign Investors'
Company" -- a company more than 25% foreign owned with an Approved Enterprise.
This tax must be withheld by the company at source regardless of whether the
dividend is converted into foreign currency. See "-- Capital Gains and Income
Taxes Applicable to Non-Israeli Shareholders." Subject to certain provisions
concerning income eligible for exemption if retained, all dividends are
considered to be attributable to the entire enterprise, and the effective tax
rate is the result of a weighted combination of the various applicable tax
rates.
 
     The Investment Law also provides that a company with an Approved Enterprise
is entitled to accelerated depreciation on its property and equipment included
in an approved investment program.
 
     Future applications to the Investment Center will be reviewed separately,
and decisions as to whether or not to approve such applications will be based,
among other things, on the then prevailing criteria set forth in the Investment
Law, on the specific objectives of the applicant company set forth in such
applications and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such applications will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions
are violated, in whole or in part, the Company would be required to refund the
amount of tax benefits, with the addition of the CPI linkage adjustment and
interest.
 
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS
 
     Under existing regulations any capital gain realized by an individual
shareholder with respect to the Ordinary Shares acquired on or after the listing
of such shares for trading will be exempt from Israeli capital gains tax if the
Ordinary Shares are listed on an approved foreign securities market (which
includes Nasdaq in the United States), provided that the company continues to
qualify as an Industrial Company under Israeli law and provide the individual
does not hold such shares for business purposes.
 
     If we do not maintain our status as an Industrial Company, then subject to
any applicable tax treaty the Israeli capital gains tax rates would be up to 50%
for non-Israeli resident individuals and 36% for companies.
 
     Upon a distribution of dividends other than bonus shares (stock dividends),
income tax is generally withheld at source at the rate of 25% (or the lower rate
payable with respect to Approved Enterprises), unless a double taxation treaty
is in effect between Israel and the shareholder's country of residence that
provides for a lower tax rate in Israel on dividends.
 
     A tax treaty between the United States and Israel (the "Treaty"), provides
for a maximum tax of 25% on dividends paid to a resident of the United States
(as defined in the Treaty). Dividends distributed by an Israeli company and
derived from the income of an approved enterprise are subject to a 15% dividend
withholding tax. The Treaty further provides that a 12.5% Israeli dividend
withholding tax applies to dividends paid to a United States corporation owning
10% or more of an
 
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<PAGE>   86
 
Israeli company's voting shares throughout the current year to the date the
dividend is paid and the preceding taxable year (as applicable). The 12.5% rate
applies only on dividends from a company that does not have an Approved
Enterprise in the applicable period.
 
     If for any reason shareholders do not receive the above exemption for a
sale of shares in an Industrial Company, the Treaty provides U.S. resident
investors with an exemption from Israeli capital gains tax in certain
circumstances (there may still be U.S. taxes) upon a disposition of shares in
CommTouch if they held under 10% of the Company's voting stock throughout the 12
months before the share disposition. If Israeli capital gains tax is payable, it
can be credited against U.S. federal tax under the circumstances specified in
the Treaty.
 
     A non-resident of Israel who has had dividend income derived or accrued in
Israel from which the applicable tax was withheld at source is currently exempt
from the duty to file an annual Israeli tax return with respect to such income,
provided such income was not derived from a business carried on in Israel by
such non-resident and that such non-resident does not derive other non-passive
income from sources in Israel.
 
TAX BENEFITS FOR RESEARCH AND DEVELOPMENT
 
     Israeli tax law allows under certain conditions a tax deduction in the year
incurred for expenditures (including depreciation on capital expenditures but
excluding depreciable capital expenditures) in scientific research and
development projects, if the expenditures are approved by the relevant Israeli
Government Ministry (determined by the field of research) and the research and
development is for the promotion of the enterprise. Expenditures not so approved
are deductible over a three-year period. However, expenditures made out of the
proceeds of government grants are not deductible, i.e. CommTouch will be able to
deduct the unfunded portion of the research and development expenditures and not
the gross amount.
 
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
 
     Under the Law for the Encouragement of Industrial Research and Development,
1984 (the "Research Law") and the Instructions of the Director General of the
Ministry of Industry and Trade, research and development programs and the plans
for the intermediate stage between research and development, and manufacturing
and sales approved by a governmental committee of the Office of Chief Scientist
(OCS) (the "Research Committee") are eligible for grants of up to 50% of the
project's expenditure if they meet certain criteria. These grants are issued in
return for the payment of royalties from the sale of the product developed in
accordance with the program as follows: 3% of revenues during the first three
years, 4% of revenues during the following three years, and 5% of revenues in
the seventh year and thereafter, with the total royalties not to exceed 100% of
the dollar value of the OCS grant (or in some cases up to 300%). Following the
full payment of such royalties, there is no further liability for payment.
 
     The Israeli government further requires that products developed with
government grants be manufactured in Israel. However, in the event that any
portion of the manufacturing is not conducted in Israel, if approval is received
from the OCS, the Company would be required to pay royalties that are adjusted
in proportion to manufacturing outside of Israel as follows: when the
manufacturing is performed outside of Israel by the Company or an affiliate
company, the royalties are to be paid as described above with the addition of
1%, and when the manufacturing outside of Israel is not performed by the Company
or an affiliate the royalties paid shall be equal to the ratio of the amount of
grant received from the OCS divided by the amount of grant received from the OCS
and the investment(s) made by the Company in the project. The payback will also
be adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing
that is performed outside of Israel is up
 
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<PAGE>   87
 
to 50%, between 50% and 90%, or more than 90%, respectively. The technology
developed pursuant to the terms of these grants may not be transferred to third
parties without the prior approval of the Research Committee. Such approval is
not required for the export of any products resulting from such research or
development. Approval of the transfer of technology may be granted only if the
recipient abides by all the provisions of the Research Law and regulations
promulgated thereunder, including the restrictions on the transfer of know-how
and the obligation to pay royalties in an amount that may be increased.
 
     In order to meet certain conditions in connection with the grants and
programs of the OCS, the Company has made certain representations to the Israel
government about the Company's future plans for its Israeli operations. From
time to time the extent of the Company's Israeli operations has differed and may
in the future differ, from the Company's representations. If, after receiving
grants under certain of such programs, the Company fails to meet certain
conditions to those benefits, including, with respect to grants received from
the OCS, the maintenance of a material preserve in Israel, or if there is any
material deviation from the representations made by the Company to the Israeli
government, the Company could be required to refund to the State of Israel tax
or other benefits previously received (including interest and CPI linkage
difference) and would likely be denied receipt of such grants or benefits, and
participation of such programs, thereafter.
 
     The Company participates in programs sponsored by the OCS for the support
of research and development activities. Through December 31, 1998, the Company
had recorded grants from OCS aggregating $653,000 for certain of the Company's
research and development projects. The Company is obligated to pay royalties to
the OCS of 3% to 5% of the sales of the products and other related revenues
developed from such projects, up to an amount equal to 100% to 150% of the
grants received. Through March 31, 1999, the Company has accrued and paid
royalties to the OCS in the aggregate amount of $253,000. At March 31, 1999, the
aggregate OCS contingent liability was $400,000.
 
     Each application to the OCS is reviewed separately, and grants are based on
the program approved by the Research Committee. Expenditures supported under
other incentive programs of the State of Israel are not eligible for OCS grants.
As a result, there can be no assurance that applications to the OCS will be
approved or, if approved, what the amounts of the grants will be.
 
FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES
 
     The Company has received grants relating to its overseas marketing expenses
from the Marketing Fund. These grants are awarded for specific expenses incurred
by the Company for overseas marketing and are based upon the expenses reported
by the Company to the Marketing Fund. All marketing grants recorded from the
Marketing Fund until 1997 are linked to the dollar and are repayable as
royalties at the rate of 3% of the amount of increases in export sales realized
by the Company from the Marketing Fund. Grants recorded beginning January 1,
1998 bear royalties of 4% plus interest at LIBOR rates. The Company will face
royalty obligations on grants from the Marketing Fund only to the extent it
actually achieves increases in export sales. The proceeds of these grants are
presented in the Company's consolidated Financial Statements as offsets to
marketing expenses. Through December 31, 1998, the Company had received grants
from the Marketing Fund in the amount of approximately $279,000. At March 31,
1999 the aggregate contingent liability was approximately $121,000.
 
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                              CONDITIONS IN ISRAEL
 
     CommTouch is incorporated under the laws of the State of Israel, and
substantially all of our research and development and significant executive
facilities are located in Israel. Accordingly, CommTouch is directly affected by
political, economic and military conditions in Israel. Our operations would be
materially adversely affected if major hostilities involving Israel should occur
or if trade between Israel and its present trading partners should be curtailed.
 
POLITICAL CONDITIONS
 
     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. In addition, Israel and several
Arab States have announced their intention to establish trade and other
relations and are discussing certain projects. Israel has not entered into any
peace agreement with Syria or Lebanon, and there have been difficulties in the
negotiations with the Palestinians. We cannot be certain as to how the peace
process will develop or what effect it may have upon CommTouch.
 
     Despite the progress towards peace between Israel and its Arab neighbors
and the Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms. CommTouch does not believe that the
boycott has had a material adverse effect on CommTouch, but restrictive laws,
policies or practices directed towards Israel or Israeli businesses may have an
adverse impact on the expansion of CommTouch's business.
 
     Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are obligated to perform up to 39 days, or longer under certain
circumstances, of military reserve duty annually. Additionally, all such
residents are subject to being called to active duty at any time under emergency
circumstances. Currently, a majority of our officers and employees are obligated
to perform annual reserve duty. While we have operated effectively under these
requirements since we began operations, no assessment can be made as to the full
impact of such requirements on our workforce or business if conditions should
change, and no prediction can be made as to the effect on us of any expansion or
reduction of such obligations.
 
ECONOMIC CONDITIONS
 
     Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. The current
Israeli government elected in 1996 has expressed its intention to reduce
government involvement in the economy by various means, including relaxation of
foreign currency controls and certain budgetary restraints, and privatization of
certain government-owned companies. The Israeli government has periodically
changed its policies in all these areas.
 
     Until May 1998, Israel imposed restrictions on transactions in foreign
currency. These restrictions affected our operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares
 
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<PAGE>   89
 
with foreign currency were able to repatriate in foreign currency both dividends
(after deduction of withholding tax) and the proceeds from the sale of the
shares. There are currently no Israeli currency control restrictions on
remittances of dividends on the ordinary shares or the proceeds from the sale of
the shares; however, legislation remains in effect pursuant to which currency
controls can be imposed by administrative action at any time.
 
TRADE AGREEMENTS
 
     Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from Australia, Canada and Japan. These
preferences allow Israel to export the products covered by such programs either
duty-free or at reduced tariffs.
 
     Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number of
the other nations, including Russia, China and India, with which Israel had not
previously had such relations.
 
ASSISTANCE FROM THE UNITED STATES
 
     Israel receives significant amounts of economic and military assistance
from the United States, averaging approximately $3 billion annually over the
last several years. In addition, in 1992, the United States approved the
issuance of up to $10 billion of loan guarantees during U.S. fiscal years 1993
to 1998 to help Israel absorb a large influx of new immigrants, primarily from
the republics of the former Soviet Union. Under the loan guarantee program,
Israel may issue up to $2 billion in principal amount of guaranteed loans each
year, subject to reduction in certain circumstances. There is no assurance that
foreign aid from the United States will continue at or near amounts received in
the past. If the grants for economic and military assistance or the United
States loan guarantees are eliminated or reduced significantly, the Israeli
economy could suffer material adverse consequences.
 
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                              PLAN OF DISTRIBUTION
 
     The Selling Securityholders may sell, directly or through brokers, the
ordinary shares and warrant in one or more long or short transactions at fixed
prices, at market prices at the time of sale, at varying prices determined at
the time of sale or at negotiated prices. The shares sold hereby and the shares
issuable upon exercise of the warrant are subject to a lock-up period which
expires January 13, 2000. Because of this lock-up period, the Selling
Securityholders have no present intention to sell the ordinary shares, or the
warrant, until after expiration of the lock-up period.
 
     The Selling Securityholders may offer their shares and the warrant in one
or more of the following transactions:
 
     - On any national securities exchange or quotation service on which the
       ordinary shares may be listed or quoted at the time of sale, including
       the Nasdaq National Market;
 
     - In the over-the-counter market;
 
     - In private transactions;
 
     - Through options or other derivative instruments;
 
     - By pledge to secure debts or other obligations;
 
     - Through block transactions;
 
     - Any other legally available means; or
 
     - A combination of any of the above transactions.
 
     In connection with such sales, the Selling Securityholders and any
participating broker may be deemed to be "underwriters" of the shares within the
meaning of the Securities Act, although the offering of these securities may not
be underwritten by a broker-dealer firm. Such broker-dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Securityholders. Any such commissions and profits realized on
any resale of the shares and warrant might be deemed to be underwriting
discounts and commissions under the Securities Act. Sales in the market may be
made to broker-dealers making a market in the ordinary shares or other
broker-dealers, and such broker-dealers, upon their resale of such securities,
may be deemed to be underwriters in this offering.
 
     The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the ordinary shares and
warrant, other than any discounts or commissions payable with respect to sales
of such securities. We estimate that our expenses in connection with this
offering will be approximately $350,000.
 
     From time to time this prospectus may be supplemented or amended as
required by the Securities Act. During any time when a supplement or amendment
is required, the Selling Securityholders are required to stop making sales until
the prospectus has been supplemented or amended. Further, the Company is
required to maintain the effectiveness of the Registration Statement during the
period ending on (i) the date the warrant is fully exercised and all the
ordinary shares offered by this prospectus, including the shares available on
exercise of the warrant, are sold or (ii) two years from the date of the initial
public offering, whichever occurs first.
 
     We will make copies of this prospectus available to the Selling
Securityholders and have informed the Selling Securityholders of the need for
delivery of a copy of this prospectus to each purchaser of the ordinary shares
or the warrant prior to or at the time of such sale.
 
     Pursuant to the terms under which the ordinary shares and the warrant were
issued to the Selling Securityholders, the Company has agreed to indemnify the
Selling Securityholders and any
 
                                       87

<PAGE>   91
 
underwriter against such liabilities as they may incur as a result of any untrue
statement of a material fact in the Registration Statement of which this
prospectus is a part, or any omission herein or therein to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. Such indemnification
includes liabilities under the Securities Act, the Securities Exchange Act of
1934, as amended (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 they have
agreed to indemnify the Company and any underwriter.
 
     Each Selling Securityholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Securityholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distribution, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to United States law are being passed
upon for CommTouch by McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto,
California. The validity of the ordinary shares offered hereby is being passed
upon for CommTouch by Naschitz, Brandes & Co., Tel-Aviv, Israel. The partners of
McCutchen, Doyle, Brown & Enersen, LLP, beneficially own an aggregate of 13,840
ordinary shares and the partners of Naschitz, Brandes & Co. beneficially own an
aggregate of 30,000 ordinary shares.
 
                                    EXPERTS
 
     The consolidated financial statements of CommTouch Software Ltd. as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 appearing in this prospectus and Registration Statement have
been audited by Kost, Forer & Gabbay, a member of Ernst & Young International,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and are included in reliance upon such report given on the authority of
such firm as experts in auditing and accounting.
 
                                 ISA EXEMPTION
 
     The Israel Securities Authority has granted CommTouch an exemption from the
obligation to publish this prospectus in the manner required pursuant to the
prevailing laws of the State of Israel, and from the obligation to file periodic
reports with the Israel Securities Authority. CommTouch will make a copy of each
report filed in accordance with United States law available for public review at
its principal office in Israel.
 
                                       88

<PAGE>   92
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
     We have filed a registration statement on Form F-1 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, 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. 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, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060. Information contained on the
CommTouch websites does not constitute part of this prospectus.
 
     We are subject to certain of the informational requirements of the Exchange
Act. We, as a "foreign private issuer," 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 for the first three quarters of each fiscal
year, within 60 days after the end of each such quarter.
 
                      ENFORCEABILITY OF CIVIL LIABILITIES
 
     We are incorporated in Israel, and most 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 Software, 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.
 
                                       89

<PAGE>   93
 
     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.
 
     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 (i) the judgment was obtained by fraud, (ii) there was
no due process, (iii) the judgment was rendered by a court not competent to
render it according to the laws of private international law in Israel, (iv) 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 (v) 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.
 
                                       90

<PAGE>   94
 
                            COMMTOUCH SOFTWARE LTD.
 
             CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999
                                IN U.S. DOLLARS
 
                                     INDEX
 

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statement of Changes in Shareholders' Equity
  (Deficit).................................................  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

 
                                       F-1

<PAGE>   95
 

                         REPORT OF INDEPENDENT AUDITORS
 
To the Shareholders of
COMMTOUCH SOFTWARE LTD.
 
     We have audited the accompanying consolidated balance sheets of CommTouch
Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards, in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the consolidated financial position of
CommTouch Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and
the consolidated results of their operations, and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles in the United States.
 
                                             /s/ KOST, FORER & GABBAY
                                                 KOST, FORER & GABBAY
                                       A member of Ernst & Young International
 
Tel-Aviv, Israel
March 15, 1999

(Except for Note 11, as to which the date is July 12, 1999)
 
Tel-Aviv, Israel
 
                                       F-2

<PAGE>   96
 
                            COMMTOUCH SOFTWARE LTD.
 
                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                                                               PRO FORMA
                                                                                              SHAREHOLDERS
                                                                 DECEMBER 31,                 EQUITY AS OF
                                                              ------------------   JUNE 30,     JUNE 30,
                                                               1997       1998       1999         1999
                                                              -------   --------   --------   ------------
                                                                                         (UNAUDITED)
<S>                                                           <C>       <C>        <C>        <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $   324   $    834   $11,663
  Trade receivables.........................................       49        133       465
  Prepaid expenses..........................................       13         96     1,263
  Government authorities....................................       38         45        31
  Other accounts receivable.................................       29        103       244
                                                              -------   --------   -------
         Total current assets...............................      453      1,211    13,666
Severance Pay Fund..........................................      214        223       273
Property and Equipment, net.................................      398        932     2,155
                                                              -------   --------   -------
                                                              $ 1,065   $  2,366   $16,094
                                                              =======   ========   =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Short-term bank line of credit............................  $   733   $  1,328   $    --
  Current portion of bank loans and capital leases..........       66        112       124
  Trade payables............................................      355        446       797
  Employees and payroll accruals............................      252        313       476
  Government authorities....................................      232        246       275
  Deferred revenue..........................................       --         74        84
  Other liabilities.........................................       79        132       308
                                                              -------   --------   -------
         Total current liabilities..........................    1,717      2,651     2,064
                                                              -------   --------   -------
Long-term Portion of Bank Loans and Capital Leases..........       28        164        99
Accrued Severance Pay.......................................      338        366       465
                                                              -------   --------   -------
                                                                  366        530       564
                                                              -------   --------   -------
Commitments and Contingent Liabilities......................
Shareholders' Equity (Deficit)
    Convertible Preferred shares -- Series A, B, C and D
      Convertible Preferred Shares -- Authorized: 565,820
      shares of NIS 1 par value; Issued and outstanding:
      183,637, 221,265 and 355,490 shares as of December 31,
      1997, 1998 and June 30, 1999, respectively; Aggregate
      liquidation preference of approximately $13,200 and
      $43,055 as of December 31, 1998 and June 30, 1999
      (unaudited), respectively; Issued and outstanding pro
      forma: no shares as of June 30, 1999..................       63         74       107
  Ordinary Shares --
    Authorized: 10,683,600, 11,515,000 and 12,000,000 shares
      of NIS 0.05 par value as of December 31, 1997 and 1998
      and June 30, 1999 (unaudited), respectively; Issued
      and outstanding: 1,450,040 shares as of December 31,
      1997, 1998 and 2,266,500 shares as of June 30, 1999,
      respectively; Issued and outstanding pro forma:
      9,376,300 shares as of June 30, 1999..................       27         27        36           143
Additional Paid-in Capital..................................    6,295     11,256    39,421        39,421
Stock-Based Employee Deferred Compensation..................       --       (418)   (7,528)       (7,528)
Notes Receivable from Shareholders..........................      (77)       (77)     (964)         (964)

Accumulated Deficit.........................................   (7,326)   (11,677)  (17,606)      (17,606)
                                                              -------   --------   -------      --------
         Total Shareholders' Equity (Deficit)...............   (1,018)      (815)   13,466        13,466
                                                              -------   --------   -------      --------
                                                              $ 1,065   $  2,366   $16,094
                                                              =======   ========   =======
</TABLE>

 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-3

<PAGE>   97
 
                            COMMTOUCH SOFTWARE LTD.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 

<TABLE>
<CAPTION>
                                                         YEAR ENDED              THREE MONTHS      SIX MONTHS ENDED
                                                        DECEMBER 31,            ENDED JUNE 30,         JUNE 30,
                                                 ---------------------------   -----------------   -----------------
                                                  1996      1997      1998      1998      1999      1998      1999
                                                 -------   -------   -------   -------   -------   -------   -------
                                                                                  (UNAUDITED)         (UNAUDITED)
<S>                                              <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues:
  Email Services...............................  $    --   $    --   $   389   $    59   $   553   $    91   $   899
  Software licenses............................    2,641       711        --        --        --        --        --
  Software maintenance and services............      493       188        --        --        --        --        --
                                                 -------   -------   -------   -------   -------   -------   -------
      Total revenues...........................    3,134       899       389        59       553        91       899
                                                 -------   -------   -------   -------   -------   -------   -------
Cost of revenues:
  Email Services...............................       --        --       569        85       797       144     1,202
  Software licenses............................       79        21        --        --        --        --        --
  Software maintenance and services............      384       144        --        --        --        --        --
                                                 -------   -------   -------   -------   -------   -------   -------
      Total cost of revenues...................      463       165       569        85       797       144     1,202
                                                 -------   -------   -------   -------   -------   -------   -------
Gross profit (loss)............................    2,671       734      (180)      (26)     (244)      (53)     (303)
                                                 -------   -------   -------   -------   -------   -------   -------
Operating expenses:
  Research and development, net................    1,478     1,108     1,149       305       407       571       714
  Sales and marketing..........................    1,965     2,202     2,001       506     1,180       965     1,661
  General and administrative...................      465       829       604       137       780       275     1,587
  Amortization of stock-based employee deferred
    compensation...............................       --        --        91         8     1,013        10     1,399
                                                 -------   -------   -------   -------   -------   -------   -------
      Total operating expenses.................    3,908     4,139     3,845       956     3,380     1,821     5,361
                                                 -------   -------   -------   -------   -------   -------   -------
Operating loss.................................   (1,237)   (3,405)   (4,025)     (982)   (3,624)   (1,874)   (5,664)
Interest expense and other, net................      (45)      (68)     (326)      (59)        6       (86)     (265)
                                                 -------   -------   -------   -------   -------   -------   -------
Net loss.......................................  $(1,282)  $(3,473)  $(4,351)  $(1,041)  $(3,618)  $(1,960)  $(5,929)
                                                 =======   =======   =======   =======   =======   =======   =======
Basic and diluted net loss per share...........  $ (0.66)  $ (2.40)  $ (3.00)  $ (0.72)  $ (1.66)  $ (1.35)  $ (3.17)
Weighted average number of shares used in
  computing basic and diluted net loss per
  share........................................    1,934     1,450     1,450     1,450     2,178     1,450     1,869
                                                 =======   =======   =======   =======   =======   =======   =======
Pro forma basic and diluted net loss per share
  (unaudited)..................................                      $ (0.78)            $ (0.44)            $ (0.76)
                                                                     -------             -------             -------
Weighted average number of shares used in
  computing pro forma basic and diluted net
  loss per share (unaudited)...................                        5,594               8,317               7,830
                                                                     =======             =======             =======
</TABLE>

 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-4

<PAGE>   98
 
                            COMMTOUCH SOFTWARE LTD.
 
                           CONSOLIDATED STATEMENT OF
                   CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                            CONVERTIBLE                                         STOCK-BASED
                                          PREFERRED SHARES     ORDINARY SHARES     ADDITIONAL     EMPLOYEE
                                          ----------------   -------------------    PAID-IN       DEFERRED       NOTES
                                          SHARES    AMOUNT     SHARES     AMOUNT    CAPITAL     COMPENSATION   RECEIVABLE
                                          -------   ------   ----------   ------   ----------   ------------   ----------
<S>                                       <C>       <C>      <C>          <C>      <C>          <C>            <C>
Balance as of January 1, 1996...........       --    $ --     3,372,760    $ 63     $ 1,935       $    --        $ (77)
  Conversion of Ordinary shares into
    Convertible Preferred shares........   97,878      36    (1,922,720)    (36)         --            --           --
  Issuance of shares....................   62,438      20            --      --       2,689            --           --
  Net loss..............................       --      --            --      --          --            --           --
                                          -------    ----    ----------    ----     -------       -------        -----
Balance as of December 31, 1996.........  160,316      56     1,450,040      27       4,624            --          (77)
  Issuance of shares....................   23,321       7            --      --       1,625            --           --
  Warrants issued for services received
    and bank line of credit.............       --      --            --      --          46            --           --
  Net loss..............................       --      --            --      --          --            --           --
                                          -------    ----    ----------    ----     -------       -------        -----
Balance as of December 31, 1997.........  183,637      63     1,450,040      27       6,295            --          (77)
  Issuance of shares....................   37,628      11            --      --       4,061            --           --
  Warrants issued for services received
    and bank line of credit.............       --      --            --      --         391            --           --
  Deferred compensation related to
    options issued to employees.........       --      --            --      --         509          (509)          --
  Amortization of deferred
    compensation........................       --      --            --      --          --            91           --
  Net loss..............................       --      --            --      --          --            --           --
                                          -------    ----    ----------    ----     -------       -------        -----
Balance as of December 31, 1998.........  221,265      74     1,450,040      27      11,256          (418)         (77)
  Issuance of shares (unaudited)........  134,225      33            --      --      18,522            --           --
  Ordinary shares issued for notes
    receivable (unaudited)..............       --      --       662,680       8         879            --         (887)
  Issuance of shares upon exercise of
    options and warrants (unaudited)....       --      --       153,780       1         255            --           --
  Deferred compensation related to
    options issued to employees
    (unaudited).........................       --      --            --      --       8,509        (8,509)          --
  Amortization of deferred
    compensation........................       --      --            --      --          --          1399           --
  Net loss (unaudited)..................       --      --            --      --          --            --           --
                                          -------    ----    ----------    ----     -------       -------        -----
Balance as of June 30, 1999
  (unaudited)...........................  355,490    $107     2,266,500    $ 36     $39,421       $(7,528)       $(964)
                                          =======    ====    ==========    ====     =======       =======        =====
 
<CAPTION>
 
                                          ACCUMULATED
                                            DEFICIT      TOTAL
                                          -----------   -------
<S>                                       <C>           <C>
Balance as of January 1, 1996...........   $ (2,571)    $  (650)
  Conversion of Ordinary shares into
    Convertible Preferred shares........         --          --
  Issuance of shares....................         --       2,709
  Net loss..............................     (1,282)     (1,282)
                                           --------     -------
Balance as of December 31, 1996.........     (3,853)        777
  Issuance of shares....................         --       1,632
  Warrants issued for services received
    and bank line of credit.............         --          46
  Net loss..............................     (3,473)     (3,473)
                                           --------     -------
Balance as of December 31, 1997.........     (7,326)     (1,018)
  Issuance of shares....................         --       4,072
  Warrants issued for services received
    and bank line of credit.............         --         391
  Deferred compensation related to
    options issued to employees.........         --          --
  Amortization of deferred
    compensation........................         --          91
  Net loss..............................     (4,351)     (4,351)
                                           --------     -------
Balance as of December 31, 1998.........    (11,677)       (815)
  Issuance of shares (unaudited)........         --      18,555
  Ordinary shares issued for notes
    receivable (unaudited)..............         --          --
  Issuance of shares upon exercise of
    options and warrants (unaudited)....         --         256
  Deferred compensation related to
    options issued to employees
    (unaudited).........................         --          --
  Amortization of deferred
    compensation........................         --       1,399
  Net loss (unaudited)..................   $ (5,929)    $(5,929)
                                           --------     -------
Balance as of June 30, 1999
  (unaudited)...........................   $(17,606)    $13,466
                                           ========     =======
</TABLE>

 
-------------------------
* Represents amount less than one thousand dollars
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-5

<PAGE>   99
 
                            COMMTOUCH SOFTWARE LTD.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                        YEAR ENDED              THREE MONTHS       SIX MONTHS ENDED
                                                       DECEMBER 31,            ENDED JUNE 30,          JUNE 30,
                                                ---------------------------   -----------------   ------------------
                                                 1996      1997      1998      1998      1999      1998       1999
                                                -------   -------   -------   -------   -------   -------   --------
<S>                                             <C>       <C>       <C>       <C>       <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss....................................  $(1,282)  $(3,473)  $(4,351)  $(1,041)  $(3,618)  $(1,960)  $ (5,929)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
    Depreciation and amortization.............      303       206       236        42       325        87        498
    Amortization of stock-based employee
      deferred compensation and warrants
      issued for service received and bank
      line of credit..........................       --        46       482        24     1,111        10      1,399
    Decrease (increase) in trade
      receivables.............................     (509)      738       (84)       48      (144)       32       (332)
    Decrease (increase) in other accounts
      receivable and prepaid expenses.........      (61)       14      (164)     (173)   (1,009)     (200)    (1,294)
    Increase (decrease) in trade payables.....      181        99        91      (141)      333       (35)       351
    Increase (decrease) in other
      liabilities.............................       27      (147)      128       117       136       (75)       368
    Increase in deferred revenue..............       --        --        74       (25)      (48)       --         10
    Increase (decrease) in accrued severance
      pay, net................................       28       (54)       19        22         5        19         49
    Other.....................................        8        --        --        --        --        --         --
                                                -------   -------   -------   -------   -------   -------   --------
         Net cash used in operating
           activities.........................   (1,305)   (2,571)   (3,569)   (1,127)   (2,909)   (2,122)    (4,880)
                                                -------   -------   -------   -------   -------   -------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment..........     (427)      (93)     (442)     (191)     (709)     (248)    (1,721)
                                                -------   -------   -------   -------   -------   -------   --------
         Net cash used in investing
           activities.........................     (427)      (93)     (442)     (191)     (709)     (248)    (1,721)
                                                -------   -------   -------   -------   -------   -------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term bank line of credit, net.........     (157)      733       595       418    (1,086)      496     (1,328)
  Short-term shareholders' loans..............     (121)       --        --        --        --        --         --
  Principal payment of bank loans.............      (63)      (67)      (94)       12        --        --         --
  Payment of capital lease....................       --        --       (52)       --       (25)       --        (53)
  Proceeds from issuance of shares............    2,709     1,632     4,072     1,130    13,166     1,890     18,811
                                                -------   -------   -------   -------   -------   -------   --------
         Net cash provided by financing
           activities.........................    2,368     2,298     4,521     1,560    12,055     2,386     17,430
                                                -------   -------   -------   -------   -------   -------   --------
Increase (decrease) in cash and cash
  equivalents.................................      636      (366)      510       242     8,437        16     10,829
  Cash and cash equivalents at the beginning
    of the period.............................       54       690       324        --        --       324        834
                                                -------   -------   -------   -------   -------   -------   --------
Cash and cash equivalents at the end of the
  period......................................  $   690   $   324   $   834   $   242   $ 8,437   $   340   $ 11,663
                                                =======   =======   =======   =======   =======   =======   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
  ACTIVITY:
Cash paid during the year:
Interest......................................  $    10   $    48   $    97   $    20   $     9   $    25   $     42
                                                =======   =======   =======   =======   =======   =======   ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
  Capital lease obligations...................  $    --   $    --   $   328   $    --   $    --   $    --   $     --
                                                =======   =======   =======   =======   =======   =======   ========
  Ordinary shares issued for notes receivable
    from shareholders.........................  $    --   $    --   $    --   $    --   $   887   $    --   $    887
                                                =======   =======   =======   =======   =======   =======   ========
</TABLE>

 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-6

<PAGE>   100
 
                            COMMTOUCH SOFTWARE LTD.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     CommTouch Software Ltd. (the "Company" or "CommTouch") was incorporated
under the laws of Israel in 1991. The Company, together with its United States
subsidiary, CommTouch Software Inc., ("CSI") a California corporation, is a
provider of Web-based email and communications solutions to business partners
(customers) who in turn offer those solutions to their end-users. From inception
through 1997, the Company generated revenues primarily from sale maintenance and
service of stand-alone email client software products for both mainframe and
personal computers. From 1998, the Company began to generate revenues by
providing email services to its business partners. Email service revenues are
derived from contracts that provide for a minimum service commitment fee,
revenue sharing from advertising, direct marketing and communications services,
and a per emailbox fee.
 
     Revenues derived from the Company's largest business partner represent 54%
of the Company's revenues in 1998.
 
     In 1998, a majority of the Company's sales were made in Europe, the Far
East and North America.
 
     The consolidated financial statements have been prepared in accordance with
generally accepted accounting policies in the United States, and include the
accounts of the Company and its wholly-owned subsidiary. Intercompany
transactions and balances have been eliminated.
 
     The majority of the Company's sales are made in U.S. dollars ("dollars").
In addition, a substantial portion of the Company's costs are incurred in
dollars. Since the dollar is the primary currency of the economic environment in
which the Company operates, the dollar is its functional and reporting currency.
Non dollar transactions and balances have been remeasured using the foreign
exchange rate at the balance sheet date. Operational accounts and non-monetary
balance sheet accounts are measured and recorded at the rate in effect at the
date of the transaction. The effects of foreign currency remeasurement are
reported in the statements of operations.
 
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.
 
Cash and Cash Equivalents:
 
     The Company considers all highly liquid investments originally purchased
with maturities of three months or less to be cash equivalents.
 
Property and Equipment:
 
     Property and equipment are stated at cost and depreciated using the
straight line method over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized on a straight line
basis over the lease term.
 
                                       F-7

<PAGE>   101
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company periodically assesses the recoverability of the carrying amount
of property and equipment and provides for any possible impairment loss based
upon the difference between the carrying amount and fair value of such assets.
As of December 31, 1998, no impairment losses have been identified.
 
Research and Development:
 
     Research and development costs are charged to the statement of operations
as incurred. Statement of Financial Accounting Standards Board No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
 
     Based on the Company's product development process, technological
feasibility is established upon completion of a working model. The Company does
not incur any costs between the completion of the working model and the point at
which the product is ready for general release. Therefore, through December 31,
1998, the Company has charged all software development costs to research and
development expense in the period incurred.
 
Revenue Recognition:
 
     Commencing 1998, the Company derives its revenues from providing web-based
email services. Revenues from contracts that are not dependent upon the number
of mailboxes and provide non-refundable fixed payments are recognized ratably
over the contract term. Revenues from contracts specifying a contractual rate
per mailbox per month are recognized monthly for mailboxes covered by the
respective contracts. Revenues from contracts based on a share of advertising
revenues earned by business partners are recognized when such revenues are
earned. Revenues from set up and installation fees are recognized upon
installation. Amounts billed or received in advance of service delivery are
recorded as deferred revenue.
 
     Revenues from software products sales which occurred through 1997 were
recognized upon delivery of the software master for reproduction and
distribution, provided no significant vendor obligations remained, and
collection of the related receivable was probable in accordance with Statement
of Position 91-1.
 
Royalty-Bearing Grants:
 
     Royalty-bearing grants from the Government of Israel for funding approved
research and development projects are recognized at the time the Company is
entitled to such grants, when expenses under such approved projects are
incurred. Development grants amounted to none in 1996, $288,000 in 1997 and none
in 1998.
 
Concentrations of Credit Risk:
 
     Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and cash
equivalents. The majority of the Company's cash and cash equivalents are
invested in dollar and dollar linked investments and are deposited in major
banks in Israel and in the United States. Management believes that the financial
institutions that hold the
 
                                       F-8

<PAGE>   102
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Company's investments are financially sound and, accordingly, minimal credit
risk exists with respect to these investments.
 
     The Company's trade receivables are derived from sales to customers located
primarily in Europe, the Far East and North America. The Company performs
ongoing credit evaluations of its customers. In 1997, the Company wrote off
approximately $170,000 of account receivables due from one customer that were
derived from revenues recognized in 1996. The Company did not provide any
allowance for doubtful accounts in 1996 relating to this customer, as the
collection of the receivable was considered probable at the time. The amount was
generated from sales made in the fourth quarter of 1996 while previous sales
made to this customer under the same agreement were fully paid. The write off
was due to a controversy on the client's demand to change the original agreement
terms and in light of the Company's decision to cease sales of software products
in 1997. All other accounts receivable derived from sales of software products
prior to 1998 have been fully paid. The Company has not had any bad debts for
any fiscal year presented excluding the above $170,000. Based on its historical
experience the Company did not provide an allowance for doubtful accounts for
all periods presented.
 
Accounting for Stock-Based Compensation:
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees", in accounting for its
employee stock option plans. Under APB 25, when the exercise price of the
Company's stock options equals or is above the market value of the underlying
stock on the date of grant, no compensation expense is recognized.
 
     In accounting for warrants granted to other than employees, the provisions
of Statement of Financial Accounting Standard Board ("SFAS") No. 123,
"Accounting for Stock based Compensation" were applied.
 
Basic and Diluted Net Loss Per Share:
 
     Basic and diluted net loss per share are presented in accordance with SFAS
No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented.
 
     Basic net loss per share has been computed using the weighted-average
number of ordinary shares outstanding during the period. Diluted net loss per
share is computed based on the weighted average number of ordinary shares
outstanding during each year, plus the weighted average number of dilutive
potential ordinary shares considered outstanding during the year. Basic and
diluted pro forma net loss per share, as presented in the statements of
operations, have been computed as described above and also give effect to the
automatic conversion of the Convertible Preferred shares that will convert upon
the closing of an initial public offering (using the as-if converted method from
original date of issuance).
 
     All convertible preferred shares, outstanding stock options, and warrants
have been excluded from the calculation of the diluted loss per share because
all such securities are antidilutive for all periods presented. The total number
of shares related to the outstanding options and warrants excluded from the
calculations of diluted net loss per share were 734,980, 911,680 and 1,236,100
for the years ended December 31, 1996, 1997 and 1998.
 
                                       F-9

<PAGE>   103
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Unaudited Pro Forma Shareholders' Equity (Deficit)
 
     All of the convertible preferred stock outstanding shall automatically
convert into ordinary shares upon the consummation of the initial public
offering ("IPO"). Unaudited pro forma shareholders' equity at June 30, 1999, as
adjusted for the assumed conversion of those shares outstanding at June 30, 1999
is disclosed on the balance sheet.
 
Comprehensive Income:
 
     As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income ("SFAS 130")." SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components, however, the
adoption of this Statement had no impact on the financial statements, as the
Company had no items of other comprehensive income in any period presented.
 
Severance Pay:
 
     The Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment or a portion thereof.
The Company's liability for all of its employees, is fully provided by monthly
deposits with severance pay funds insurance policies and by an accrual.
 
     The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The value
of the deposited funds are based on the cash surrendered value of these
policies, and include immaterial profits.
 
Fair Value of Financial Instruments:
 
     The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
 
     Cash and cash equivalents -- The carrying amounts of these items
approximate their fair value due to the short-term maturity of such instruments.
 
     Short-term bank credit, long-term bank loans and capital leases -- The
carrying amounts of the Company's borrowing arrangements approximate their fair
value. Fair values were estimated using discounted cash flow analyses, based on
the Company's incremental borrowing rates for similar types of borrowing
arrangements.
 
Impact of Recently Issued Accounting Standards:
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company is required to
adopt SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities. Because the Company currently holds no derivative financial
instruments as defined by SFAS 133 and does not currently engage in hedging
activities, adoption of
 
                                      F-10

<PAGE>   104
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
SFAS 133 is expected to have no material effect on the Company's financial
condition and results of operations.
 
Unaudited Information:
 
     The financial statements include the unaudited consolidated balance sheets
and the related consolidated statements of operations, changes in shareholders
equity (deficit) and cash flows for the six months ended June 30, 1999. This
unaudited information has been prepared by the Company on the same basis as the
audited consolidated financial statements and, in management's opinion, reflects
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information, in accordance with generally
accepted accounting principles, for the period presented. Results for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
 
2. PROPERTY AND EQUIPMENT
 

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1997     1998
                                                              ----    ------
                                                              (IN THOUSANDS)
<S>                                                           <C>     <C>
Cost:
  Computers and peripheral equipment........................  $518    $1,260
  Office furniture and equipment............................    85        90
  Motor vehicles............................................   103       118
  Leasehold improvements....................................   129       137
                                                              ----    ------
                                                               835     1,605
Less accumulated depreciation...............................   437       673
                                                              ----    ------
                                                              $398    $  932
                                                              ====    ======
</TABLE>

 
     Computers and peripheral equipment under various capital lease agreements
amounted to approximately $328,000 and their accumulated depreciation amounted
to approximately $38,000 as of December 31, 1998.
 
     Depreciation expenses amounted to approximately $137,000, $145,000, and
$236,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
 
3. SHORT-TERM BANK LINE OF CREDIT
 
     As of December 31, 1998, the Company has an authorized line of credit in
the amount of $1,300,000 which was fully utilized. The credit line bears
interest at an annual rate of LIBOR +3%. For overdrawn amounts in excess of the
Company's authorized line of credit, the Company is subject to an annual
interest rate of LIBOR +8%.
 
     Weighted average interest for 1997 and 1998 was LIBOR +3%.
 
     In consideration of the line of credit, the bank is entitled to receive
warrants for ordinary shares at an exercise price equal to the par value subject
to the outstanding utilized line of credit per month (see Note 9).
 
                                      F-11

<PAGE>   105
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     As collateral for all the Company's liabilities to the bank, a floating
charge (security interest on all assets of the Company as they exist from time
to time) has been placed on all assets of the Company, and the Company's
authorized share capital, goodwill and insurance rights are pledged at fixed
charges.
 
4. LONG-TERM BANK LOANS AND CAPITAL LEASES
 

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1997     1998
                                                              -----    -----
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Bank loans -- Israeli CPI, interest rates range from
  5.3% - 6.3%...............................................   $64     $ --
Bank loans -- U.S. Dollar, interest rates range from
  8.3% - 9.7%...............................................    30       --
Capital leases..............................................    --      276
                                                               ---     ----
                                                                94      276
Less current portion........................................    66      112
                                                               ---     ----
                                                               $28     $164
                                                               ===     ====
</TABLE>

 
     In 1998, the Company has repaid its Bank loans.
 
     CSI has leased computers and peripheral equipment under various capital
lease agreements, with an option to purchase the equipment upon the expiration
of the initial lease term, for the fair market value prevailing at that time,
not to exceed 10% of the original cost of the equipment. The annual interest
rate of such capital leases ranges between 19.5% and 21.9%.
 
     Future minimum lease commitments for the years ending December 31, are as
follows, in thousands:
 

<TABLE>
<S>                                                <C>
1999.............................................  $158
2000.............................................   136
2001.............................................    23
2002.............................................    23
2003.............................................    17
                                                   ----
                                                    357
Less amount representing interest................    81
                                                   ----
                                                   $276
                                                   ====
</TABLE>

 
5. ACCRUED SEVERANCE PAY
 
     The Company's liability for severance pay, pursuant to Israeli law, is
fully provided. Part of the liability is funded through insurance policies which
are designated only for severance payments. The value of these policies is
recorded as an asset in the Company's balance sheet. Severance expenses for the
years ended December 31, 1996, 1997, and 1998, were approximately $105,000,
$73,000 and $62,000, respectively.
 
                                      F-12

<PAGE>   106
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
6. COMMITMENTS AND CONTINGENT LIABILITIES
 
Operating Leases:
 
     The facilities of the Company and CSI are leased under operating leases for
periods ending in 2005.
 
     Future minimum lease commitments under non-cancelable operating leases for
the years ending December 31, are as follows, in thousands:
 

<TABLE>
<S>                                                <C>
1999.............................................  $197
2000.............................................   170
2001.............................................   154
2002.............................................    89
2003.............................................    53
                                                   ----
                                                   $663
                                                   ====
</TABLE>

 
     Rent expenses for the years ended December 31, 1996, 1997 and 1998 were
approximately $49,000, $55,000 and $56,000, respectively. CSI expanded its
facilities by entering into an additional office lease starting 1999, for which
the commitment is reflected above.
 
Royalties:
 
     The Company is required to pay royalties on grants received from the
Government of Israel for research and development projects and marketing
activities at the rate of 3% - 5% of total revenues, up to an amount equal to
100% to 150% of the original amount received linked to the dollar.
 
     As of December 31, 1998, the Company had an outstanding contingent
obligation to pay royalties in the aggregate amount of $532,000.
 
7. RELATED PARTIES
 
     During 1995, the Company issued ordinary shares to three of its directors
in exchange for notes receivables. The notes are linked to the Israeli CPI with
no additional interest and at December 31, 1998, the total amount outstanding
was approximately $77,000 to be repaid by December 31, 1999. These notes are
recorded as an offset to additional paid-in capital. The Company believes that
the terms under which these notes have been provided by the Company are as
favorable to those that could be agreed upon with an unaffiliated party.
 
8. INCOME TAXES
 
Israeli Income Tax:
 
     The Company has been granted "Approved Enterprise" status in two separate
investment programs approved in 1993 and 1995 by the Israeli Government under
the Law for Encouragement of Capital Investments, 1959 ("the Law").
 
     Undistributed Israeli income derived from each of its "Approved Enterprise"
programs entitle the Company to tax-exemption for a period of two years
commencing the first year it will earn taxable income (not commenced yet) and to
a reduced tax rate of 10% - 25% for an additional period
 
                                      F-13

<PAGE>   107
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
of eight years (depending on the level of foreign-investment in the Company).
These tax benefits, are subject to a limitation of the earlier of twelve years
from commencement of operation, or fourteen years from receipt of approval.
Thereafter, the Company's income will be subject to the regular income tax rate
of 36%.
 
     The Company's first investment program commenced operation in 1995, while
the second program has not yet been completed.
 
     The tax exempt income attributable to the "Approved Enterprise" can be
distributed to shareholders without subjecting the Company to taxes only upon
the complete liquidation of the Company. The Company's board of directors has
determined that such tax exempt income will not be distributed as dividends.
 
     Income from sources other than the "Approved Enterprise," during the
benefit period, will be subject to tax at regular corporate tax rates of 36%.
 
     The Company is an "industrial company" under the Law for the Encouragement
of Industry (Taxation), 1969 and as such is entitled to certain tax benefits,
including accelerated rate of depreciation and deduction of public offering
expenses.
 
     As of December 31, 1998, Israeli net operating loss carryforwards amounted
to approximately $5,700,000. Such net operating loss may be carried forward
indefinitely and offset against future taxable income. The Company expects that
during the period in which these tax losses are utilized its income would be
substantially tax exempt. Accordingly there will be no tax benefit available
from such losses and no deferred income taxes have been included in these
financial statements.
 
U.S. Income Tax:
 
     As of December 31, 1998, CSI has U.S. federal net operating loss
carryforwards of approximately $4,700,000. The net operating loss expires in
various amounts between the years 2010 and 2016.
 
     Utilization of U.S. net operating losses may be subject to the substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.
 
                                      F-14

<PAGE>   108
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Deferred Taxes:
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
 

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1998
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
U.S. operating loss carryforwards...........................  $ 1,052    $ 1,656
Reserves and allowances not currently deductible............        6         15
                                                              -------    -------
Net deferred tax asset before valuation allowance...........    1,058      1,671
Valuation allowance.........................................   (1,058)    (1,671)
                                                              -------    -------
Net deferred tax asset......................................  $    --    $    --
                                                              =======    =======
</TABLE>

 
     For the year ended December 31, 1998 the valuation allowance increased by
approximately $613,000. No utilization of CSI's tax losses carryforwards is
expected in the foreseeable future, because of its history of operating losses.
In 1996, 1997 and 1998, the Company provided a 100% valuation allowance against
the deferred tax assets in respect of these tax loss carryforward and other
temporary differences because of the uncertainty of realizing these deferred tax
assets.
 
Pretax loss:
 

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                       --------------------------
                                                        1996      1997      1998
                                                       ------    ------    ------
                                                             (IN THOUSANDS)
<S>                                                    <C>       <C>       <C>
Domestic.............................................  $  809    $1,602    $2,497
Foreign..............................................     473     1,871     1,854
                                                       ------    ------    ------
                                                       $1,282    $3,473    $4,351
                                                       ======    ======    ======
</TABLE>

 
9. SHARE CAPITAL
 
Convertible Preferred Shares:
 

<TABLE>
<CAPTION>
                                                                    NUMBER OF SHARES
                                   -----------------------------------------------------------------------------------
                                       DECEMBER 31, 1997            DECEMBER 31, 1998              JUNE 30, 1999
                       ORIGINAL    -------------------------    -------------------------    -------------------------
                       ISSUANCE                  ISSUED AND                   ISSUED AND                   ISSUED AND
                        PRICE      AUTHORIZED    OUTSTANDING    AUTHORIZED    OUTSTANDING    AUTHORIZED    OUTSTANDING
                       --------    ----------    -----------    ----------    -----------    ----------    -----------
                                                                                                    (UNAUDITED)
<S>                    <C>         <C>           <C>            <C>           <C>            <C>           <C>
Series A.............   $17.02      200,000         97,878       200,000         97,878       157,919         97,878
Series B.............   $44.04      200,000         62,438       200,000         62,438       200,000         62,438
Series C.............   $72.17      100,000         23,321       124,250         60,949       165,820        153,093
Series D.............   314.56           --             --            --             --        42,081         42,081
                                    -------        -------       -------        -------       -------        -------
                                    500,000        183,637       524,250        221,265       565,820        355,490
                                    =======        =======       =======        =======       =======        =======
</TABLE>

 
                                      F-15

<PAGE>   109
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
CONVERSION
 
     Each share of Series A, B, C and D Convertible Preferred share is
convertible into ordinary shares on a twenty-to-one basis (reflecting the April
1999 stock split and subject to adjustment for stock splits, stock dividends and
alike).
 
     All Convertible Preferred shares shall be automatically converted
immediately prior to consummation of an initial public offering ("IPO") in which
the proceeds to the company are not less than $10,000,000 and in which the
company's valuation is not less than $30,000,000.
 
     The pro forma shareholders' deficit gives effect to the conversion of all
outstanding Convertible Preferred shares as if such conversion occurred on
December 31, 1998.
 
Voting Rights
 
     The holders of Convertible Preferred shares are entitled to vote on all
matters submitted to the shareholders with such number of votes which is equal
to the number of ordinary shares into which such Preferred shares could be
converted.
 
Liquidation Preference
 
     The Convertible Preferred shares have preference over the Ordinary shares,
in the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary. The liquidation preference is equal to the
greater of the full amount originally paid multiplied by 1.5, together with
declared but unpaid dividends in respect thereof or the pro rata amount that
would have been received had all of the Convertible Preferred shares been
converted into ordinary shares immediately prior to such distribution.
 
Dividends
 
     The holders of any series of the convertible preferred shares shall be
entitled to receive dividends as and when declared for the holders of ordinary
shares, pari passu, calculated on the basis of the number of Ordinary shares
into which such Convertible Preferred shares could then be converted, out of any
assets legally available.
 
     In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
 
                                      F-16

<PAGE>   110
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Warrants Issued for Services Received and Bank Lines of Credit:
 
     In 1997, 1998 and in the six months period ended June 30, 1999, the Company
granted warrants in connection with a bank line of credit, loans, and consulting
services received. Warrants outstanding at June 30, 1999:
 

<TABLE>
<CAPTION>
                                                                        WARRANTS FOR
                                                               -------------------------------
                                                                 CONVERTIBLE        EXERCISE
                                                                  PREFERRED         PRICE PER      EXERCISABLE
             ISSUE DATE                 IN CONNECTION WITH          SHARES            SHARE          THROUGH
             ----------                 ------------------     ----------------    -----------    -------------
<S>                                    <C>                     <C>                 <C>            <C>
December 1997........................  bank loan               346 Series C          $72.17       December 2002
June 1997............................  bank loan               568 Series B          $44.04         June 2002
July 1998............................  lease commitment        243 Series C          $72.17         July 2005
                                                                ==============
                                                               1,157
</TABLE>

 
     In addition, (i) in February 1998, in consideration of consulting services
received, the Company issued warrants for 35,600 ordinary shares at $0.36 per
share. The warrants were exercised in October 1998, with the ordinary shares
issued in the first quarter of 1999 (see Note 11); (ii) from December 1997
through March 1999, in connection with a bank line of credit, the Company issued
warrants for 92,340 ordinary shares at par value. Such warrants were exercised
from April through June 1999; (iii) from September 1997 through April 1998, in
connection with consulting services received, the Company issued warrants for
300 and 350 Series B and C convertible preferred shares at par value. Such
warrants were exercised in June 1999.
 
     In connection with the amounts of the warrants:
 
     The Company recorded $17,000, $264,000 and $353,000 as compensation expense
in 1997, 1998 and the six months ended June 30, 1999, that were included in
interest expense, and $21,000 and $135,000 in 1997 and 1998 that were included
for operating expenses.
 
Warrants to Investors:
 
     The Company issued to certain Series B Convertible Preferred shares
investors 13,873 warrants to Series B Convertible Preferred shares in
consideration of their investment in the Company. The warrants had an exercise
price of $44.04 per share and were exercised at the consummation of an IPO.
 
Issuance of Ordinary Shares against Promissory Notes:
 
     On March 17, 1999, several employees and officers exercised 662,680 options
granted to them by CommTouch. In consideration for the ordinary shares purchased
pursuant to the exercise of the options, they provided CommTouch with full
recourse Promissory Notes dated March 17, 1999 in the original principal amount
of approximately $887,000. The Promissory Notes bear interest at 4.83%, with
payments of interest due on December 31 of each year and with the balance due
and payable on the fourth anniversary of the date of the promissory notes. The
shares purchased are restricted shares, and are subject to a right of repurchase
in favor of CommTouch according to the original vesting schedule of the options
exercised, generally four years.
 
                                      F-17

<PAGE>   111
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Stock Options:
 
     The Company issued options to purchase ordinary shares to its Israeli
employees pursuant to individual agreements. In 1996, the Company adopted the
1996 CSI Stock Option Plan for granting options to its U.S. employees to
purchase ordinary shares of the Company. As of December 31, 1998 the Company has
reserved 2,000,000 ordinary shares. Options granted under such plan and
agreements expire generally after 10 years from the date of grant and terminate
upon termination of the optionee's employment or other relationship with the
Company. The options vest generally ratably over a 4 year period. The exercise
price of the options granted under the individual agreements may not be less
than the nominal value of the shares into which such options are exercisable or
in the case of the subsidiary's plan it may not be less than fair market value.
Any options which are canceled or not exercised within the options period become
available for future grant.
 
     A summary of the Company's stock option activity, and related information
is as follows:
 

<TABLE>
<CAPTION>
                                                                                               WEIGHTED AVERAGE
                                                     NUMBER OF SHARES              SIX          EXERCISE PRICE           SIX
                                              ------------------------------     MONTHS      ---------------------     MONTHS
                                                 YEARS ENDED DECEMBER 31,         ENDED           YEARS ENDED           ENDED
                                              ------------------------------    JUNE 30,     ---------------------    JUNE 30,
                                                1996       1997       1998        1999       1996    1997    1998       1999
                                              --------   --------   --------   -----------   -----   -----   -----   -----------
                                                                               (UNAUDITED)                           (UNAUDITED)
<S>                                           <C>        <C>        <C>        <C>           <C>     <C>     <C>     <C>
Outstanding at beginning of period..........    31,000    457,520    607,040      849,520    $1.45   $0.99   $1.10      $1.20
  Granted...................................   426,520    213,820    251,900      785,720     0.96    1.45    1.45       4.84
  Exercised.................................        --         --         --     (671,520)      --      --      --       1.38
  Forfeited.................................        --    (64,300)    (9,420)      (9,700)      --    1.45    1.45       1.45
                                              --------   --------   --------    ---------    -----   -----   -----      -----
Outstanding at end of period................   457,520    607,040    849,520      954,020    $0.99   $1.10   $1.20      $4.12
                                              --------   --------   --------    ---------    -----   -----   -----      -----
Exercisable at end of period................     7,760    165,480    375,580      753,175    $1.45   $1.45   $1.45      $2.75
                                              --------   --------   --------                 -----   -----   -----      -----
Deemed fair value of options granted at an
  exercise price of:
  -- Less than fair value at date of
    grant...................................  $     --   $     --   $   2.46
                                              --------   --------   --------
  -- Equals to fair market value at date of
    grant...................................  $   0.45   $   0.61   $     --
                                              --------   --------   --------
  -- Exceeds fair value at date of grant....  $   0.23   $     --   $     --
                                              --------   --------   --------
</TABLE>

 
     The options outstanding as of December 31, 1998, have been separated into
ranges of exercise price, as follows:
 

<TABLE>
<CAPTION>
                                                   OPTIONS            WEIGHTED
                                              OUTSTANDING AS OF       AVERAGE            WEIGHTED
                                                DECEMBER 31,         REMAINING       AVERAGE EXERCISE
               EXERCISE PRICE                       1998          CONTRACTUAL LIFE        PRICE
               --------------                 -----------------   ----------------   ----------------
<S>                                           <C>                 <C>                <C>
$0.01.......................................       101,520              7.20              $0.01
$1.10 - $1.45...............................       676,480              8.67              $1.27
$2.20.......................................        71,520              7.58              $2.20
                                                   -------              ----              -----
$0.01 - $2.20...............................       849,520              8.40              $1.20
                                                   =======              ====              =====
</TABLE>

 
     Under SFAS 123, pro forma information regarding net income and earnings per
share is required (for grants issued after December 1994), and has been
determined as if the Company had accounted for its employee stock option under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes Option Pricing Model with
the following weighted-average assumptions for 1996, 1997 and 1998: risk-free
interest rates of
 
                                      F-18

<PAGE>   112
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
approximately 6%, dividend yields of 0%, volatility factors of the expected
market price of the Company's Ordinary shares of 0.5 for 1996, 1997 and 1998 and
an expected life of the option of 3.5 years, 2.5 years and 1.5 years after the
option is vested for 1996,1997 and 1998, respectively, but not sooner than
December 1999.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
 
     Pro forma information under SFAS 123:
 

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                    -----------------------------
                                                     1996       1997       1998
                                                    -------    -------    -------
                                                           (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Net loss as reported..............................  $(1,282)   $(3,473)   $(4,351)
                                                    -------    -------    -------
Pro forma net loss................................  $(1,368)   $(3,600)   $(4,402)
                                                    -------    -------    -------
Pro forma basic and diluted net loss per share....  $ (0.71)   $ (2.48)   $ (3.04)
                                                    -------    -------    -------
</TABLE>

 
     The Company recorded deferred compensation representing the difference
between the exercise price and the deemed fair value of the Company's ordinary
share at the date of grant. Such amount is being amortized based on an
accelerated vesting method over the vesting period of the options, generally 4
years.
 

<TABLE>
<CAPTION>
                                                                 DEFERRED
                                                               COMPENSATION
                                                              --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
Balance as of January 1, 1998...............................       $ --
Deferred compensation related to options issued to
  employees.................................................        509
Less amortization of deferred compensation..................         91
                                                                   ----
Balance as of December 31, 1998.............................       $418
                                                                   ====
</TABLE>

 
                                      F-19

<PAGE>   113
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
10. SELECTED STATEMENTS OF OPERATIONS DATA
 
Geographic information:
 
     The Company manages its business on the basis of one reportable segment and
attributes revenues based on the customers' location, as follows:
 

<TABLE>
<CAPTION>
                                                                 REVENUES
                                                          ----------------------
                                                           1996     1997    1998
                                                          ------    ----    ----
                                                              (IN THOUSANDS)
<S>                                                       <C>       <C>     <C>
Israel..................................................  $  522    $  1    $ --
U.S.A...................................................   2,072     543     109
Europe..................................................      19      28     130
Japan...................................................     380     282     103
Other...................................................     141      45      47
                                                          ------    ----    ----
                                                          $3,134    $899    $389
                                                          ======    ====    ====
</TABLE>

 
     The Company's long-lived assets are as of December 31, are as follows:
 

<TABLE>
<CAPTION>
                                                           1996    1997    1998
                                                           ----    ----    ----
                                                              (IN THOUSANDS)
<S>                                                        <C>     <C>     <C>
Israel...................................................  $434    $365    $291
U.S.A....................................................    48      33     641
                                                           ----    ----    ----
                                                           $482    $398    $932
</TABLE>

 
11. SUBSEQUENT EVENTS
 
Series C Convertible Preferred Shares Financing and Exercise of Warrants to
Ordinary Shares
 
     In the first quarter of 1999, the Company issued 92,144 Series C
Convertible Preferred Shares of NIS 1.0 par value and 35,000 ordinary shares in
connection with the exercise of warrants in consideration of approximately
$6,596,000 in net proceeds to the Company. An aggregate amount of $1,304,000 was
received in October and December 1998 in respect of those shares and was
recorded in additional paid in capital.
 
Convertible Notes Financing
 
     In April 1999, the Company issued convertible promissory Notes (the
"Notes") to investors resulting in net cash proceeds of approximately
$13,237,000. The Notes have since been converted into 42,081 Series D
Convertible Preferred Shares.
 
     In April 1999, subsequent to the Convertible Notes financing, the Company
fully repaid its short-term bank line of credit.
 
Initial Public Offering and Related Matters:
 
     The Board of Directors has authorized the Company to file a registration
statement with the United States Securities and Exchange Commission for an IPO
of its ordinary shares.
 
     In April 1999, the Board of Directors approved a twenty for one ordinary
stock split. The stock split will be effected prior to the effective date of the
IPO. All Ordinary share numbers, ordinary
 
                                      F-20

<PAGE>   114
                            COMMTOUCH SOFTWARE LTD.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
share option and warrant numbers and Convertible Preferred Shares Conversion
ratios have been retroactively adjusted to reflect the stock split.
 
Strategic Transaction with an Investor
 
     On July 7, 1999 CommTouch executed a Memorandum of Understanding with two
new investors. According to this Memorandum, concurrently with the effectiveness
of the initial public offering, the Company sold 1,344,086 ordinary shares to
the new investors. In addition, concurrently with the effectiveness of the
offering, CommTouch entered into an agreement with one of the investors pursuant
to which the Company will offer the investor's end users a private label email
service in return for sharing future revenues generated by the investor's use of
the Company's services. In connection with that agreement, CommTouch granted the
investor a warrant to purchase 1,136,000 ordinary shares at a per share exercise
price of $12.80 subject to adjustment as set forth in the warrant.
 
Employee Stock Purchase Plan
 
     The CommTouch 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors on April 18, 1999 and was effective upon CommTouch's initial public
offering of its ordinary shares, subject to shareholders' approval.
 
     CommTouch reserved a total of 150,000 shares for issuance under the plan.
Eligible employees may purchase Ordinary Shares at 85% of the lesser of the
market value of CommTouch's ordinary shares on the first day of the applicable
offering period or the last day of the applicable purchase period.
 
Non-Employee Directors Stock Option Plan
 
     The CommTouch 1999 Non-Employee Director Stock Option Plan was adopted,
subject to shareholder approval, by the Board of Directors on April 18, 1999 and
was effective upon the completion of a CommTouch IPO. CommTouch reserved a total
of 250,000 shares for issuance under this plan. Each individual who first joins
the Board of Directors as a nonemployee director on or after the effective date
of this offering received an option grant for 10,000 ordinary shares. Each
option granted under the Non-Employee Directors Plan would become exercisable
with respect to one-fourth of the number of shares covered by such option three
months after the date of grant and with respect to one-third of the remaining
shares subject to the option every three months thereafter. Each option has an
exercise price equal to the fair market value of the ordinary shares on the
grant date of such option. Each option has a maximum term of ten years, but will
terminate earlier if the optionee ceases to be a member of the Board of
Directors.
 
12. SUBSEQUENT EVENTS (NOT AUDITED)
 
     On July 16, 1999, CommTouch effected an IPO on Nasdaq, in which CommTouch
sold 3,000,000 ordinary shares to the public at $16 per share. In addition,
CommTouch sold an overallotment option to the underwriters in the offering for
the purchase of up to 450,000 additional ordinary shares at $14.88 per share. In
connection with the initial public offering all of CommTouch's convertible
preferred shares outstanding were converted into ordinary shares.
 
                                      F-21

<PAGE>   115
 
                           1,344,086 ORDINARY SHARES
 
                 WARRANT TO PURCHASE 1,136,000 ORDINARY SHARES
 
          1,136,000 ORDINARY SHARES ISSUABLE UPON EXERCISE OF WARRANT
 
                            COMMTOUCH SOFTWARE LTD.
 
                                      LOGO
 
                           -------------------------
 
                                   PROSPECTUS
                           -------------------------
 
                                           , 1999

<PAGE>   116
 
 
                                   PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The following table sets forth the expenses payable by the Company (the
"Registrant") in connection with the offering of the securities being
registered. All of the amounts are estimates except for the SEC registration
fee, and the Nasdaq National Market filing fee.
 

<TABLE>
<S>                                                           <C>
SEC registration fee........................................  $ 14,651
Nasdaq National Market filing fee...........................    17,500
Blue Sky fees and expenses..................................    10,000
Printing and engraving expenses.............................    20,000
Israeli Stamp Duty..........................................   145,408*
Legal fees and expenses.....................................    60,000
Accounting fees and expenses................................    50,000
Transfer agent and registrar fees and expenses..............    10,000
Miscellaneous expenses......................................    22,441
                                                              --------
  Total.....................................................  $350,000
                                                              ========
</TABLE>

 
---------------
* Payable only upon exercise of the warrant.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Articles of Association provide that the Registrant will indemnify any
Office Holder of the Registrant as defined in the Companies Ordinance out of the
assets of the Registrant against all liabilities incurred bona fide by such
Office Holder in the line of his duties for the Registrant or related thereto.
The Registration Rights Agreement which we entered into with Go2Net and Vulcan
(filed as an exhibit to this registration statement) contains certain provisions
relating to the indemnification of our directors and officers.
 
     In addition, the Registrant maintains insurance for its 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 monetary liability in
connection with his activities as an Office Holder. The Articles of Association
of the Registrant allow the Registrant to insure and indemnify Office Holders to
the fullest extent permitted by law. Pursuant to these provisions, the
Registrant has in effect insurance policies in the amount of US$25 million
covering its directors and officers.
 
     Certain members of our management team are officers of our subsidiary,
CommTouch Software Inc., a California Corporation, or reside in California. The
Articles of Incorporation of CommTouch Software 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.
 
                                      II-1

<PAGE>   117
 
     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 and the warrant were
issued to the Selling Securityholders, the Company has agreed to indemnify the
Selling Securityholders and any underwriter against such liabilities as they may
incur as a result of any untrue statement of a material fact in the Registration
Statement of which this prospectus is a part, or any omission herein or 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 Go2Net or
Vulcan Ventures, as to which the Selling Securityholders have agreed to
indemnify the Company and any underwriter. The Company has also agreed indemnify
the Selling Securityholders against withholding tax, tax on capital gains,
dividends or other income, any transfer tax, stamp duty or similar tax, or any
other form of tax, assessment or imposition imposed by the State of Israel with
respect to their acquisition and subsequent sale of the ordinary shares and the
warrant as well as certain other matters, including the requirement to pay
additional amounts to reimburse the Selling Securityholders for any U.S. taxes
on the amount of such indemnity.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
     Since April 1996, we have sold and issued the securities listed below
without registering the securities under the Securities Act of 1933, as amended.
None of these transactions involved any underwriters, underwriting discounts or
commissions, or any public offering.((a))
 
          (1) In May 1996, we issued and sold for cash 11,353 Series B
     Convertible Preferred Shares at a price of $44.04 per share to C.S.K.
     Venture Capital Co. Ltd. ("C.S.K."). In connection with this issuance, we
     also issued warrants to purchase 2,522 Series B Convertible Preferred
     Shares at an exercise price of NIS 1 per share to C.S.K.
 
          (2) Between July 1997 and March 1999, we issued and sold for cash
     153,093 Series C Convertible Preferred Shares at a price of $72.17 per
     share to 22 investors.
 
          (3) In April 1999, we issued Convertible Promissory Notes that have
     since converted into 42,081 Series D Convertible Preferred Shares. The
     effective price for each Series D Preferred Share was $314.56.
 
---------------
 
     (a)Share figures and price-per-share figures do not reflect the
twenty-for-one stock split which became effective concurrently with the initial
public offering.
                                      II-2

<PAGE>   118
 
          (4) Concurrently with our initial public offering on July 16, 1999, in
     a private transaction we sold 896,057 ordinary shares to Go2Net for a
     purchase price of $13,333,328 and an additional 448,029 shares to Vulcan
     Ventures Incorporated for a purchase price of $6,666,672. The purchase
     price per share was $14.88, equal to the initial public offering price less
     the underwriting discount. In addition, we issued a warrant to Go2Net to
     purchase 1,136,000 ordinary shares at an exercise price of $12.80 per
     share.
 
     We believe that each transaction listed above was exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) of the Securities Act, Regulation D, promulgated under the
Securities Act or Rule 701 with respect to compensatory benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(a) EXHIBITS
 

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                      DESCRIPTION OF DOCUMENT
-------                     -----------------------
<C>       <S>
 3.1      Memorandum of Association of the Registrant.(1)
 3.2      Articles of Association of the Registrant.(1)
 4.1      Specimen Certificate of Ordinary Shares.(1)
 4.2      Amended and Restated Registration Rights Agreement dated as
          of April 19, 1999.(1)
 4.3      Form of Tag-Along Rights (Right of First Refusal and
          Co-Sale) Agreement dated as of December 23, 1998.(1)
 4.4      Form of Drag-Along Letter dated as of April 15, 1999.(1)
 5.1      Opinion of Naschitz, Brandes & Co., Israeli counsel to the
          Registrant, as to certain legal matters with respect to the
          legality of the shares.
10.1      Registrant's 1996 CSI Stock Option Plan and forms of
          agreements thereunder.(1)
10.2      Registrant's form of Stock Option Agreement for Israeli
          Employees.(1)
10.3      Registrant's 1999 Stock Option Plan and form of agreement
          thereunder.(1)
10.4      CommTouch Software Ltd. 1999 Nonemployee Directors Stock
          Option Plan.(1)
10.5      CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
          and forms thereunder.(1)
10.6      Sublease between ASCII of America, Inc. and CommTouch for
          CommTouch's offices in Santa Clara, California, dated
          December 16, 1998.(1)
10.7      Lease between DeAnza Building and CommTouch for CommTouch's
          offices in Sunnyvale, California, dated February 5, 1996, as
          amended.(1)
10.8      Form of Letter Agreement between the Registrant and U.S.
          Bancorp Piper Jaffray.(2)
10.9      Form of Customized Web-based Email Service Agreement by and
          between Go2Net, Inc. and the Registrant.(3)
10.9.1    Form of Share Warrant for Go2Net, Inc. to purchase ordinary
          shares of the Registrant.(3)
10.10     Form of Share Purchase Agreement by and among the
          Registrant, Go2Net, Inc. and Vulcan Ventures
          Incorporated.(3)
10.10.1   Form of Registration Rights Agreement by and among the
          Registrant, Go2Net, Inc. and Vulcan Ventures
          Incorporated.(3)
</TABLE>

 
                                      II-3

<PAGE>   119
 

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                      DESCRIPTION OF DOCUMENT
-------                     -----------------------
<C>       <S>
21.1      Subsidiaries of the Registrant.(1)
23.1      Consent of Kost, Forer & Gabbay, independent auditors.
23.2      Consent of Naschitz, Brandes & Co. (contained in Exhibit
          5.1.)
23.3      Consent of McCutchen, Doyle, Brown & Enersen, LLP.
24.1      Power of Attorney.
99.1      Press Release of the Registrant, dated July 7, 1999.(2)
99.2      Memorandum of Understanding between the Registrant, Go2Net,
          Inc. and Vulcan Ventures Incorporated, dated July 7,
          1999.(2)
</TABLE>

 
-------------------------
(1) Incorporated by reference to similarly numbered exhibit in Amendment No. 1
    to Registration Statement on Form F-1 of CommTouch Software Ltd., File No.
    333-78531.
 
(2) Incorporated by reference to similarly numbered exhibit in Amendment No. 4
    to Registration Statement on Form F-1 of CommTouch Software Ltd., File No.
    333-78531.
 
(3) Incorporated by reference to similarly numbered exhibit in Amendment No. 5
    to Registration Statement on Form F-1 of CommTouch Software Ltd., File No.
    333-78531.
 
(b) FINANCIAL STATEMENT SCHEDULES.
 
     Schedule II
 
ITEM 17. 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.
 
                                      II-4

<PAGE>   120
 
          (4) To file a post-effective amendment to the registration statement
     to include any financial statements required by Rule 3-19 of this chapter
     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 Rule 3-19 of this chapter 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) 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-5

<PAGE>   121
 

                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto,
state of California, on October 26, 1999.
 
                                      COMMTOUCH SOFTWARE LTD.
 
                                      By:         /s/ GIDEON MANTEL
                                         ---------------------------------------
                                                      Gideon Mantel
                                                 Chief Executive Officer
 
     Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
 

<TABLE>
<CAPTION>
                       NAME                                      TITLE                     DATE
                       ----                                      -----                     ----
<S>                                                  <C>                             <C>
 
                 /s/ GIDEON MANTEL                      Chief Executive Officer      October 26, 1999
---------------------------------------------------           and Director
                   Gideon Mantel                     (Principal Executive Officer)
 
               /s/ JAMES E. COLLINS                     Chief Financial Officer      October 26, 1999
---------------------------------------------------  (Principal Financial Officer)
                 James E. Collins
 
                 /s/ DEVYANI PATEL                             Controller            October 26, 1999
---------------------------------------------------
                   Devyani Patel
 
                   /s/ AMIR LEV                                 Director             October 26, 1999
---------------------------------------------------
                     Amir Lev
 
                  /s/ YIFTAH ATIR                               Director             October 26, 1999
---------------------------------------------------
                    Yiftah Atir
 
                /s/ ALLAN C. BARKAT                             Director             October 26, 1999
---------------------------------------------------
                  Allan C. Barkat
 
                  /s/ YAIR SAFRAI                               Director             October 26, 1999
---------------------------------------------------
                    Yair Safrai
 
                  /s/ YOSEPH SELA                               Director             October 26, 1999
---------------------------------------------------
                    Yoseph Sela
 
                  /s/ THOMAS CAMP                               Director             October 26, 1999
---------------------------------------------------
                    Thomas Camp
</TABLE>

 
                                      II-6

<PAGE>   122
 

<TABLE>
<CAPTION>
                       NAME                                      TITLE                     DATE
                       ----                                      -----                     ----
<S>                                                  <C>                             <C>
                /s/ RICHARD SORKIN                              Director             October 26, 1999
---------------------------------------------------
                  Richard Sorkin
 
               /s/ JAMES E. COLLINS                       Attorney-in-fact and       October 26, 1999
---------------------------------------------------  Authorized U.S. Representative
                 James E. Collins
</TABLE>

 
                                      II-7

<PAGE>   123
 
                            COMMTOUCH SOFTWARE LTD.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                           U.S. DOLLARS IN THOUSANDS
 

<TABLE>
<CAPTION>
                                       BALANCE AT
                                           THE         CHARGED TO                      BALANCE AT
                                      BEGINNING OF      COSTS AND                      END OF THE
                                       THE PERIOD      EXPENSES(1)    DEDUCTIONS(2)      PERIOD
                                      -------------    -----------    -------------    ----------
<S>                                   <C>              <C>            <C>              <C>
Year ended December 31, 1996:
  Bad debt..........................       --               --             --             --
                                            ==             ===              ==             ==
Year ended December 31, 1997:
  Bad debt..........................       --              170             --             --
                                            ==             ===              ==             ==
Year ended December 31, 1998:
  Bad debt..........................       --               --             --             --
                                            ==             ===              ==             ==
</TABLE>

 
-------------------------
(1) The charge refers to a write off of a bad debt as further disclosed in note
    1 of the financial statements under the caption "concentration of credit
    risk." This amount was charged to general and administrative expenses during
    1997 since an allowance for doubtful accounts was only deemed necessary
    during 1997, prior to year end, as it became clear that the amount had
    turned into a bad debt. The Company wrote off the allowance for doubtful
    accounts against the account receivable. This resulted in no allowance for
    doubtful accounts as of December 31, 1997.
 
(2) The deductions refer to valuation allowance for doubtful accounts which
    became bad debts.
 
                           [ERNST & YOUNG LETTERHEAD]
 
To: Board of Directors
CommTouch Software LTD.
 
We have audited the consolidated financial statements of CommTouch Software LTD.
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated March 15, 1999
(except for Note 11, as to which the date is July 12, 1999)(included elsewhere
in this Registration Statement). Our audits also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
 
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
 
                                                  /s/ KOST, FORER & GABBAY
                                            ------------------------------------
 
                                                    Kost, Forer & Gabbay
                                                 A member of Ernst & Young
                                                       International
 
Tel-Aviv, Israel
July 12, 1999
 
                                       S-1

<PAGE>   124
 

                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
                                                                       SEQUENTIALLY
EXHIBIT                                                                  NUMBERED
NUMBER                     DESCRIPTION OF DOCUMENT                         PAGE
-------                    -----------------------                     ------------
<S>      <C>                                                           <C>
 3.1     Memorandum of Association of the Registrant.(1)
 3.2     Articles of Association of the Registrant.(1)
 4.1     Specimen Certificate of Ordinary Shares.(1)
 4.2     Amended and Restated Registration Rights Agreement dated as
         of April 19, 1999.(1)
 4.3     Form of Tag-Along Rights (Right of First Refusal and
         Co-Sale) Agreement dated as of December 23, 1998.(1)
 4.4     Form of Drag-Along Letter dated as of April 15, 1999.(1)
 5.1     Opinion of Naschitz, Brandes & Co., Israeli counsel to the
         Registrant, as to certain legal matters with respect to the
         legality of the shares.
10.1     Registrant's 1996 CSI Stock Option Plan and forms of
         agreements thereunder.(1)
10.2     Registrant's form of Stock Option Agreement for Israeli
         Employees.(1)
10.3     Registrant's 1999 Stock Option Plan and form of agreement
         thereunder.(1)
10.4     CommTouch Software Ltd. 1999 Nonemployee Directors Stock
         Option Plan.(1)
10.5     CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
         and forms thereunder.(1)
10.6     Sublease between ASCII of America, Inc. and CommTouch for
         CommTouch's offices in Santa Clara, California, dated
         December 16, 1998.(1)
10.7     Lease between DeAnza Building and CommTouch for CommTouch's
         offices in Sunnyvale, California, dated February 5, 1996, as
         amended.(1)
10.8     Form of Letter Agreement between the Registrant and U.S.
         Bancorp Piper Jaffray.(2)
10.9     Form of Customized Web-based Email Service Agreement between
         Go2Net, Inc. and the Registrant.(3)
10.9.1   Form of Share Warrant for Go2Net, Inc. to purchase ordinary
         shares of the Registrant.(3)
10.10    Form of Share Purchase Agreement among the Registrant,
         Go2Net, Inc. and Vulcan Ventures Incorporated.(3)
10.10.1  Form of Registration Rights Agreement by and among the
         Registrant, Go2Net, Inc. and Vulcan Ventures
         Incorporated.(3)
21.1     Subsidiaries of the Registrant.(1)
23.1     Consent of Kost, Forer & Gabbay, independent auditors.
23.2     Consent of Naschitz, Brandes & Co. (contained in Exhibit
         5.1.)
23.3     Consent of McCutchen, Doyle, Brown & Enersen, LLP.
24.1     Power of Attorney.
99.1     Press Release of the Registrant, dated July 7, 1999.(2)
99.2     Memorandum of Understanding between the Registrant, Go2Net,
         Inc. and Vulcan Ventures, Incorporated, dated July 7,
         1999.(2)
</TABLE>

 
-------------------------
(1) Incorporated by reference to similarly numbered exhibit in Amendment No. 1
    to Registration Statement on Form F-1 of CommTouch Software, Ltd., File No.
    333-78531.
 
(2) Incorporated by reference to similarly numbered exhibit in Amendment No. 4
    to Registration Statement on Form F-1 of CommTouch Software, Ltd., File No.
    333-78531.
 
(3) Incorporated by reference to similarly numbered exhibit in Amendment No. 5
    to Registration Statement on Form F-1 of CommTouch Software, Ltd., File No.
    333-78531.





<PAGE>   1
                                                                     Exhibit 5.1



                                    C/255/72
                           Tel-Aviv, October 26, 1999

CommTouch Software Ltd.
6 Hazoran Street
Poleg Industrial Park, P.O. Box 8511
Netanya 42504

Israel


Ladies and Gentlemen:

     We refer to the registration statement on Form F-1 (the "Registration
Statement"), initially filed by CommTouch Software Ltd. (the "Company") on
October 26, 1999 with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Registration Statement relates to the
offering by the Selling Securityholders described in the Registration Statement
of (i) up to 1,344,086 Ordinary Shares, nominal value NIS 0.05 per share, of
the Company that are held by the Selling Securityholders (the "Issued Shares"),
(ii) a warrant issued by the Company to purchase 1,136,000 Ordinary Shares,
nominal value NIS 0.05 per share, of the Company (the "Warrant"), and (ii) up
to 1,136,000 Ordinary Shares, nominal value NIS 0.05 per share, of the Company,
that may be issued to one of the Selling Securityholders upon the exercise of
the Warrant (the "Warrant Shares" and, together with the Issued Shares, the
"Shares").

     As special Israeli counsel to the Company in connection with the offering
of the Shares and the Warrant pursuant to the Registration Statement, we have
examined
 such corporate records and documents and such questions of law as we
have considered necessary or appropriate for the purpose of this opinion.

     Upon the basis of such examination, we are of the opinion that:

          1. The Issued Shares to be sold by the Selling Securityholders are
legally and validly issued, fully paid and non-assessable; and


          2. The Warrant Shares to be sold by one of the Selling Securityholders
are duly and validly authorized and, when issued and sold by the Company upon
exercise of, and in the manner contemplated by, the Warrant and upon receipt by
the Company of payment therefor as provided in the Warrant, will be legally and
validly issued, fully paid and non-assessable.

     We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm under the caption "Legal Matters"
in the Prospectus contained in the Registration Statement and elsewhere in the
Registration Statement and Prospectus.


                                   Very truly yours,


                                   /s/  NASCHITZ, BRANDES & CO.
                                   ----------------------------------
                                   Naschitz, Brandes & Co.








<PAGE>   1
                                                                    EXHIBIT 23.1


                 [ERNST & YOUNG/KOST FORER & GABBAY LETTERHEAD]

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts",  and to the
use of our reports  dated  March 15,  1999  (Except for Note 11, as to which the
date is July 12, 1999) with respect to the consolidated financial statements and
schedule, respectively and the related Prospectus of CommTouch Software Ltd. for
the registration in the  Registration  Statement on Form F-1 of 1,344,086 of its
ordinary  shares, a Warrant to Purchase  1,136,000 of its ordinary  shares,  and
1,136,000 ordinary shares issuable upon exercise of the Warrant.

Tel-Aviv, Israel
October 26, 1999


                               KOST FORER & GABBAY
                     A member of Ernst & Young International





<PAGE>   1

                                                                    EXHIBIT 23.3

                CONSENT OF MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP

We consent to the references to the name of our firm under the caption "Legal
Matters" in the Registration Statement (Form F-1) and related Prospectus of
CommTouch Software Ltd. for the registration of 1,344,086 of its Ordinary
Shares, a Warrant to purchase 1,136,000 of its ordinary shares, and 1,136,000
ordinary shares issuable upon exercise of the Warrant.

                                          MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP


Palo Alto, California

October 26, 1999





<PAGE>   1
                                                                    EXHIBIT 24.1

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below  hereby  constitutes  and  appoints  James E.  Collins his true and lawful
attorney-in-fact  and agent for him and on his behalf and in his name, place and
stead  as a  director  or  officer  or  both of  CommTouch  Software  Ltd.  (the
"Registrant")  to sign the  registration  statement  on Form F-1  relating  to a
secondary  offering by certain  selling  securityholders  of the  Registrant  of
ordinary   shares  and  a  warrant  and  any  and  all   amendments   (including
post-effective  amendments) to the  registration  statement and any registration
statement for the same offering that is to be effective upon filing  pursuant to
Rule 462(b) under the Securities Act of 1933 (and any amendments  thereto),  and
to file the same,  with  exhibits  and any and all other  documents  filed  with
respect  thereto,  with the  Securities  and Exchange  Commission  (or any other
governmental  or regulatory  authority),  granting unto said attorney full power
and  authority to do and to perform each and every act and thing  requisite  and
necessary to be done in and about the premises in order to  effectuate  the same
as  fully  to all  intents  and  purposes  as he  himself
  might  or could do if
personally   present,   hereby   ratifying   and   confirming   all  that   said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.


<TABLE>
<CAPTION>
                 Name                                              Title                                Date
                 ----                                              -----                                ----   
<S>                                                <C>                                        <C>   

--------------------------------------             Chief Executive Officer and Director       October 26, 1999
             Gideon Mantel                             (Principal Executive Officer)


--------------------------------------                    Chief Financial Officer             October 26, 1999
           James E. Collins                            (Principal Financial Officer)


--------------------------------------                          Controller                    October 26, 1999
             Devyani Patel


--------------------------------------                           Director                     October 26, 1999
               Amir Lev


--------------------------------------                           Director                     October 26, 1999
              Yiftah Atir


--------------------------------------                           Director                     October 26, 1999
            Allan C. Barkat


--------------------------------------                           Director                     October 26, 1999
              Yair Safrai


--------------------------------------                           Director                     October 26, 1999
              Yoseph Sela


--------------------------------------                           Director                     October 26, 1999
              Thomas Camp


--------------------------------------                           Director                     October 26, 1999
            Richard Sorkin
</TABLE>