Commtouch Private Placement Secures $1.3 Million Funding; Company Pursues Turnaround Plan.

Business/Technology Editors

MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Feb. 27, 2002

Commtouch Software Ltd. (Nasdaq: CTCH), a leading vendor of highly scalable messaging solutions to service providers, today announced that it has secured $1.3 million of additional equity funding.

Commtouch will issue approximately 4.39 million Ordinary Shares in a private placement to private investors, one-third of the shares are being purchased by Commtouch's founders, who are currently Commtouch directors or executive officers. The purchasers in the private placement will also receive five-year warrants to purchase up to an additional 2.63 million Ordinary Shares. The exercise price for one-third of the warrants will be $0.37 per share, the exercise price for an additional one-third of the warrants will be $1.00 per share and the exercise price for the final one-third of the warrants will be $2.00 per share.

Carolyn Chin, Chairman of Commtouch comments, "During the past year, Commtouch has been implementing a turnaround plan with this financing round representing a milestone. Starting first with expense cuts, we have sold our consumer and business ASP hosted messaging services with minimal service disruption to our customers and are finalizing the strategic shift from being a service organization to selling our highly scalable, reliable and robust software messaging platform to other service providers. The present round of investment includes the company's founders who have demonstrated once again their strong confidence in the company's core set of competencies. The confidence of the founders has been reinforced by the investment of the others participating in the current round. With this new funding, we expect to have enough cash to bring us to profitability before year-end."

Yossi Sela, one of the investors in this round, noted, "I am very familiar with Commtouch, its management team and its technology. I have monitored the company for several years and I believe that it will be able to achieve its targets."

The private placement is subject to various conditions, including the receipt of shareholder approval and various government approvals. Commtouch expects to distribute a proxy statement to shareholders and to apply for the necessary government approvals shortly. Commtouch has agreed to file a shelf registration statement for the Ordinary Shares and the warrant shares within 30 days. Commtouch has also agreed to pay certain liquidated damages to the investors (other than the Commtouch officers and directors who are investing) and grant them piggy-back registration rights, if the shelf registration statement is not declared effective within 90 days after the Company has received all necessary approvals.

In describing the steps to profitability, Gideon Mantel, CEO of Commtouch said, "Our first priority has been to pursue our turnaround plan. We have already succeeded in narrowing our losses significantly, quarter-by-quarter. The next step is to launch version 3.0 of the Commtouch Messaging Platform (CMP). Based on our years of providing proven email technology, CMP version 3.0 is a special software version developed for service providers that will enable them to target their business subscribers with more flexible and advanced featured messaging capabilities, while co-existing with any other email solution that the service providers may already have deployed. We hope that the sales of CMP version 3.0 will make us cash flow positive by the end of 2002."

Gideon Mantel added, "We have to consider the current economic conditions very carefully and are sensitive to the issues of our global service provider customers. The new version of CMP has been designed with increased revenue generation by service providers from hosted messaging as a top priority. In 2002, we are focusing all our resources on achieving profitability."

About Commtouch

Commtouch Software Ltd. is the developer and provider of comprehensive and highly scalable messaging solutions through its Commtouch Messaging Platform (CMP) for service providers such as ISPs, ASPs, Data Centers, Telcos and Wireless Operators. The CMP offers service providers an opportunity to increase revenue from their business and residential subscribers utilizing CMP's advanced messaging services, which can be deployed and managed easily and quickly. The Company's core competencies come from its vast experience in hosted messaging as a global ASP and its established reputation as a leading vendor for email software applications. Commtouch is headquartered in Netanya, Israel and its subsidiary company, Commtouch Inc., operates out of Mountain View, CA. The Company was founded in 1991 and has been a publicly traded company since 1999 (Nasdaq: CTCH). To learn how Commtouch solutions are designed to meet service providers' messaging and collaboration needs, visit our web site at http://www.commtouch.com.

Note to Editors: MS-Exchange(R) is a registered trademark of Microsoft Corporation.

Commtouch is a registered trademark of Commtouch Software Ltd. Terms and product names in this document may be trademarks of others.

This press release contains forward-looking statements, including projections about our business, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements in the future tense, and statements including words such as "expect", "plan", "estimate", anticipate", or "believe" are forward-looking statements. These statements are based on information available to us at the time of the release; we assume no obligation to update any of them. The statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations as a result of numerous factors, including business conditions and growth or deterioration in the Internet market, commerce and the general economy both domestic as well as international; fewer than expected new-partner relationships; competitive factors including pricing pressures; technological developments, and products offered by competitors; availability of qualified staff for expansion; and technological difficulties and resource constraints encountered in developing new products as well as those risks described in the Company's Annual Reports on Form 20-F and reports on Form 6-K, which are available through www.sec.gov.