Commtouch Reports Eighth Consecutive Quarter of Revenue Growth; Second Quarter 2005 is Highlighted by Improvement in Company's K

Commtouch(R) (Nasdaq:CTCH), the developer of ground
breaking RPD(TM) technology for real time anti-spam and zero-hour
virus protection, today announced its second quarter and year to date
results for the period ending June 30, 2005.
   Revenues for the quarter were more than double those of the same
quarter of last year, and grew by 19% in comparison to the prior
quarter, from $740,000 for the first quarter to $880,000 during the
second quarter of 2005.
   Deferred revenues as at June 30, 2005 were $1,753,000, compared to
deferred revenues of $1,200,000 as at December 31, 2004 and $1,478,000
as at March 31, 2005.
   Net loss for the quarter was $737,000 compared to $1,072,000 in
the prior quarter, and $1,194,000 in the comparable quarter last year.
Net loss attributable to ordinary and equivalently participating
shareholders for the quarter was $1,368,000, which included non-cash
amortization totaling $631,000 relating to the Series A Preferred
Share beneficial conversion feature.
   Revenues for the six months ended June 30, 2005 and June 30, 2004
were $1,620,000 and $518,000, respectively. Total loss for the six
months ended June 30, 2005 was $1,809,000, compared to $2,806,000 in
the comparable period last year. Net loss attributable to ordinary and
equivalently participating shareholders for the six months ended June
30, 2005 was $3,117,000, which included non-cash amortization totaling
$1,308,000 relating to the Series A Preferred Share beneficial
conversion feature.
   "We have shown that we have great products that are answering the
market's needs," stated Gideon Mantel, CEO of Commtouch. "Remarkably,
we are growing the business while lowering expenses and significantly
reducing the company's cash burn. The first half-year results are yet
another example of the scalability of our business, and we look
forward to the second half of the year with much anticipation and
excitement as we continue to educate markets globally of the 'must
have' features of our products."
   Cash at June 30, 2005 was approximately $3,878,000 compared to
$4,334,000 as of March 31, 2005 on a pro forma basis (includes
$914,000 of the proceeds relating to the warrant exercise transaction
of March 31, 2005). The company expects expenses during the third
quarter to remain relatively unchanged.

   About Commtouch

   Commtouch Software Ltd. (Nasdaq:CTCH) is dedicated to protecting
and preserving the integrity of the world's most important
communications tool -- email. Commtouch has 14 years of experience
developing messaging software, and is a global developer and provider
of proprietary anti-spam and Zero-Hour(TM) virus protection solutions.
Using core technologies including RPD(TM) -- Recurrent Pattern
Detection, the Commtouch Detection Center analyzes 1.5 billion email
messages per month to identify new spam and malware outbreaks within
minutes of their introduction into the Internet. Integrated by
approximately 28 OEM partners, Commtouch technology protects thousands
of organizations, with 35 million users in 100 countries. Commtouch is
headquartered in Netanya, Israel and has a subsidiary in Mountain
View, CA. For more information, see: www.commtouch.com.

   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; fewer than expected license agreements
resulting from Commtouch's exclusive rights to market DCC; competitive
factors including pricing pressures; technological developments, and
products offered by competitors; the ability of our OEM partners to
successfully penetrate markets with products integrated with Commtouch
technology; a slower than expected acceptance rate for real time AV
solutions in general and the Commtouch Zero Hour(TM) Virus Protection
product in particular; availability of qualified staff for expansion;
and technological difficulties and resource constraints encountered in
developing new products, such as the Zero Hour solution, as well as
those risks described in the text of this press release and the
company's Annual Reports on Form 20-F and reports on Form 6-K, which
are available through www.sec.gov.

   Recurrent Pattern Detection, RPD and Zero-Hour are trademarks, and
Commtouch is a registered trademark, of Commtouch Software Ltd. U.S.
Patent No. 6,330,590 is owned by Commtouch.

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                        COMMTOUCH SOFTWARE LTD.

                 CONDENSED CONSOLIDATED BALANCE SHEETS

                          (USD in thousands)

                                              June 30,  December 31,
                                              2005      2004(a)
                                              --------  ------------


Assets
Current Assets:
 Cash and cash equivalents                     $3,878       $4,149
 Trade receivables, net                           401           97(a)
 Prepaid expenses                                  44           89
 Other accounts receivable                         27           22
                                                ------       ------
 Total current assets                           4,350        4,357
                                                ------       ------
Long-term lease deposits                           40           53
Equity investment in Imatrix                      171          248
Severance pay fund                                481          484
Property and equipment, net                       390          337
                                                ------       ------
                                               $5,432       $5,479
                                                ------       ------
Liabilities and Shareholders' Equity
Current Liabilities:
 Accounts payable                                 256          245
 Employees and payroll accruals                   531          462
 Accrued expenses and other liabilities           272          415
 Deferred revenue                               1,753        1,200(a)
                                                ------       ------
 Total current liabilities                      2,812        2,322
                                                ------       ------

 Accrued severance pay                            559          564
                                                ------       ------

 Shareholders' equity                           2,061        2,593
                                                ------       ------
                                               $5,432       $5,479
                                                ======       ======

(a) Reclassed for current period presentation


                        COMMTOUCH SOFTWARE LTD.

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


                                        Three Months     Six Months
                                            ended          ended
                                     ---------------- ----------------
                                      June 30 June 30 June 30 June 30
                                     ---------------- ----------------
                                        2005    2004    2005    2004
                                       ------- ------- ------- -------

  Revenues                            $   880 $   358 $ 1,620 $   518

  Cost of revenues                        145     161     339     305
                                       ------- ------- ------- -------
Gross profit (loss)                       735     197   1,281     213
                                       ------- ------- ------- -------
Operating expenses:
  Research and development, net           363     269     731     632
  Sales and marketing                     627   1,073   1,305   1,914
  General and administrative              504     536   1,050     890
  Amortization of stock-based employee
   deferred compensation                  ---     ---     ---      30
                                       ------- ------- ------- -------
  Total operating expenses              1,494   1,878   3,086   3,466
                                       ------- ------- ------- -------
Operating loss                           (759) (1,681) (1,805) (3,253)
  Interest and other expense, net          63     489      56     444
  Equity in (loss) earnings of
   affiliate                              (41)     (2)    (60)      3
                                       ------- ------- ------- -------
  Net loss                               (737) (1,194) (1,809) (2,806)
  Amortization of beneficial conversion
   feature relating to convertible
   Series A Preferred Shares             (631)      -  (1,308)      -
                                       ------- ------- ------- -------

Net loss attributable to ordinary and
 equivalently participating
 shareholders                         $(1,368)$(1,194)$(3,117)$(2,806)
                                       ======= ======= ======= =======
Basic and diluted net loss per share  $ (0.03)$ (0.03)$ (0.06)$ (0.08)
                                       ======= ======= ======= =======

Weighted average number of shares used
 in computing basic and diluted net
 loss per share                        53,565  37,473  51,905  37,339
                                       ======= ======= ======= =======
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