20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20–F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report………….

For the transition period from _________________ to ________________

Commission file number 000–26495

COMMTOUCH SOFTWARE LTD.

(Exact name of Registrant as specified in its charter and

translation of Registrant’s name into English)

Israel

(Jurisdiction of incorporation or organization)

4A Hazoran Street

Poleg Industrial Park,

P.O. Box 8511

Netanya 42504, Israel

011–972–9–863–6888

(Address of principal executive offices)

Ron Ela, CFO, Fax: 011-972-9-8636863. Same address as above.

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class	Name of each exchange on which registered
Ordinary Shares, par value NIS 0.15 per share	NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2010).

Ordinary Shares, par value NIS 0.15 23,505,713

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes oNo x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes oNo x

Note: Checking the above box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ¨ Yes     ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  Check one:

Large accelerated filero Accelerated filero Non-accelerated filerx

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

U.S. GAAPx International Financial Reporting Standards as issued by the International Accounting Standards Board¨            Othero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

PART I

Item 1. Identity of Directors, Senior Management and Advisers.

Not applicable.

Item 2. Offer Statistics and Expected Timetable.

Not Applicable

Item 3. Key Information.

Unless otherwise indicated, all references in this document to “Commtouch,” “the Company,” “we,” “us” or “our” are to Commtouch Software Ltd. or its wholly–owned subsidiary, Commtouch Inc., as relating to consolidated financial information contained herein.

The selected consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from the Consolidated Financial Statements of Commtouch included elsewhere in this report. The selected consolidated statements of operations data for the years ended December 31, 2006 and 2007 and the selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from the Consolidated Financial Statements of Commtouch not included elsewhere in this report. 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 “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements and the Notes thereto included elsewhere herein:

	Year Ended December 31,
	2006			2007		2008		2009		2010
	(USD in thousands, except per share data)
Selected Data:
Revenues	$	7,234		$	11,250	$	14,092	$	15,189	$	18,161
Operating profit (loss)	$	(415	)	$	1,610	$	1,931	$	2,696	$	3,360
Net income (loss) attributable to ordinary and equivalently participating shareholders	$	(190	)	$	2,109	$	2,270	$	5,160	$	4,403
Basic net earnings (loss) per share	$	(0.01	)	$	0.08	$	0.09	$	0.21	$	0.19
Diluted net earnings (loss) per share	$	(0.01	)	$	0.08	$	0.08	$	0.20	$	0.18
Weighted average number of shares used in computing basic net earnings (loss) per share		22,113			24,847		25,619		24,532		23,575
Weighted average number of shares used in computing diluted net earnings (loss) per share		22,113			27,591		26,929		25,292		24,874
Total Assets	$	11,999		$	18,210	$	20,709		25,190	$	31,982

FORWARD LOOKING STATEMENTS

Except for the historical information contained in this Annual Report, the statements contained in this Annual Report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and other federal securities laws with respect to our business, financial condition and results of operations.  Such forward-looking statements reflect our current view with respect to future events and financial results.

We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements appear in Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects,” as well as elsewhere in this Annual Report.Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.  We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears below.

RISK FACTORS

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

Business Risks

If the market does not continue to respond favorably to our current Internet security solutions, including our anti-spam, Zero-Hour antivirus, Mail Reputation, Command Antivirus and  Uniform Resource Locator or URL filtering solutions, or our future solutions do not gain acceptance, we will fail to generate sufficient revenues.

Our success depends on the continued acceptance and use of our Internet security solutions by current and new business, Original Equipment Manufacturer or OEM, and Service Provider customers. We have been selling our inbound anti-spam products (as a stand-alone product) for over seven years, Zero-Hour™ virus outbreak detection product for approximately six years, our GlobalView™ Mail Reputation perimeter defense solution for approximately five years, our URL filtering solutions for over one year, our outbound spam solution for slightly less than a year and the newly acquired Command Antivirus solution for over half a year.

As the markets for messaging, antivirus and Web security products continue to mature and consolidate, we are seeing increasing competitive pressures and demands for even higher quality products at lower prices.   This increasing demand comes at a time when Internet security threats are more varied and intensive, challenging even the top end solutions to keep their performance at an industry acceptable high level of accuracy. If our solutions do not continue to evolve to meet market demand, or newer products on the market prove more effective, our business could fail.  Also, if growth in the markets for these solutions begins to slow, our business will suffer dramatically.

If we are unable to successfully integrate the Command Antivirus business unit of Authentium, Inc., there could be a material adverse effect on our business operating results and financial condition.

On September 3, 2010, we acquired certain assets comprising the Command Antivirus business unit of Authentium, Inc. (now known as SafeCentral, Inc.). In particular, we:

· received assignments to a number of license agreements under which we provide antivirus services to new customers and generate substantial revenues;

· are expected to continue to receive certain support services from SafeCentral through the end of 2011; and

· hired thirteen new employees and four new contractors formerly employed by Authentium, who are vital for the successful operation of the new antivirus business.

While the integration to date has been successful, nevertheless our business will suffer significantly if

● a number of the new customers that we are servicing decide not to renew their agreements or fail to honor the current agreements,

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● SafeCentral fails to support this new business before we are able to fully move all facets of the operation in-house,

● a number of the new employees and contractors decide to seek alternative employment, or

● we otherwise fail to integrate the Command Antivirus unit.

Recurring unfavorable national and global economic conditions could have a material adverse effect on our business, operating results and financial condition.

It is not yet clear if the crisis in the financial and credit markets that began in 2008 in the United States, and that led to a global economic slowdown, has passed completely. If the economies of countries in which our customers and potential customers are located continue to be weak or weaken further, our customers may reduce or postpone their spending significantly. This could result in reductions in sales of our services and longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of our OEM partners, distributors and resellers who could, in turn, delay paying their obligations to us. This would increase our credit risk exposure and cause delays in our recognition of revenues on future sales to these customers. While our OEM business generally remained stable during 2010, we did see instances of financial weakness with a few non-key OEM partners.   Specific economic trends, such as declines in the demand for PCs, servers, and other computing devices, or weakness in corporate information technology spending, could have a more direct impact on our business. Any of these events would likely harm our business, operating results and financial condition.

If global economic and market conditions, or economic conditions in the United States or other key markets do not continue to improve, or revert to a recessionary state, our business, operating results and financial condition may be adversely impacted in a material way.

Tighter governmental enforcement of regulations could decrease the distribution of unsolicited bulk (spam) email and malicious software and decrease demand for our solutions, or increase our cost of doing business.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act) established a framework of U.S. administrative, civil, and criminal tools to combat spam. The law establishes both civil and criminal prohibitions to assist in deterring the most offensive forms of spam, including unmarked sexually-oriented messages and emails containing fraudulent headers. Under the law, senders of email are required to honor a request by a consumer not to receive any further unsolicited messages. While past high profile prosecutions of direct marketers seemingly have not had much of a deterrent effect on marketers of unsolicited email, it is not known whether or not future enforcement actions will prove effective.

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

These and similar legal measures, both in the United States and worldwide, may have the effect of reducing the amount of unsolicited email and malicious software that is distributed and hence diminish the need for our Internet security solutions. Any such developments would have an adverse impact on our revenues.

We depend upon OEM partners, Service Providers and, to a lesser extent, resellers.

We expect to continue to be dependent upon OEM partners, Service Providers and resellers for a significant portion of our revenues, which will be derived from sales of our messaging, antivirus and Web security solutions. Our operating results and financial condition may be materially adversely affected if:

•  Anticipated orders or payments from these customers fail to materialize;

•  Some of the key customers cease the promotion of our business or begin to promote additional solutions in a layered approach to email defense, anti-malware and URL filtering management; or

•  Some of our key customers’ businesses fail as a result of a deepening global economic crisis.

Our quarterly operating results may fluctuate, which could adversely affect the value of your investment.

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

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• Our ability to successfully market our messaging, antivirus and Web security solutions in new markets, both domestic and international;

• Our ability to successfully develop and market new, modified or upgraded solutions, as may be needed;

• The continued acceptance of our solutions by our current customer base;

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

• Unanticipated bugs or other problems affecting the delivery of our solutions to customers;

• The success of our customers’ sales efforts to their customer base;

• The solvency of our customers and their ability to allocate sufficient resources towards the marketing of our solutions;

• Our customers’ ability to effectively integrate our solutions into their product offerings;

• The substantial decrease in information technology spending;

• The pricing of our solutions;

• Our ability to timely collect fees owed by our customers;

• A renewed global slowdown;

• Sudden, dramatic fluctuations in exchange rates of currencies covering the fees we collect from our foreign customers versus the currencies utilized in our business (namely, the New Israeli Shekel, U.S. Dollar and EURO);

• Our ability to add cost-effective space and equipment to our current detection centers, or Detection Centers, in a timely and effective manner to match the rate of growth in our business, plus our ability to build new, cost-effective detection centers as worldwide demand for our products may require; and

• The effectiveness of our end user support, whether provided by our customers or directly by Commtouch.

Our products and services have changed many times since we commenced operations in 1991.  For example, in September 2010, we acquired the Command Antivirus unit of Authentium, and have been integrating this new business into our existing business. Future changes in our product offerings may require that we adjust our business processes and workforce, which can cause fluctuations in our results from operations.

We have many established competitors who are offering a multitude of solutions to the problems of spam/virus distribution and Web-related security threats.

The market for Internet security products remains intensely competitive and is subject to rapid changes in technology.  We expect both product and pricing competitive pressures to increase in the future. Some of our competitors have longer operating histories, greater brand recognition, larger technical staffs and/or greater financial, technical and marketing resources, and other advantages compared to us. This competition could have a negative impact on our business and financial results.  Additional details are provided in Item 4. Information on the Company.

Our ability to continue to increase our revenues will depend on our ability to successfully execute our sales and business development plan.

The complexity of the underlying technological base of messaging, antivirus and Web security solutions, and the current landscape of the markets, require highly trained sales and business development personnel to educate prospective resellers, OEM and service provider partners and customers regarding the use and benefits of our solutions. It may take time for our current and future employees to convey to potential, as well as current, OEM/service provider partners and resellers how to most effectively market and utilize our solutions. As a result, our sales and business development personnel may not be able to compete successfully against larger, more heavily financed and more experienced sales and business development departments of our competitors.

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

Our success depends on the skills, experience and performance of our senior management and other key personnel. The loss of the services of any of our senior management or other key personnel could materially and adversely affect our business. The loss of our software developers or senior operations personnel may also adversely affect the continued development and support of our messaging, antivirus and Web security solutions, thereby causing our operating results to suffer and the value of your investment to decline.

We do not have employment agreements inclusive of set periods of employment with any of our key personnel. We cannot prevent them from leaving at any time. We do not maintain key-person life insurance policies, listing us as a beneficiary, on any of our employees.

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

As of December 31, 2010, we had sales offices in Israel and the United States. We also are marketing our messaging, antivirus and Web security solutions in international markets by utilizing appropriate distribution channels. However, we may not be able to compete effectively in international markets due to various risks inherent in conducting business internationally, such as:

• Differing technology standards;

• Inability of distribution channels to successfully market our solutions;

• Export restrictions;

• Difficulties in collecting accounts receivable and longer collection periods;

• Unexpected changes in regulatory requirements;

• Political and economic instability;

• Potentially adverse tax consequences; and

• Limited enforcement mechanisms for protecting intellectual property rights.

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

Our Web security and antivirus solutions may be adversely affected if we are not able to receive sufficient components from third party suppliers.

Our Web security and antivirus solutions rely in part on certain components supplied by third parties (separate third parties per each solution) pursuant to contractual relationships.  If these third parties breach their agreements with us, we may have difficulty in securing alternative sources for these components in a timely manner and thus our Web security and antivirus solutions may not perform at the level we expect.  If this were to occur, the effectiveness of these solutions would drop, they would become less attractive to customers/potential customers and anticipated revenues could decline.

Technology Risks

We have recently entered into a new market with our Command Antivirus solution, and may not fully appreciate the needs of customers and risks inherent in this new market

Our acquisition of the Command Antivirus business from Authentium in September 2010 represents our first efforts at expansion into the antivirus market.  While we hired the core team of ex-Authentium employees and contractors who possess the expertise to manage the Command Antivirus business, nevertheless we cannot be totally certain that we have anticipated all possible issues that might arise with our “in the cloud” technology infrastructure and this new offering.  Should unanticipated issues arise, sales of our antivirus solution likely will slow and our business will suffer.

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For example, because of the complexity of the new antivirus products, we understand that in the past, errors were found in versions of these products that were not detected before first introduced, or appeared in new versions or enhancements, and we may find such errors in the future.  Failures, errors or defects in our antivirus products could result in security breaches or compliance violations for our customers, disruption or damage to their networks or other negative consequences and could result in negative publicity, damage to our reputation, declining sales, increased expenses and customer relation issues. Such failures could also result in product liability damage claims against us by our customers, even though our agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims.

The antivirus products have in the past, and may at times in the future, falsely detect viruses or computer threats that do not actually exist. These false alarms, while typical in the security industry, would likely impair the perceived reliability of our products and may therefore adversely impact market acceptance of our antivirus products.

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

The messaging, antivirus and Web security industries are characterized by difficult technological challenges, sophisticated distributors of Internet security threats, multiple-variant viruses, unique phishing scams and constantly evolving malevolent software distribution practices and targets that could render our solutions and proprietary technology ineffective. Our success depends, in part, on our ability to continually enhance our existing messaging, antivirus and Web security solutions and to develop new solutions, functions and technology that address the potential needs of prospective and current customers and their users. The development of proprietary technology and necessary enhancements entails significant technical and business risks and requires substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may not be able to use new technologies effectively or adapt to OEM, customer or end user requirements or emerging industry standards. Also, we must be able to act more quickly than our competition, and may not be able to do so.

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

Our messaging, antivirus and Web security solutions are based in part upon new and complex software and highly advanced computer systems. Complex software and computer systems can contain defects, particularly when first introduced or when new versions are released, and are possible targets for denial of service attacks instigated by “hackers”. Although we conduct extensive testing and implement Internet security processes, we may not discover defects to or vulnerabilities in our software or systems that affect our new or current solutions or enhancements until after they are delivered. Although we have not experienced any material defects or vulnerabilities to date in our messaging, antivirus and Web security offerings, it is possible that, despite testing by us, defects or vulnerabilities may exist in the solutions we provide. These defects or vulnerabilities could cause or lead to interruptions for customers of our solutions, resulting in damage to our reputation, legal risks, loss of revenue, delays in market acceptance and diversion of our development resources, any of which could cause our business to suffer.

Our messaging, antivirus and Web security solutions may be adversely affected if we are not able to receive a sufficient sampling of Internet traffic or our Detection Centers were to become unavailable.

Our messaging, antivirus and Web security solutions are dependent, in part, on the ability of our Detection Centers to analyze, in an automated fashion, live feeds of Internet and Web related traffic received through our services to customers and other contractual arrangements.  If we were to suffer an unanticipated, substantial decrease in such traffic or our multiple Detection Centers become unavailable for any significant period, the effectiveness of our technologies would drop, our product offerings would become less attractive to customers/potential customers and revenues could decline.

Our Web security and antivirus solutions may be adversely affected if we are not able to receive sufficient support from third party suppliers.

Our Web security and antivirus solutions rely in part on third parties, pursuant to agreements, to supply certain information.  If these third parties breach their agreements with us, we may have difficulty in securing alternative sources for this information in a timely manner, and thus these solutions may not perform at the level we expect.  If this were to occur, these solutions would become less attractive to customers/potential customers and revenues could decline.

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Investment Risks

If we will be in need of additional capital, we may not be able to secure additional funds on acceptable terms, or at all, and the Company’s business could suffer.

We have invested heavily in technology development and an acquisition. We expect to continue to spend financial and other resources on developing, acquiring and introducing new offerings and maintaining our corporate organizations and strategic relationships. We also expect to invest resources in research and development projects to further enhance our solutions.

Notwithstanding the Company’s current, solid financial condition, should additional funding become necessary we may be unable to secure capital on acceptable terms, or at all, due to, among other things, difficulties in the capital and credit markets.  In such case, the Company’s business could suffer.

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

Our directors and affiliates of our directors, our executive officers and our shareholders who currently individually beneficially own over five percent of the voting power in the Company (together known as “affiliated entities”), beneficially own, in the aggregate, approximately 37.8% of our outstanding Ordinary Shares as of April 30, 2011. Included in the calculation of voting power are options exercisable by the affiliated entities within 60 days thereof (with some having an exercise price greater than the market price of our shares as of April 30, 2011). If they vote together (especially if they were to exercise all vested options into shares entitled to voting rights in the Company), these shareholders will be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also delay or prevent a change in control of Commtouch. In addition, conflicts of interest may arise as a consequence of the significant shareholders control relationship with us, including:

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

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

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

Our Ordinary Shares are traded on more than one market and this may result in price variations.

Our Ordinary Shares are traded primarily on the NASDAQ Capital Market and also on the Tel Aviv Stock Exchange.  Trading in our Ordinary Shares on these markets is made in different currencies (U.S. dollars on the NASDAQ Capital Market, and New Israeli Shekels, or NIS, on the Tel Aviv Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel).  Consequently, the trading prices of our Ordinary Shares on these two markets often differ.  Any decrease in the trading price of our Ordinary Shares on one of these markets could cause a decrease in the trading price of our Ordinary Shares on the other market.

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Intellectual Property Risks

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

We regard our patented and patent pending technology, copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees and customers to protect our proprietary rights.

During 2004, we purchased a United States patent, U.S. Patent No. 6,330,590. During 2005, we filed in the United States an anti-spam related patent application, claiming priority for a prior period based on the filing of U.S. Provisional Patent Application. This application remains outstanding. During 2006, we filed in the United States a patent application relating to the prevention of spam in streaming systems or, in other words, unwanted conversational media sessions (i.e. voice and video related).  This provisional application was converted to a formal patent application and, effective December 7, 2010, the United States Patent and Trademark Office split our application into three pending applications and issued us a new patent – United States Patent No. 7,849,186.  During 2008, we filed a U.S. Provisional Patent Application for anti-malware data center aggregate, the subject of which remains unpublished and thus confidential. During 2009, it too converted into a formal patent application.  We may seek to patent certain additional software or other technology in the future. Any such patent applications might not result in patents issued within the scope of the claims we seek, or at all.

Despite our precautions, unauthorized third parties may copy certain portions of our technology, reverse engineer or obtain and use information that we regard as proprietary or otherwise infringe or misappropriate our patent or our patent pending technology, trade secrets, copyrights, trademarks and similar proprietary rights.  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. Thus, our means of protecting our proprietary rights in the United States or abroad, as well as our financial resources, may not be adequate, and competitors may independently develop similar technology.

We cannot be certain that our Internet security solutions do not infringe issued patents in certain parts of the world. Therefore, other parties, whether in the United States or elsewhere, 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 copyrights, trademarks and other intellectual property rights of third parties by ourselves and our customers. Our customer agreements typically include indemnity provisions, so we may be obligated to defend against third party intellectual property rights infringement claims on behalf of our customers.   Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.  We may not have the proper resources in order to adequately defend against such claims.

Risks Relating to Operations in Israel

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

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

Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors.  Since October 2000, terrorist violence in Israel has increased significantly.  There has been ongoing violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities in December 2008 and January 2009 along Israel's border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into Southern Israel.   There were also extensive hostilities along Israel's northern border with Lebanon in the summer of 2006. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and cause our revenues to decrease.  With the recent uprisings in Egypt (which borders southern Israel) and resignation of its longtime president, Hosni Mubarak, it is uncertain what type of government will be formed and whether that government will continue to respect the Israel-Egypt peace treaty signed in 1979. Other civilian protests and uprisings continue to sprout in various Middle Eastern countries and North Africa, including Syria, which borders Israel to the Northeast, and (to a lesser degree) in Jordan, which borders Israel to the East. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and certain of these countries.  In addition, this instability may affect the global economy and marketplace, including as a result of changes in oil and gas prices.

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

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

Certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time in the event of a national emergency, such as in connection with the hostilities along Israel's border with the Gaza Strip in December 2008 and January 2009. Although Commtouch has operated effectively under these requirements since its inception, we cannot predict the effect of these obligations on Commtouch in the future. Our operations could be disrupted by the absence for a significant period of one or more of our officers or key employees due to military service. Any disruption in our operations would harm our business.

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

We have generated a substantial portion of our revenues in U.S. dollars and Euro, and incurred a portion of our expenses, principally salaries and related personnel expenses in Israel, in New Israeli Shekels, or NIS. We anticipate that a significant portion of our expenses will continue to be denominated in Israeli shekels.  As a result, we are exposed to risk to the extent that the value of the U.S. dollar decreases against the NIS and the Euro.  In that event, the U.S. dollar cost of our operations will increase and our U.S. dollar-measured results of operations will be adversely affected, as occurred during a portion of 2011, when the NIS and the Euro appreciated against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our operational expenses and revenues. We cannot predict the trend for future years. Our operations also could be adversely affected if we are unable to guard against currency fluctuations in the future. To date, we have not engaged in any significant hedging transactions.  In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS. Foreign currency fluctuations, and our attempts to mitigate the risks caused by such fluctuations, could have a material and adverse effect on our results of operations and financial condition.

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

Prior to 1998, we received grants from the Government of Israel, through the OCS, for the financing of a significant portion of our research and development expenditures in Israel. These grants totaled $0.6 million.  In 2001, we received $0.6 million and in 2002 we received $0.2 million. We did not submit an application for funding during the period 2004 – 2008.  In 2009 and 2010, our applications for funding were approved in the amounts of approximately $0.5 million and $0.6 million respectively. We have not submitted an application during the early part of 2011 and we do not expect to receive any grants during 2011.

In order to meet specified conditions in connection with previous grants and programs of the OCS, we have made representations to the Israel government about our Israeli operations.  From time to time the conduct of our Israeli operations has deviated from our forecasts.  If we fail to meet the conditions of the grants, including the maintenance of a material presence in Israel, or if there is any material deviation from the representations made by us to the Israeli government, we could be required to refund the grants previously received (together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive OCS grants in the future.

Under the Law for the Encouragement of Industrial Research and Development, 5744-1984 and the related regulations, the discretionary approval of an OCS committee is required for any transfer of technology developed with OCS funding or for the transfer of manufacturing rights outside of Israel.  OCS approval is not required for the export of any products resulting from the research and development. There is no assurance that we will receive the required approvals for any proposed future transfer.  Such approvals, if granted, may be subject to the following additional restrictions:

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· a requirement to pay the OCS a portion of the consideration we receive upon any sale of such technology to an entity that is not Israeli.  The scope of the support received, the royalties that were paid by us, the amount of time that elapsed between the date on which the know-how was transferred and the date on which the grants were received, as well as the sale price, will be taken into account in order to calculate the amount of the payment; and

· the transfer of manufacturing rights could be conditioned upon an increase in the royalty rate and payment of increased aggregate royalties (up to 300% of the amount of the grant plus interest, depending on the percentage of the manufacturing that is foreign).

These restrictions may impair our ability to sell certain of our older technology assets outside of Israel.  The restrictions will continue to apply even after we repay the full amount of royalties payable for the grants.

You may have difficulties enforcing a U.S. judgment against us and our executive officers and directors or asserting U.S. securities laws claims in Israel.

We are organized under the laws of Israel, and we maintain significant operations in Israel. In addition, the majority of our directors and executive officers are not residents of the United States and most of their assets and our assets are located outside the United States.  Service of process upon our non-U.S. resident directors or executive officers and enforcement of judgments obtained in the United States against us and our directors and executive officers may be difficult to obtain within the United States.  It may be difficult to assert U.S. securities law claims in original actions instituted in Israel.  Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum in which to bring such a claim.  In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim.  If U.S. law is found to be applicable, the substance of the applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.  Certain matters of procedure will also be governed by Israeli law.  Furthermore, there is little binding case law in Israel addressing these matters.

Israeli courts might not enforce judgments rendered outside Israel which may make it difficult to collect on judgments rendered against us. Subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable only if it finds that (a) the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment; (b) the judgment may no longer be appealed; (c) 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 (d) the judgment is executory in the state in which it was given.

Even if these 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 is a finding of lack of 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 that 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.

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

Israeli corporate law regulates mergers and acquisitions of shares through tender offers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his Ordinary Shares for shares in a foreign corporation to immediate taxation or to taxation before his investment in the foreign corporation becomes liquid. These provisions may adversely affect the price of our shares.

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As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.

As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Listing Rules.

Among other things, we may follow home country practice with regard to composition of the board of directors and quorum at shareholders' meetings.  In addition, we may follow our home country law, instead of the NASDAQ Listing Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or more interest in the Company and certain acquisitions of the stock or assets of another company.

A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement (see Item 16G. Corporate Governance for a list of those home country practices followed by us).  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ's corporate governance rules.

Item 4. Information on the Company.

Overview

The legal name of the Company is Commtouch Software Ltd., and its principal executive offices are located at 4A Hazoran Street, Poleg Industrial Park, P.O.Box 8511, Netanya 42504, Israel, where our telephone number is 011–972–9–863–6888. The Company was incorporated as a private company under the laws of the State of Israel on February 10, 1991 and its legal form is a company limited by shares. Commtouch became a public company on July 15, 1999. Its Articles of Association are on file in Israel with the office of the Israeli Registrar of Companies and available for public inspection at that office. The Company’s wholly owned subsidiary, Commtouch Inc., has its principal office located at 292 Gibraltar Drive, Suite 107, Sunnyvale, California 94089, where our telephone number is (650) 864–2000, as well as another office located at 7121 Fairway Dr., St. 104, Palm Beach Gardens, FL 33418, tel: 561 575-3200.

We are a provider of messaging, antivirus and Web security solutions to a wide array of customers and OEM and service provider distribution partners, including real-time Anti-Spam, Outbound Spam Protection for Service Providers, Zero-Hour virus outbreak protection and GlobalView Mail Reputation services, as well as Command Antivirus and GlobalView URL Filtering services. The Company offers its solutions to network and security vendors offering content security gateways, unified threat management, or “UTM”, solutions, network routers and appliances, antivirus solutions and to service providers such as Software-as-a-Service  or “SaaS” vendors, Web hosting providers and Internet Service Providers.  Our multiple services are intended to provide Internet security for various users of the Internet against the harmful effects of spam, malevolent software or “malware”, unwelcome websites, etc.

Additional Detail on Our Offerings

Our above-described services are typically accessed by our OEM and service provider customers through the integration of a Software Development Kit or “SDK” which, upon integration, is then able to communicate with our remote, worldwide Detection Centers in order to provide our customers and their users with the most up to date protection against the latest Internet threats that they are facing.

At the core of our messaging security offerings is our proprietary Recurrent Pattern Detection (RPD)™ technology which, in general terms, analyzes messages associated with mass email outbreaks and directs the blocking of such emails, without the need to analyze individual messages.

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At the core of our Web security solutions is its “in the cloud” infrastructure, which analyzes various feeds from worldwide sources as well as data from our RPD pertaining to URLs, and provides a classification of the URLs based on a set of categories.

At the core of our Command Antivirus solutions is our proprietary detection and remediation technology and unique engine design based on a combination of heuristics, emulation and several types of signatures, as well as an “in the cloud” infrastructure, which allows for a high degree of flexibility for our OEM customers.

In February 2011, we announced the availability of all three of our principal service offerings – messaging, antivirus and Web security – in one, unified SDK.  The unified SDK can be integrated into the products of security and networking vendors on an OEM basis, as well as into service providers’ infrastructure. Typical solutions that would benefit from the unified engine are software or hardware solutions or services that combine multiple security technologies, such as UTM, secure content filtering gateways and SaaS security solutions. The three principal service offerings – messaging, antivirus and Web security – are still available also in non-unified, individual SDKs for our OEM and service provider customers.

For our Anti-Spam, Zero-Hour virus outbreak protection and GlobalView Mail Reputation services, we have developed several technologies enabling easier integration to common mail servers and third party technologies used by hosting and service providers. These technologies serve as connectors and or plug-ins to existing infrastructure allowing elimination of most of the development work needed for integration for such platforms and letting system administrators configure their systems to use our services.

We also offer the following services typically through reseller channels:

· An enterprise anti-spam and Zero-Hour virus outbreak detection solution, which allows the reseller’s customer to download an Enterprise Gateway, enabling the subject Commtouch services to be provided in real time by our Detection Center(s).  Through the Enterprise Gateway, messages are filtered at the customer organization’s entry point, before being distributed to recipients, with added user-level controls and a top level of secure spam and virus detection services from the Detection Center, all allowing for real-time reaction to worldwide attacks.

· Command Anti-Malware service known as  “CSAM”, which offer world-class anti-malware protection for consumers and small businesses, as well as enterprises with hundreds of managed endpoints. 

2010 Acquisition of Command Antivirus

On September 3, 2010, Commtouch Inc. acquired certain assets comprising the Command Antivirus business unit of Authentium, Inc. (now known as SafeCentral, Inc.), including:

· the antivirus products known as “AV SDK” and “CSAM”, which are aimed at protecting customers against viruses, spyware, Trojan downloaders and other such Internet related threats;

· certain contracts with OEM customers pursuant to which such customers are authorized to integrate the AV SDK into their solutions and to sell and support such integrated solutions;

· certain contracts with resellers pursuant to which such resellers are authorized to sell the CSAM solutions;

· all such products’ intellectual property (including all interests in the Authentium and Command Software brand names and all associated trademarks, trade names and related property);

· certain furniture, computers and office equipment; and

At the closing, we also hired 13 ex-Authentium employees, based in a Florida office, and engaged additional independent contractors providing remote services to the operation.

In consideration for the sale of this division, we paid Authentium the sum of $4.6 million in cash, $920,000 of which was placed in escrow for distribution to Authentium in two installments during 2011, provided those funds are not needed to satisfy certain obligations. Additionally, following the conclusion of the 2011 year and based on achievement of certain revenue milestones, we will pay SafeCentral approximately $3 million in cash, or the “Earnout”, subject to adjustment upward or downward based on the performance level of the purchased OEM contracts. The fair value of the Earnout obligation as of December 31, 2010 is $ 2.8 million.

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As a result of this transaction, we are generating additional revenues and are able to sell our newly acquired antivirus services to new and existing customers.

Sales and Marketing

We utilize third party distribution channels to sell our products.  Generally, our software is provided to OEM and service provider customers, who in turn integrate the software into their product or service offerings for sale or provision of our services to their customers.  We are paid service fees under a variety of fee structures, including fixed fee and fee sharing arrangements.

Our enterprise anti-spam and Zero-Hour anti-virus gateway service, as well as CSAM service, are sold through resellers, who pay us pre-negotiated fees after each sale is closed with a reseller’s customer.

All Company sales are managed by the Company’s and its U.S. subsidiary’s business development/sales departments, each of which consists of a department head and a relatively small number of business development/sales professionals.  The Company’s marketing efforts are aimed mainly at potential OEM and service provider customers.  The marketing department is concentrated in the Company’s Israel office, though our personnel travel internationally in furtherance of the Company’s marketing goals.

Intellectual Property

We regard our patented and patent pending anti–spam and anti-virus technology, copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. During 2004, we purchased a United States patent, Patent No. 6,330,590, which we believe to be an integral part of our patent strategy aimed at protecting our proprietary anti-spam technology.  During 2005, we filed in the United States an anti-spam related patent application, claiming priority for a prior period based on the filing of U.S. Provisional Patent Application. This application remains outstanding. During 2006, we filed in the United States a patent application relating to the prevention of spam in streaming systems or, in other words, unwanted conversational media sessions (i.e. voice and video related).  This provisional application was converted to a formal patent application and, effective December 7, 2010, the United States Patent and Trademark Office split our application into three pending applications and issued us a new patent – United States Patent No. 7,849,186.  During 2008, we filed a U.S. Provisional Patent Application for anti-malware data center aggregate, the subject of which remains unpublished and thus confidential. During 2009, it too converted into a formal patent application.  We may seek to patent certain additional software or other technology in the future.

We are actively maintaining our registered trademark for "COMMTOUCH", which is registered in the U.S., Canada, Israel, European Union and China. With the acquisition of Command Antivirus, we also acquired registered trademarks in “Command Antivirus”, “Command Anti-Malware”, “Command On Demand”, “Command Interceptor”  and “Galileo”, as well as registered service marks in “Authentium” and “Authentium ESP”.  A previous registration of "PRONTO" in Canada is still in force, but we are not maintaining this registration and it will lapse in 2014. Since at least September 2003, we have claimed trademark rights in “RPD” and “Recurrent Pattern Detection”, as applicable to our messaging security solutions.  We have also been claiming trademark rights in Zero-Hour in relation to our virus outbreak detection product (and more recently one of our web security products) and GlobalView in relation to our IP reputation and Web security products, as well as our “in the cloud” network infrastructure.

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. 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.

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 by us and/or our customers of the trademarks and other intellectual property rights of third parties.  Our customer agreements typically include indemnity provisions, so we may be obligated to defend against third party intellectual property rights infringement claims on behalf of our customers.  Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

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Government Regulation

Laws aimed at curtailing the spread of spam have been adopted by the United States federal government, i.e. CAN-SPAM Act, and some individual U.S. states, with the CAN-SPAM Act superseding some state laws or certain elements thereof.  See also disclosure under “Item 3. Key Information– Risk Factors—Business Risks— “Tighter governmental enforcement of regulations could decrease the distribution of unsolicited bulk (spam) email and malicious software and decrease demand for our solutions, or increase our cost of doing business.”  Despite this legislation, we have not seen abatement in the amount of spam traffic on the Internet; rather, a continuing increase in large numbers that is being distributed in more sophisticated ways.  The continuing growth and development of the spam market may prompt calls for even more stringent Internet user protection laws that would limit the ability of companies and individuals promoting or delivering spam online, and thus potentially negatively affect our business.

The propagation of email viruses, whether through email or Web sites, which are aimed at destroying or stealing third party data, is illegal under standard state and federal law outlawing theft, misappropriation, conversion, etc., without the need for special legislation prohibiting such activities on the Internet.  Despite the existence of these laws, sources for Internet viruses continue to spread multi-variant viruses seemingly without much fear of recrimination.  New laws providing for more stringent penalties could be adopted in various jurisdictions, but it is unclear what, if any, affect these would have on the anti-virus industry in general and our Zero-Hour Virus Outbreak Detection and GlobalView URL filtering solutions in particular.

Employees

As of December 31, 2010, 2009 and 2008, we had 93, 72 and 69 employees, respectively. None of our U.S. employees are covered by a collective bargaining agreement. As of December 31, 2010, our employees were categorized as follows:

LOCATION	General & Administrative	Sales & Marketing	Research & Development	Hosting (Operations)	TOTAL:
ISRAEL OFFICE	10	19	31	-	60
U.S. OFFICE:
California	4	9	-	7	20
Florida	2	2	9	-	13

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 workday and workweek, 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 Israeli employees are subject to cost of living adjustments, based on changes in the Israeli Consumer Price Index. The amounts and frequency of such adjustments are modified from time to time.  Also, all Israeli employees employed for at least a year commencing in 2009 are entitled to the funding of pension benefits by preset monthly contributions of the employee and the employer. 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. We currently fund our ongoing severance obligations by making monthly payments for insurance policies and by an accrual. 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. We also provide certain Israeli 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 an amount equal to 7.5% of the employee’s base salary, up to a certain maximum base salary set by law.

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Description of Property

All of our facilities are leased. Our headquarters, in Netanya, Israel, is approximately 1,057 square meters, and it houses senior management, research and development, sales, marketing and administrative personnel.  Our subsidiary’s Sunnyvale, California office, which is approximately 4,527 square feet in size, houses administrative, sales and hosting (operations) personnel; its office in Florida (approximately 3,000 square feet), houses the Command Antivirus operations and research and development personnel, plus a small number of administrative and sales personnel.

Geographic Information

The Company conducts its business on the basis of one reportable segment  in accordance with Accounting Standards Codification™, or ASC, 280, "Segment Reporting".

Revenues for Last Three Financial Years

See Item 5. Operating and Financial Review and Prospects - “Revenue Sources” and the financial statements included elsewhere in this annual report. Below is a breakdown of our revenues by location (in thousands):

	Year December 31,
	2008		2009		2010
Israel	$	1,080	$	1,544	$	2,047
North America		8,018		8,032		9,184
Europe		3,160		3,776		4,454
Asia		1,497		1,508		1,976
Other		337		329		500
	$	14,092		15,189		18,161

We have had only negligible capital expenditures and divestitures in the last three financial years.

Competitive Landscape

The markets in which Commtouch competes are intensely competitive and rapidly changing. However, we believe there are very few competitors that offers the complete package of anti–spam, anti-virus (both traditional and complementary real-time offerings), IP reputation and Web security protections that Commtouch provides.

The principal competitive factors in our industry include price, product functionality, product integration, platform coverage and ability to scale, worldwide sales infrastructure and global technical support. Some of our competitors have greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition and a larger installed customer base. Additionally, some of these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with product lines we market and distribute, possibly at a lower cost.  Our success will depend on our ability to adapt to these competing forces, to develop more advanced products more rapidly and less expensively than our competitors, and to educate potential customers as to the benefits of using our products rather than developing their own products.

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In the market for messaging security solutions, there are sophisticated offerings that compete with our solutions. Email defense providers offering forms of software (gateway), multi-functional appliances and managed service solutions and which may be viewed as both competitors and potential customers to Commtouch include Symantec (Brightmail), TrendMicro, Intel (McAfee) and Cisco (IronPort).  Messaging security providers offering solutions on an OEM basis similar to Commtouch’s business model, and which may be viewed as direct competitors, include Cloudmark, Mailshell and Vade Retro.

Commtouch’s GlobalView Mail Reputation Service competes in an evolving market. This market includes some established vendors, including TrendMicro, that are offering reputation-based solutions. In some cases, while the product positioning may be new, the underlying solutions may be mature – for example, Spamhaus repositioning its RBL, or “Real-time Block List”, service as a commercial reputation service. In addition, there are several startups competing in this space, such as Karmasphere.

The market for real-time virus protection products is also constantly evolving, as those promoting the proliferation of viruses continually seek new distribution techniques. Commtouch’s real-time offering differs from traditional anti-virus solutions (such as our Command Antimalware solution) in that we offer an additional, complementary solution to signature and heuristic-based anti-virus engines. For this reason, our Zero-Hour virus outbreak protection engine has been employed by several anti-virus companies.  If virus distribution methods continue to migrate from email to other formats, there may be less of a demand for our Zero-Hour solution and more of a demand for a Web security product, such as our GlobalView URL filtering solution.

In the market for antimalware solutions, there are vendors offering fairly effective solutions using various technologies based on signatures, emulation and heuristics.  The Commtouch solution is not unique, but has an exclusive OEM/service provider focus, and an increasing focus on heuristics and zero day effectiveness. Most companies in this space provide end-user products and in some cases make software development kits available on an OEM basis.  Competitors to Commtouch include McAfee, Sophos, Kaspersky, and open source software such as Clam-AV. 

In the market for Web security solutions, there are advanced offerings that compete with our GlobalView URL filtering solution. Web security providers offering forms of software (gateway), multi-functional appliances and managed service solutions and which may be viewed as both competitors and potential customers to Commtouch include Intel (McAfee), WebSense and BlueCoat.  Web security providers offering solutions on an OEM basis similar to Commtouch’s business model, and which may be viewed as direct competitors, include Webroot (BrightCloud), Symantec (RuleSpace) and IBM (ISS/Cobion). 

We expect that the markets for Internet security solutions will continue to become more consolidated, with companies increasing their presence in this market or entering ancillary markets by acquiring or forming strategic alliances with our competitors or business partners. Some examples of this in the messaging security field are the acquisitions of IronPort by Cisco, McAfee by Intel, Brightmail by Symantec Corp., both Frontbridge and Sybari Software by Microsoft, and Bizanga by Cloudmark.  Some examples of this in the Web security field are the acquisitions of Fastdata by Cisco, SurfControl by WebSense, CipherTrust by Secure Computing, Secure Computing by McAfee, McAfee by Intel, RuleSpace by Symantec and and BrightCloud by Webtoot .

See also disclosure under “Item 3. Key Information– Risk Factors—Business Risks—We have many established competitors who are offering a multitude of solutions to the problems of spam/virus distribution and Web-related security threats.”

Item 4A.  Unresolved Staff Comments.

Not applicable

Item 5. Operating and Financial Review and Prospects.

Overview

From 2003 through 2008, the sole focus of our business had been the development and selling, through reseller and OEM distribution channels, of anti-spam, Zero-Hour virus outbreak detection and IP reputation solutions to a wide array of customers. During late 2008, we expanded our focus by way of the release of our first URL filtering solutions for the web security market. On September 3, 2010, Commtouch Inc. acquired certain assets comprising the Command Antivirus business unit of Authentium, Inc.

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Critical Accounting Policies and Estimates

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

Accounting for Stock–Based Compensation:

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

The Company recognizes compensation expense for the value of its awards on a straight line basis over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

The fair value for options granted in 2008, 2009 and 2010 is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

Revenue recognition

The Company derives revenues from Anti-Spam, Anti-virus, Zero-Hour™ Virus Outbreak Protection, GlobalView Mail Reputation, GlobalView URL filtering Services and Command Antivirus.  The service component of the Company's solutions is considered essential to the functionality of the software components. Furthermore, the software components cannot be effectively used on a standalone basis, or with a third party's service. The customer has no ability to effectively run the software or the Software Development Kit ("SDK") on its own hardware. As the software portion of the product cannot effectively stand on its own, the Company considers each sale as a service arrangement.

Therefore, revenues from such services are recognized over the service term, which generally includes a term period of one to three years.

Revenue is recognized in accordance with ASC 605, "Revenue Recognition", when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collectability is probable.

Deferred revenues include unearned amounts received from customers, but not yet recognized as revenues.

Commitments and Contingencies

Commtouch periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called “contingencies”, and Commtouch’s accounting for such events is prescribed by ASC 450 “Contingencies” ("ASC 450 "). ASC 450 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”

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ASC 450 does not permit the accrual of gain contingencies under any circumstances. For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and (2) that the amount of the loss can be reasonably estimated.

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

Goodwill

Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350 (formerly SFAS No. 142), "Intangibles - Goodwill and Other",  goodwill acquired in a business combination should not be amortized. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is allocated to one reporting unit and fair values are determined using market capitalization. In 2010, no impairment losses were identified.

Revenue Sources

We recognize revenues from anti-spam, antivirus,  Zero-Hour virus outbreak detection, GlobalView Reputation and URL filtering/Web security services. Revenues from these services are recognized when persuasive evidence of an arrangement exists, services are provided, the fee is fixed or determinable and collectability is probable. Revenues derived from these services are recognized ratably over the life of the service period.

Results of Operations

The following table sets forth financial data for the years ended December 31, 2008, 2009 and 2010 (in thousands):

	2008		2009			2010
Revenues	$	14,092	$	15,189		$	18,161
Cost of revenues		1,828		2,260			2,918
Gross profit		12,264		12,929			15,243
Operating expenses:
Research and development, net		3,152		2,958			3,397
Sales and marketing		3,992		4,212			4,575
General and administrative		3,189		3,063			3,911
Total operating expenses		10,333		10,233			11,883
Operating income		1,931		2,696			3,360
Financial income (expenses), net		346		60			(55	)
Net income before taxes on income (tax benefit)		2,277		2,756			3,305
Taxes on income (tax benefit)		7		(2,404	)		(1,098	)
Net income attributable to ordinary and equivalently participating shareholders	$	2,270	$	5,160		$	4,403

Comparison of Years Ended December 31, 2010 and 2009

Revenues. Revenues increased by $3.0 million from $15.2 million in 2009 to $18.2 million in 2010.  The increase is mainly due to a growth in market share, especially in the Asian market, increase in sales derived from our Web security product launched in the fourth quarter of 2008 and sales of the Antivirus product following the purchase of Command Antivirus on September 2010.

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Cost of Revenues. Cost of revenues increased by $0.6 million from $2.3 million in 2009 to $2.9 million in 2010. The increase in 2010 is mainly due to higher facility costs and hosting expenses aimed to serve the increasing number of customers and the Command Antivirus expenses fully consolidated into Commtouch.

Research and Development, net. Research and development expenses increased by 15% and amounted to $3.4 million in 2010 compared to $3.0 million in 2009. The increase is mainly due to the related Command Antivirus expenses being fully consolidated into Commtouch from September 2010 and an increase due to recruitment of additional employees to support the company’s efforts to develop new products. However, this increase was offset by an OCS grant in 2010, which reduced our payroll cost by $0.8 million compared to only $0.3 million in 2009.  Research and development expenses include $0.3 million of expenses in connection with equity based compensation.

Sales and Marketing. Sales and marketing expenses increased by 9% and amounted to $4.6 million compared to $4.2 million in 2009. The increase is mainly due to recruitment of employees, increased sales and marketing activity and the related Command Antivirus expenses fully being consolidated into Commtouch from September 2010. Sales and marketing expenses included $0.4 million expenses in connection with ASC 718.

General and Administrative. General and administrative expenses increased by 28%, from $3.1 million in 2009 to $3.9 million in 2010. The increase is mainly due to  expenses incurred  in connection with the acquisition of Command Antivirus. In 2010, general and administrative expenses included $0.7 million expenses in connection with equity based compensation.

Financial Income (Expenses), Net. Financial income (expenses), net, resulted in expenses of  $0.1 million in 2010 compared to income of $0.1 million in 2009.  The decrease is primarily due to a decrease in interest income in the Company's cash deposits and exchange differences derived from the devaluation of the US dollar against the NIS.

Taxes on income (tax benefit). In 2009, a deferred tax asset in the amount of $2.4 million in respect of loss carry forwards and other temporarydifferences was created in respect of forecasted taxable income that is more likely than not to be realized in the foreseeable future, based on our established pattern of profitability in the last few years. In 2010, the deferred tax asset increased by $1.1 million due to an increase in forecasted taxable income more likely than not to be realized in the foreseeable future.

Comparison of Years Ended December 31, 2009 and 2008

Revenues. Revenues increased by $1.1 million from $14.1 million in 2008 to $15.2 million in 2009.  The increase is mainly due to a growth in market share, especially in the international (non-U.S.) markets and due to sales derived from our Web security product launched in the fourth quarter of 2008. The number of parties we signed OEM agreements with increased by 29 in 2009 and amounted to 135 as of December 31, 2009, 18 of which are in respect of our Web security products.

Cost of Revenues. Cost of revenues increased by $0.5 million from $1.8 million in 2008 to $2.3 million in 2009. The increase in 2009 is mainly due to higher facility costs and hosting expenses following the opening of a fifth data center in the U.S.  aimed to serve the increasing number of customers.

Research and Development, net. Research and development expenses decreased by 6% and amounted to $3.0 million in 2009 compared to $3.2 million in 2008. The decrease is mainly due to approval of a $0.5 million OCS grant, which reduced our payroll cost in $0.3 million during 2009; however, this decrease was offset by an increase due to recruitment of additional employees to support the company’s efforts to develop new products. Research and development expenses in 2009 include $0.3 million of expenses in connection with ASC 718.

Sales and Marketing. Sales and marketing expenses increased by 6% and amounted to $4.2 million compared to $4.0 million in 2008. The increase is mainly due to recruitment of employees and increased selling and marketing activity. In 2009, sales and marketing expenses included $0.3 million expenses in connection with ASC 718.

General and Administrative. General and administrative expenses decreased by 4% from $3.2 million in 2008 to $3.1 million in 2009. The decrease is mainly due to a decrease in expenses related to ASC 718. In 2009, general and administrative expenses included $0.7 million expenses in connection with ASC 718.

Financial Income (Expenses), Net. Financial income (expenses), net, decreased by 83% from income of $0.3 million in 2008 to income of $60,000 in 2009.  The decrease is primarily due to less interest income derived from declining interest rates throughout 2009 earned on the company's cash deposits.

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Taxes on income (tax benefit). In 2009, a deferred tax asset in the amount of $2.4 million in respect of loss carry forwards and other temporarydifferences was created in respect of forecasted taxable income that is more likely than not to be realized in the foreseeable future, based on our established pattern of profitability in the last few years.

Quarterly Results of Operations (Unaudited)

The following table sets forth certain unaudited quarterly statements of operations data for the eight quarters ended December 31, 2010. This information has been derived from the Company’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 report. The operating results for any quarter are not necessarily indicative of the operating results for any future period.

Three Months Ended

	Mar 31			June 30		Sep. 30		Dec. 31			Mar 31			June 30			Sep. 30			Dec. 31
	2009			2009		2009		2009			2010			2010			2010			2010
(in thousands)
(unaudited)
Revenues		3,543			3,733		3,899		4,014			4,079			4,104			4,601			5,377
Cost of revenues		513			516		596		635			609			652			753			904
Gross profit		3,030			3,217		3,303		3,379			3,470			3,452			3,848			4,473
Operating expenses:
Research and development, net		786			765		806		601			810			561			824			1,202
Sales and marketing		998			1,022		1,025		1,167			1,062			1,024			1,100			1,389
General and administrative		732			746		772		813			792			873			1,054			1,192
Total operating expenses		2,516			2,533		2,603		2,581			2,664			2,458			2,978			2,978
Operating income		514			684		700		798			806			994			870			690
Financial income(expenses), net		(78	)		12		149		(23	)		(50	)		(12	)		59			(52	)
Net income		436			696		849		775			407			982			929			638
Taxes on income (tax benefit)		-			-		-		(2,404	)		(38	)		97			(128	)		(1,029	)
Net income attributable to ordinary and equivalently participating shareholders		436			696		849		3,179			794			885			1,057			1,667
Basic
Net income per share	$	0.02		$	0.03	$	0.03	$	0.13		$	0.03		$	0.04		$	0.05		$	0.07
Diluted net income per share	$	0.02		$	0.03	$	0.03	$	0.13		$	0.03		$	0.04		$	0.05		$	0.07

New Accounting Pronouncements

ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. These amendments establish a selling price hierarchy for determining the selling price of a deliverable, which is based on: a) vendor-specific objective evidence; b) third-party evidence; or c) estimates. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company has not early adopted the guidance. Management believes that the adoption of the new guidance will not have a material impact on its consolidated financial statements.

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ASU 2010-06 - In January 2010, the FASB updated the "Fair Value Measurements Disclosures" codified in ASC 820. More specifically, this update require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to the Company, this update became effective as of the first quarter ended December 31, 2010, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting of December 31, 2010. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

Liquidity and Capital Resources

We have financed our operations from positive operating cash flows, the issuance of equity securities and, to a lesser extent, from research and development grants from the Israeli government.

As of December 31, 2009 and December 31, 2010, we had approximately $17.3 million and $13.4 million of cash and cash equivalents, respectively. The decrease was mainly due to the purchase of the Command Antivirus business unit in the amount of $4.6 million and $3.8 million expended in our Ordinary Share buyback plan (see discussion under Item 16E. “Purchases of Equity Securities by the Issuer and Affiliated Purchasers”), offset by positive operating cash flow of $4.3 million and receipt of proceeds from the exercise of warrants and options in the amount of $0.8 million.

In 2010, net cash provided by operating activities was approximately $4.3 million. Net cash used in financing activities in 2010 was approximately $3.0 million, net of the share buyback activity. Net cash provided by investing activities in 2010 was $5.1 million and consisted primarily of the purchase of the Command Antivirus business unit in the amount of $4.6 million and purchase of property and equipment in the amount of $0.6 million. As of December 31, 2009 and December 31, 2010, we had working capital of $16.9 million and $13.6 million, respectively.

Based on the cash balance at December 31, 2010, current projections of revenues and related expenses, the Company believes it has sufficient cash to continue operations at least through May 2012.

Contractual obligations

The following table summarizes our outstanding contractual obligations as of December 31, 2010 (in thousands):

Contractual Obligation	Payments due by period (USD in thousands)
	Total			Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligation	$	791		$	501	$	290	$	-	$	-
Other Long-term liabilities reflected on the Company’s Balance Sheet - Accrued severance pay		1,303			-		-		-		1,303
Other Long-term asset reflected on the Company’s Balance Sheet - severance pay fund		(1,208	)		-		-		-		(1,208	)
Net - severance pay liability		95			-		-		-		95
Earnout obligation		2,831			-		2,831-		-		-
Total	$	3,717		$	501	$	3,121	$	-	$	95

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Effective Corporate Tax Rates

The Company is subject to company tax on its taxable income. The applicable rate was 29% in 2007, 27% in 2008 and 26% in 2009, is 25% in 2010, and is scheduled to decline to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.

As of December 31, 2010, the Company's net operating loss carry forwards for tax purposes amounted to approximately $ 80 million (including capital loss carry forward of $ 16 million), which may be carried forward and offset against taxable income in the future, for an indefinite period.

As of December 31, 2010, for federal income tax purposes, the U.S. subsidiary had net operating loss carry-forwards of approximately $ 90 million. These losses may offset any future U.S. taxable income of the U.S. subsidiary and will expire in the years 2012 through 2025.

Utilization of U.S. net operating losses may be subject to substantial annual limitation due to a "change in ownership" under provisions of the Internal Revenue Code of 1986 and similar state provisions.  Such limitation might result in the loss of some or all of our U.S. net operating losses.

Impact of Inflation and Currency Fluctuations

Most of our sales are in U.S. dollars, and the rest are mainly in Euros. However, a portion of our costs relate to our operations in Israel. A substantial portion of our operating expenses in Israel, primarily our research and development expenses are denominated in NIS. Costs and revenues not denominated in U.S. dollars are re-measured to U.S. dollars, when recorded, at prevailing rates of exchange. This is done for the purposes of our financial statements and reporting. As a result, we are exposed to risk to the extent that the value of the U.S. dollar decreases against the NIS.  In that event, the U.S. dollar cost of our operations will increase and our U.S. dollar-measured results of operations will be adversely affected, as occurred in the first half of 2008, when the NIS appreciated against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our operations.  Also, in the event that the U.S. dollar appreciates against the Euro, our revenues will decrease. Consequently, we are and will be affected by changes in the prevailing NIS/U.S. dollar and Euro/ U.S. dollar exchange rates.

The annual rate of inflation in Israel was 2.7% in 2010, 3.9% in 2009 and 3.8% in 2008 The NIS appreciated against the U.S. dollar by approximately (6.0%) in 2010 and (0.7%) in 2009 and (1.1%) in 2008. The representative dollar exchange rate for converting the NIS to U.S. dollars, as reported by the Bank of Israel, was NIS 3.549for one U.S. dollar on December 31, 2010. The representative dollar exchange rate was NIS 3.538 at May 16, 2011. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our operating results and period–to–period comparisons of our results. The effects of foreign currency re–measurements are reported in the consolidated financial statements for relevant periods in the statement of operations.

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Item 6. Directors, Senior Management and Employees

The following table presents information with respect to our directors’ beneficial ownership of our Ordinary Shares as of April 30, 2011.  Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power, with respect to shares. To our knowledge, except under applicable community property laws or as otherwise indicated, the persons named in the table have sole voting and sole investment control and rights to receive economic benefits with respect to all shares beneficially owned. The applicable percentage of ownership for each director is based on 23,511,636 Ordinary Shares outstanding as of April 30, 2011. Ordinary Shares issuable upon exercise of options and other rights held and exercisable on or within sixty days of April 30, 2011 are deemed outstanding for the purpose of computing the percentage ownership of the director holding those options and other rights.

Name and Position	Age	Ordinary Share Beneficial Ownership >1%	Number of Ordinary Shares Beneficially Owned	Number of Options and Warrants included in Beneficial Ownership
Lior Samuelson, Director and Chairman of the Board	61	<1%
Amir Lev, Director, President and CTO	51	3.8%	924,087	762,936 options, at exercise prices ranging from $0.36 to $6.60 per Ordinary Share.  Expiration dates range from 12/30/11 to 8/4/15
Aviv Raiz, Director (1)	52	23.7%	5,590,863	104,994 options, at exercise prices ranging from $1.58 to $6.60 per Ordinary Share.  Expiration dates range from 12/30/11 to 12/15/16.
Hila Karah, Director(1)(3)	42	<1%
Lloyd E. Shefsky, Director(2)(3)	70	<1%
Yair Shamir, Director (Outside Director) (2)(3)(4)	66	5.6%	1,325,267	61,244 options, at exercise prices ranging from $1.58 to $4.10.  Expiration dates range from 3/31/14 to 12/15/16
Yair Bar-Touv, Director (Outside Director) (1)(2)	50	<1%

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

(3) Member of the Nominating Committee

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(4) Mr. Shamir’s ownership interest includes 1,264,023 Ordinary Shares purchased by Catalyst Private Equity Partners II, for which Mr. Shamir acts as Chairman and Managing Partner.  Mr. Shamir’s options, as noted in the table above, are also held on behalf of Catalyst.

Gideon Mantel, our longtime CEO (Chairman and co-founder, as well) retired from the Company at the end of 2010.

Other Senior Management Employees:

The following table sets forth the names and positions of our senior management employees, with ownership data being as of April 30, 2011:

Name	Age	Ownership>1%	Position
Ido Hadari	37	(1)	Chief ExecutiveOfficer
Amir Lev	51	See table above	President and Chief Technology Officer
Ron Ela	40	(1)	Chief Financial Officer
Gary Davis	49	(1)	Vice President, General Counsel and Corporate Secretary
Amos Arev	44	(1)	Vice President, Research & Development Commtouch Software Ltd.
Francois Depayras	37	(1)	Vice President, Americas Sales and Business Development, Commtouch Inc.
Ofer Tal	41	(1)	Vice President, International Sales and Business Development, Commtouch Software Ltd.
Yossi Maslaton	43	(1)	Vice President, Network Operations & Customer Services, Commtouch Inc.
Asaf Greiner	37	(1)	Vice President, Products, Commtouch Software Ltd.
Rebecca Herson	40	(1)	Vice President, Marketing, Commtouch Software Ltd.
Gabriel Mizrahi	36	(1)	Vice President, Technologies, Commtouch Software Ltd.
Helmuth Freericks	57	(1)	General Manager Anti-Malware Solutions, Commtouch Inc.
Michael Myshrall	41	(1)	Vice President, Corporate Development, Commtouch Inc.

(1) less than 1%

Lior Samuelson has been a member of the Board since August 2010 and Chairman since December 2010.  Mr. Samuelson is the founder and managing partner of Mercator Capital, a merchant bank specializing in advising and investing in the technology and telecom sectors. During his extensive career, Mr. Samuelson served as chairman, CEO and board member of several companies in technology, telecom, financial services and management consulting.  In 2008, he was the chairman of Deltathree (DDDC); from 1997 to 1999, he was the president and CEO of PricewaterhouseCoopers Securities. Prior to that, he was the president and CEO of The Barents Group, a merchant bank specializing in advising and investing in companies in emerging markets. He previously was a managing partner with KPMG and held a senior management position at Booz, Allen & Hamilton. Mr. Samuelson earned B.S. and M.S. degrees in Economics from Virginia Tech.

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 was also the General Manager of Commtouch from January 1997 through April 2000, and in May 2000 became President. Mr. Lev received a B.A. in Computer Science and Economics from Hebrew University, Jerusalem.

Aviv Raizhas served as a Director since December 2005.  He is the founder and President of Eurotrust Ltd.  Mr. Raiz has been active in the foreign exchange markets for the past twenty years, and has been a private equity investor in several high-tech, bio-tech and Internet companies for the past ten years.He holds an M.B.A. from Tel Aviv University.

Hila Karah joined the Board of Directors in March 2008. Ms. Karah has been the CIO of Eurotrust Ltd. since 2006, and has been a private and public equity investor in several high-tech, bio-tech and Internet companies since 2000. Prior to her joining Eurotrust, she served as a partner financial analyst at Perceptive Life Sciences Ltd., a New York-based hedge fund. Prior to her position at Perceptive, Ms. Karah was a research analyst at Oracle Partners Ltd., a health care-focused hedge fund based in Connecticut. Ms. Karah holds a BA in Molecular and Cell Biology from the University of California, Berkeley, and has studied at the UCB-UCSF JMP.

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Lloyd E. Shefskyhas served as a Director of Commtouch since October 2003.  He is a Clinical Professor of Entrepreneurship and Co-Director of the Center for Family Enterprises at the Kellogg School of Management and has taught in several countries. In 1970, he founded the Chicago law firm, Shefsky & Froelich Ltd., where has been Of Counsel since 1996. Since 1981 he has represented the Government of Israel throughout the Midwestern U.S. For nearly forty years he has represented hundreds of entrepreneurs and their companies, and during the past twenty-five years, such representation has included numerous Israeli companies with U.S. operations.  Mr. Shefsky authored Entrepreneurs Are Made Not Born, which was translated into five foreign languages. He received his J.D. from the University of Chicago Law School, a B.S.C. from De Paul University (accounting), is a member of the Illinois and Florida Bars, and has a CPA certificate in Illinois.

Yair Shamir joined the Board of Directors as an Outside Director under the Israel Companies Law in March 2008.  Mr. Shamir is the Chairman and Managing Partner of Catalyst Investments and the Chairman of IAI, Israeli Aerospace Industries.  From 2004 to 2005, Mr. Shamir was Chairman of El Al, Israeli Airlines and lead the privatization process of the firm.  From 1997 to 2005, Mr. Shamir served as Chairman and CEO of VCON Telecommunications Ltd.  From 1995 to 1997, Mr. Shamir served as executive vice president of the Challenge Fund-Etgar L.P.  From 1994 to 1995, he served as Chief Executive Officer of Elite Food Industries, Ltd.  From 1988 to 1993, Mr. Shamir served as Executive Vice President and General Manager of Scitex Corporation, Ltd. Mr. Shamir served in the Israeli Air Force as a pilot and commander from 1963 to 1988. During his term in the Air Force, Mr. Shamir attained the rank of colonel and served as head of the electronics department, the highest professional electronics position within the Air Force.  He currently serves as a director of DSP Group Corporation and also serves as director of other private hi-tech companies.  Mr. Shamir holds a B.Sc. Electronics Engineering from the Technion, Israel Institute of Technology.

Yair Bar-Touv joined the Board of Directors as an Outside Director under the Israel Companies Law in March 2008.  Mr. Bar-Touv is formerly the CIO of a leading government enterprise specializing in analytic software solutions for knowledge discovery (text and data mining) of large volumes of data, with a focus on changing the ways enterprise organizations make decisions with regards to primary business processes.  Mr. Bar-Touv is also the former CEO of Elron Telesoft  and co-CEO of NCC, a leading Systems Integrator operating in Israel and the USA, which was acquired in 1997 by Elron Electronics.  Mr. Bar-Touv holds an M.Sc in Computer Engineering from the Technion Institute of Technology (1987) and a B.Sc in Electronic Engineering from Ben-Gurion University (1981).

Ido Hadari became the CEO of Commtouch in January 2011.  He joined Commtouch in 2008, as Vice President, International Sales and Business Development and from November 2009 through December 2010 he served as Chief Operating Officer. Mr. Hadari has over a decade of business management and sales experience.  Prior to Commtouch, he worked for eight years at Interwise, an enterprise voice and web conferencing provider that was acquired by AT&T, where he held various senior business development and channel management positions with responsibilities for regional sales in Europe and Asia, and global strategic alliances. He holds a BA magna cum laude in Business Administration and Economics from Hebrew University, Jerusalem.

Ron Ela joined Commtouch in July 2006 as its Chief Financial Officer. A Certified Public Accountant, Mr. Ela formerly held management positions at two Israeli-based NASDAQ listed companies, and most recently held the role of Controller at Verint Systems Ltd., a wholly–owned subsidiary of Verint Systems Inc. During the five years prior to that time, Mr. Ela served as Deputy Controller and subsequently Controller for Partner Communication Ltd. Also, Mr. Ela spent 3 years in public accounting with Kesselman & Kesselman, a member of PricewaterhouseCoopers in Israel. Mr. Ela has a B.A. in business administration majoring in accounting from the College of Management Academic Studies.

Gary Davis joined Commtouch in September 1999 and serves as Vice President, General Counsel and Corporate Secretary. Mr. Davis has over 25 years of legal experience in both private law firm and corporate practices. Mr. Davis is certified to practice law in both the State of Israel and California. Prior to September 1999, Mr. Davis was in–house counsel to Israel Military Industries and Elta Electronics Industries. He received a B.A. in Political Economy of Industrial Societies from U.C. Berkeley and a J.D. in law from Golden Gate University.

Francois Depayras re-joined Commtouch in 2010 as Vice President, Americas Sales and Business Development. Mr. Depayras has over a decade of experience in the messaging market, from leadership roles at Critical Path and Ensim as well as his prior affiliation with Commtouch. At Critical Path, Mr. Depayras served as Senior Product Manager, responsible for the development of a hosted email solution targeting large enterprises. He then served as Vice President of Sales and Alliances at Ensim, where he was responsible for managing worldwide sales of user provisioning software solutions targeting both service providers and enterprises, and managed relationships with strategic partners. Prior to these positions, Mr. Depayras worked at Commtouch for four years in a variety of roles, his last post being Director of Business Development. He holds an MBA from San Francisco State University.

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Ofer Tal joined Commtouch in 2009 as Vice President, International Sales & Business Development. Mr. Tal is an experienced business development & sales executive with nearly a decade of global experience in technology solutions across EMEA. Most recently prior to Commtouch, he served as Senior Director of Channel Sales and then Director of Sales, SEMEA at GigaSpaces Technologies. Prior to GigaSpaces, he held various senior business development and sales positions at Interwise, an enterprise voice and web conferencing provider that was acquired by AT&T.  He holds an LL.B from the University of Tel Aviv School of Law.

Yossi Maslaton joined Commtouch in 1998 and has served as Vice President of Network Operations and Customer Services since early 2005.  Before 2005 he was Director of Service Operations.  With over 20 years of experience in the fields of Information Technology and Networking, Mr. Maslaton is responsible for the operations of Commtouch's data centers and customer services, servicing tens of millions of users daily with the highest standards of uptime.  From 1991 to 1998 Mr. Maslaton was Manager of Information Systems and labs for RND Networks, a group of hi-tech startups in the network-routing field.  Prior to that, Mr. Maslaton managed the technical field-operations of a large project for the Israel Defense Forces in the areas of distributed computing systems and radio communications.

Asaf Greiner joined Commtouch in 2008 and serves as Vice President, Products. Mr. Greiner has over a decade of experience in executive and entrepreneurial roles, previously serving as Director of Business Innovation at Aladdin Knowledge Systems, a company specializing in software and Internet security. Previously he co-founded and acted as general manager of beeFENCE, a network security company, and Aduva, a Linux lifecycle management company that was acquired by SUN Microsystems. He holds an MBA summa cum laude from The Interdisciplinary Center, Herzliya and a BA in Business and Economics from Hebrew University, Jerusalem.

Rebecca Steinberg Herson joined Commtouch in April 2006 as Director of Marketing. Currently, she serves as Vice President, Marketing, orchestrating the company's global marketing strategy and activities. Prior to joining Commtouch, Ms. Herson served as Vice President of Marketing at Redmatch, a software start-up. Previously, she led marketing initiatives at Whale Communications (acquired in 2006 by Microsoft), Orckit Communications (NASDAQ: ORCT) and at various not-for-profit organizations. As the head of marketing for six years at Whale, an Internet security company, she was responsible for launching numerous hardware/software products and held a key role in establishing the company as a market leader in the secure remote access field. Ms. Herson holds a BA magna cum laude from Yale University, and an MS in Management from Boston University.

Gabriel Mizrahi joined Commtouch in 2008 and serves as Vice President,Technologies. Prior to Commtouch, Mr. Mizrahi co-founded and served as CTO of PineApp, a global messaging and Web security company that utilizes Commtouch’s technology. Prior to PineApp, Mr. Mizrahi was a Project Manager in a large integration company, where he led Unix and Linux projects in the field of Internet Security & Networking. He has extensive technical knowledge and experience in tailor-made solutions and complex technology integration, and received a prestigious award from the Chief of Electronics and Computers of the Israel Defense Force for designing, developing and implementing a logistics and technical management system. Mr. Mizrahi holds a technical degree in electronics from Ort College.

Helmuth Freericks joined Commtouch in September 2010 with the acquisition of the Command division of Authentium, Inc, and serves as General Manager Anti-Malware Solutions.  Mr. Freericks is an industry pioneer in the anti-malware field, having co-founded one of the earliest antivirus companies – Command Software —  in 1984, long before computers were ubiquitous, and before computer viruses were a household concept. At Command, Mr. Freericks served in various executive roles over the years, starting as Vice President of Research and Development and Chief Technology Officer, and finally as CEO before the company was acquired by Authentium in 2002. While at Authentium, he served as CEO of Global Risc, an Authentium subsidiary, and later as CTO and then Chief Science officer at Authentium.

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Amos Arev joined Commtouch in April 2011 as Vice President of Research & Development. Mr. Arev has over 20 years of software development management experience and has spent over half of his career specializing in IT security. Prior to joining Commtouch, Mr. Arev was VP R&D of Skybox Security, a provider of automated security risk management solutions. Prior to Skybox Security, Mr. Arev held several R&D management positions at Check Point Software and at Comverse Network Systems. Mr. Arev holds a Master of Science in Electrical Engineering from Tel-Aviv University and a Bachelor of Science in Electrical Engineering from the Technion, Israel Institute of Technology, both cum laude.

Michael Myshrall joined Commtouch in January 2011 as Vice President, Corporate Development. He brings to Commtouch two decades of investment banking, business development and technology experience. Prior to joining Commtouch, he focused on technology strategy, financial advisory and mergers and acquisitions, first with Mercator Capital and more recently with Trilos Ventures. Mr. Myshrall previously held various roles in business development, marketing, and engineering within companies such as Nortel, Newbridge Networks, Corvis, and Civcom.  Mr. Myshrall holds a degree in Electrical Engineering from the University of New Brunswick and an MBA from Harvard Business School.

Election of Directors

Directors (other than outside directors, as explained below) are elected by shareholders at the annual general meeting of the shareholders and hold office until the next annual general meeting following the general meeting at which such director is elected and until a successor is elected, or until the director is removed. An annual general meeting must be held at least once in every calendar year, but not more than fifteen months after the preceding annual 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. Until a vacancy is filled by the shareholders, the Board of Directors may appoint new directors temporarily to fill vacancies on the Board of Directors. The Amended and Restated Articles of Association of Commtouch authorize the shareholders to determine, from time to time, the number of directors. The maximum number of directors is currently fixed at ten directors, though only seven directors are currently serving on the Board of Directors. There are no family relationships among any of the directors, officers or key employees of Commtouch.

Alternate Directors

The Amended and Restated 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, the alternate may not in turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides) and the alternate is not entitled to remuneration. A person who is not qualified to be appointed as a director may not be appointed as an alternate director. 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.

Chairman of the Board

Under the Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Companies Law.  In any event, the shareholder vote cannot authorize the appointment for a period longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote.  The chairman of the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the general manager.

Independent and Outside Directors

The Israel Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least two outside directors. No person may be appointed as an outside director if the person or the person’s relative, partner, employer or any entity under the person’s control has or had, on or within the two years preceding the date of the person’s appointment to serve as outside director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term affiliation includes:

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• an employment relationship;

• a business or professional relationship maintained on a regular basis;

• control; and

• service as an office holder.

No person may serve as an outside director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an outside director or may otherwise interfere with the person’s ability to serve as an outside director. If, at the time outside directors are to be appointed, all current members of the Board of Directors are of the same gender, then at least one outside director must be of the other gender.  At least one of the outside directors is required to have "financial and accounting expertise," unless another member of the audit committee, who is an independent director under the NASDAQ Listing Rules, has "financial and accounting expertise," and the other outside director or directors are required to have "professional expertise," all as defined under the Israel Companies Law.

Outside directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:

• such majority includes a majority of the shares held by non–controlling shareholders and shareholders who have no personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the controlling shareholders) who are present and voting at the meeting; or

• the total number of shares held by non–controlling shareholders and disinterested shareholders voting against the election of the director at the meeting does not exceed two percent of the aggregate voting rights in the company.

The initial term of an outside director is three years and may be extended for an additional period of three years. Outside directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the outside director ceases to meet the statutory qualifications for their appointment or if they violate their fiduciary duty to the company. Each committee of a company’s Board of Directors must include at least one outside director and the audit committee (the existence of which is required under the Israel Companies Law) must include all outside directors. An outside director is entitled to compensation as provided in the regulations adopted under the Israel Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an outside director.

Mr. Shamir and Mr. Bar-Touv currently serve as the Company’s outside directors.

In addition, the NASDAQ Listing Rules currently require Commtouch to have at least a majority of independent directors, as defined under Listing Rule 5605(a)(2), on the Board of Directors and to maintain an audit committee of at least three members, each of whom must:

(i) be independent as defined under Listing Rule 5605(a)(2);

(ii) meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended, or “Exchange Act”, as set forth below (subject to the exemptions provided in Exchange Act Rule 10A-3(c));

(iii) not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years; and

(iv) be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.

Under limited circumstances, the Company may have one audit committee member not independent in accordance with the above, but such a member would only be able to serve for a maximum of two years.

Exchange Act Rule 10A-3(b)(1) requires that members of the audit committee meet that rule’s definition of independence, which requires that an audit committee member may not, except in his or her capacity as a director or committee member, (i) accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any of its subsidiaries (except for fixed amounts of compensation under a retirement plan for prior service with the Company, provided that such compensation is not contingent in any way on continued service), and (ii) be an “affiliated person” of the Company or any of its subsidiaries.

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NASDAQ rules also require that the Company certify that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight  responsibilities.  Also, the Company is required to disclose whether or not it has an “audit committee financial expert” on its audit committee, as defined under Item 16A to Form 20-F.

The three directors who serve on our audit committee, Mr. Shamir, Mr. Bar-Touv and Mr. Shefsky, qualify as independent directors under NASDAQ Listing Rules (including Exchange Act Rule 10A-3). Furthermore, Mr. Shamir and Mr. Bar-Touv meet the qualification requirements for outside directors, as required under the Israel Companies Law.

The Company has identified the following Board members as “Independent directors” pursuant to NASDAQ Listing Rule 5605(a)(2):

a. Yair Bar-Touv

b. Yair Shamir

c. Aviv Raiz

d. Hila Karah

e. Lloyd Shefsky

Pursuant to the Israeli Companies Law, an Israeli company, whose shares are publicly traded, may elect to adopt a provision in its articles of association pursuant to which a majority of its board of directors (or a third of its Board of Directors in case the company has a controlling shareholder) will constitute individuals complying with certain independence criteria prescribed by the Israel Companies Law, as well as certain other recommended corporate governance provisions.  We have not included such a provision in our articles of association since our board of directors complies with the independence requirements of the NASDAQ and Securities and Exchange Commission regulations described above.

Audit Committee

As noted above in the discussion under “Independent and Outside Directors”, the Israel Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the Company’s business (including through consultations with the internal auditor and independent accountant), approving management compensation, reviewing, classifying and approving related party transactions and extraordinary transactions as required by law, reviewing the internal auditor's audit plan and establishing and monitoring whistleblower procedures). An audit committee must consist of at least three directors meeting the independence standards under the NASDAQ Listing Rules and must include all outside directors under the Israel Companies Law, all as described above. One of the outside directors must serve as the chair of the audit committee.  Furthermore, under the Israel Companies Law, the audit committee may not include the chairman of the board, or any director employed by the Company, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder.  Under the Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and in addition a majority of the attending committee members are independent directors within the meaning of the Companies Law and include at least one outside director.  Individuals who are not permitted to be audit committee members may not participate in the committee's meetings other than to make a presentation regarding a particular issue.  However, an employee who is not a controlling shareholder or relative may participate in the committee's discussions but not in any vote, and the company's legal counsel and corporate secretary may participate in the committee's discussions and votes if requested by the committee.

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Compensation Committee

The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for Commtouch’s directors and its executive officers.  The Compensation Committee is also responsible for administering the various stock option plans, including the issuance of grants of options to employees of the Company and its subsidiary.

Nominating Committee

The committee’s responsibilities include identifying individuals qualified to become board members and recommending director nominees to the board.

Investment Committee

The committee’s responsibilities include identifying appropriate investment vehicles for the cash reserves of the Company and recommending to the board appropriate investment policy from time to time.  As of the date of filing of this annual report, the committee had not yet been reconstituted.

Internal Auditor

Under the Israel Companies Law, the Board of Directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether a company’s actions comply with relevant law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an interested party or office holder, or a relative of an interested party or office holder, and he or she may not be the company’s independent accountant or its representative

Approval of Certain Transactions; Obligations of Directors, Officers and Shareholders

The Israel Companies Law codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. Each person listed in the first table that appears above at the beginning of this Item 6 is an office holder.

The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, including to avoid any conflict of interest between the office holder’s position in the company and such person’s personal affairs, avoiding any competition with the company, avoiding exploiting any corporate opportunity of the company in order to receive personal advantage for such person or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his or her position as an office holder. A company may approve any of the acts mentioned above provided that all the following conditions apply: the office holder acted in good faith and neither the act nor the approval of the act prejudices the good of the company, and the office holder disclosed the essence of his personal interest in the act, including any substantial fact or document, a reasonable time before the date for discussion of the approval.  A director is required to exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director.  A violation of these requirements is deemed a breach of the director's duty of loyalty.

The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances.  This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information material to these actions.

Under the Israel Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the audit committee and the Board of Directors. The approval of the compensation committee may be substituted for the approval of the audit committee, provided the compensation committee complies with all the requirements prescribed by the Companies Law regarding composition of the audit committee.  If the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director, the approval of the audit committee without Board approval is sufficient.  Arrangements regarding the compensation of directors require audit committee, Board of Directors and shareholder approval.

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The Israel Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. "Personal interest," as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporation in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager, and includes shares for which the person has the right to vote pursuant to a power-of-attorney.  "Personal interest" does not apply to a personal interest stemming merely from holding shares in the company.

The office holder must make the disclosure of his personal interest no later than the first meeting of the company's board of directors that discusses the particular transaction.  This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an "extraordinary transaction."  An “extraordinary transaction” is defined as a transaction not in the ordinary course of business, a transaction that is not on market terms, or a transaction that is likely to have a material impact on the company’s profitability, assets or liabilities, and a "relative" as a spouse, sibling, parent, grandparent or descendant, and the sibling, parent or descendant of a spouse, as well as the spouse of any of the foregoing.

In the case of a transaction that is not an extraordinary transaction and that does not relate to compensation or terms of employment, after the office holder complies with the above disclosure requirement, only Board approval is required unless the Articles of Association of the company provide otherwise.  Our Amended and Restated Articles of Association do not provide otherwise.  Such approval must determine that the transaction is not adverse to the company’s interest. If the transaction is an extraordinary transaction, then in addition to any approval required by the Articles of Association, it also must be approved by the audit committee and by the Board and, under specified circumstances, by a meeting of the shareholders. An office holder who has a personal interest in a matter that is considered at a meeting of the Board of Directors or the audit committee generally may not be present at this meeting or vote on this matter unless a majority of the board of directors or the audit committee has a personal interest in the matter, or if such person is invited by the Chairman of the Board of Directors or audit committee, as applicable, to present the matter being considered.  If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.

The Israel Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions, including a private placement with a controlling shareholder or in which a controlling shareholder has a personal interest (including for the provision of services to the company through a company controlled by a controlling shareholder), and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the Board of Directors and the shareholders of the company. The shareholder approval must either include a majority of the non-controlling and disinterested shareholders who are present, in person or by proxy, at the meeting or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company.Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern terms of compensation for service as an office holder, or as a service provider to the company, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a period longer than three years is reasonable under the circumstances.

Under the Israel Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and refrain from abusing his or her power in the company, including, among other things, in respect to his or her voting at the general meeting of shareholders on the following matters:

• any amendment to the Articles of Association;

• an increase of the company’s authorized share capital;

• a merger; or

• approval of interested party transactions that require shareholder approval.

In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote and any shareholder who, under the company’s Articles of Association, can appoint or prevent the appointment of an office holder, are under a duty to act with fairness towards the company. The Israel Companies Law provides that a breach of the duty of fairness will be governed by the laws governing breach of contract. The Israel Companies Law does not describe the substance of this duty.

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Insurance, Indemnification and Exculpation of Directors and Officers; Limitations on Liability

The Israel Companies Law permits a company to insure an office holder in respect of liabilities incurred by him or her as a result of the breach of his or her duty of care to the company or to another person, or as a result of the breach of his or her duty of loyalty to the company, to the extent that he or she 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 or she committed in connection with his or her serving as an office holder. Moreover, a company can indemnify an office holder for (a) any monetary liability imposed upon such a office holder for the benefit of a third party pursuant to a court judgment, including a settlement or an arbitrator’s decision, confirmed by a court, (b) reasonable legal costs, including attorney’s fees, expended by a office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the office holder and either i) no financial liability was imposed on the office holder in lieu of criminal proceedings  or ii) financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent, and (c) reasonable litigation expenses, including legal fees, actually incurred by such a office holder or imposed upon the office holder by a court order, in a proceeding brought against the office holder by or on behalf of the company or by others, or in a criminal action in which he was acquitted, or in a criminal action which does not require proof of criminal intent in which he was convicted.  The Companies Law further provides that the indemnification provision in a company’s articles of association (i) may be an obligation to indemnify in advance, provided that, other than litigation expenses, it is limited to events the board of directors can foresee in light of the company’s actual activities when providing the obligation and that it is limited to a sum or standards the board of directors determines is reasonable in the circumstances, and (ii) may permit the company to indemnify an officer or a director after the fact.

Furthermore, a company can, with one limited exception, exculpate an office holder in advance, in whole or in part, from liability for damages sustained by a breach of duty of care to the company.

All of these provisions are specifically limited in their scope by the Companies Law, which provides that a company may not indemnify or exculpate an officer or director nor enter into an insurance contract that would provide coverage for any monetary liability incurred as a result of (i) a breach by the officer or director of the duty of loyalty, unless the officer or director acted in good faith and had a reasonable basis to believe that the act would not prejudice the company, in which case the company is permitted to indemnify and provide insurance to but not to exculpate; (ii) an intentional or reckless breach by the officer or director of the duty of care, other than if solely done in negligence; (iii) any act or omission done with the intent to derive an illegal personal benefit; or (iv) any fine levied or forfeit against the director or officer.

Our Amended and Restated Articles of Association allow us to insure, exculpate and indemnify office holders to the fullest extent permitted by law provided such insurance, exculpation or indemnification is approved in accordance with the Israel Companies Law. We have acquired directors’ and officers’ liability insurance covering the officers and directors of Commtouch and its subsidiary for certain claims. At the annual meeting of shareholders held on November 18, 2002, the shareholders approved a form of indemnification, exculpation and insurance agreement that is applicable to all our directors.  The form of this agreement, as well as related provisions in our Amended and Restated Articles of Association, were amended at the annual meeting of shareholders held on December 30, 2005.

Compensation of Directors and Executive Officers

The directors of Commtouch can be remunerated by Commtouch for their services as directors to the extent such remuneration is approved by Commtouch’s audit committee, Board of Directors and shareholders. Through 2008, directors did not receive cash compensation for their services.  However, at the annual meeting in December 2008, shareholders approved the payment of cash compensation, in addition to equity compensation (options), according to the following:

a. NIS 31,700 base annually per director, as linked to the applicable Israeli consumer price index, payable in four equal installments at the beginning of each calendar quarter; and

b. NIS 1,590 per director per face to face Board or committee meeting or NIS954 (60% of NIS 1590) in case of telephonic participation at such meeting, payable at the beginning of each calendar quarter following the quarter during which a Board member participated in a meeting. No separate per meeting compensation will be paid for committee meetings that are held on the same day immediately prior or subsequent to a Board meeting.  In that event, a Board and committee meeting will be considered one meeting.

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c. For non-Israeli based directors, the amounts set forth will be paid in United States dollars, according to the representative rate of exchange published by the Bank of Israel on the date of payment.

Directors also are reimbursed for their expenses for each Board of Directors meeting attended. See in this item 6, “Amended and Restated 1999 Non-employee Directors Stock Option Plan” for a discussion of director compensation in the form of option grants. During 2010, options to purchase 318,335 Ordinary Shares were granted to directors and executive officers under the Company’s stock option plans at a weighted average exercise price of $3.46 per share. The aggregate direct remuneration paid by Commtouch to all directors and executive officers (10 persons) in 2010 was approximately $912,000. During the same period Commtouch accrued or set aside approximately $97 thousand for the same group to provide pension, retirement or similar benefits. As of April 30, 2011, directors and executive officers of Commtouch (9 persons) held an aggregate of 2,146,207 stock options to purchase a like number of Ordinary Shares, with 1,495,160 of those options being vested and exercisable within sixty days of said date.

At the meeting of shareholders in December 2010, shareholders approved the payment to Hila Karah of up to $10,000 annually for the performance of any additional services, as agreed upon by Ms. Karah and the Company on a case by case basis.

Options to Purchase Securities from Registrant or Subsidiaries

As of April 30, 2011, options to purchase 4,526,507 Ordinary Shares were outstanding and held by 86 persons made up of then existing employees, consultants, executive officers and non–employee directors under the Company’s stock option plans, and there were 2,085,398 shares available for grant under all plans. Of the number of options outstanding, 3,263,539 were vested and exercisable.  Additionally, these outstanding options had exercise prices ranging from $0.0375 to $6.60 per share, a weighted average per share exercise price of approximately $2.08 and termination dates ranging from May 2011 to March 2017.

Employee Stock Option Plans

Employees, including executive officers and other management employees, participate in the Company’s employee option plans. The Commtouch Software Ltd. 2006 U.S. Stock Option Plan, primarily covering the granting of options to employees and consultants based in the United States, was adopted on December 15, 2006 and has a term of ten years.  The Commtouch Software Ltd. Amended and Restated Israeli Share Options Plan, primarily covering the granting of options to employees, consultants and directors based in Israel, was adopted on June 22, 2003 and has a term of ten years.   While Israeli based directors receive their grants under the Israeli plan, the principal terms of their grants are identical to those of non-Israeli based directors receiving their grants under the non-employee director plan (discussed below).

Some previous employee option plans have either terminated or were amended and restated, though options remain outstanding and exercisable under those plans.  Such plans include the Amended and Restated 1996 CSI Stock Option Plan which expired on January 1, 2006 and theAmended and Restated 1999 3(i) Share Option Plan, which was replaced by the above described Israeli Share Option Plan.

All employee stock option plans are administered by the Compensation Committee. Subject to the provisions of the employee stock plans and applicable law, the Compensation Committee has the authority to determine, among other things, to whom options may be granted; the number of Ordinary Shares to which an option may relate; the exercise price for each share; the vesting period of the option and the terms, conditions and restrictions thereof, including accelerated vesting on change of control provisions; to amend provisions relating to such plans; and to make all other determinations deemed necessary or advisable for the administration of such plans.

Amended and Restated 1999 Non–Employee Directors Stock Option Plan

New non-employee directors are currently entitled to an initial grant of 50,000 options. Non-employee directors who are re-elected at the annual meeting of shareholders are entitled to additional grants of 16,667 options, though at the annual meeting held October 26, 2009 shareholders approved a one-time increase in the grants to re-elected directors to 30,000 options.

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The Company’s Non–Employee Directors Plan was extended by an additional ten years at the annual meeting of shareholders held on December 15, 2008. Under this plan, each option becomes exercisable at a rate of 1/16th of the option shares every three months, and has an exercise price equal to the fair market value of the Ordinary Shares on the grant date of such option. Up through 2004, each option granted had a maximum term of ten years, but would terminate earlier if the optionee ceased to be a member of the Board of Directors. Options granted to directors during 2005 - 2010 have a maximum term of six years.  At the annual meeting of shareholders of December 30, 2005, shareholders approved an amendment to the Non-Employee Directors Plan to allow for the acceleration of unvested options for any director who has served the Company for at least three years, unless the director resigned voluntarily or was removed from the Board of Directors due to a failure to perform any of his/her duties to the Company.

Employees

See Item 4: Employees

Item 7. Major Shareholders and Related Party Transactions.

The following table presents information with respect to beneficial ownership of our Ordinary Shares as of April 30, 2011, including:

• each person or entity known to Commtouch to own beneficially more than five percent of Commtouch’s Ordinary Shares, and

• all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power, with respect to shares. To our knowledge, except under applicable community property laws or as otherwise indicated, the persons named in the table have sole voting and sole investment control and rights to receive economic benefits with respect to all shares beneficially owned. The applicable percentage of ownership for each shareholder is based on 23,511,636 Ordinary Shares outstanding as of April 30, 2011. Ordinary Shares issuable upon exercise of options and other rights held and exercisable on or within sixty days of April 30, 2011 are deemed outstanding for the purpose of computing the percentage ownership of the person holding those options and other rights and for all directors and officers as a group, but are not deemed outstanding for computing the percentage ownership of any other person.  Major shareholders in the Company have the same voting rights as all other shareholders.

MAJOR SHAREHOLDERS OF ORDINARY SHARES	Amount			Percent of
	Owned			Class
Aviv Raiz*		5,590,863	**		23.7	%
Gideon Mantel*		1,381,123	***		5.6	%
Catalyst Private Equity Partners II LP		1,325,267	****		5.6	%
All directors and executive officers as a group at 4/30/11 (9 persons)		8,492,868	*****		34	%

*These shareholders of record reside in Israel.  With respect to Catalyst Private Equity Partners II LP, the Chairman and Managing Partner of this limited partnership, Mr. Yair Shamir – a director in the Company - resides in Israel.

**Includes 104,994 options, exercisable into a like number of Ordinary Shares.

***Includes 1,088,097 options exercisable into a like number of Ordinary Shares.

****Includes 61,244 options exercisable into a like number of Ordinary Shares.

*****Includes 1,495,160 options exercisable into a like number of Ordinary Shares.

Based on a review of the information provided to us by our transfer agent, as of April 30, 2011, there were63 holders of record of our Ordinary Shares, including 42 holders of record residing in the United States holding 20,288,149 Ordinary Shares, or approximately 85% of the aggregate 23,889,265Ordinary Shares outstanding as of such date.  These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these Ordinary Shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 82% of our outstanding Ordinary Shares as of such date on behalf of approximately 86 brokers and banks).

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Significant Changes in Percentage Ownership During the Past Three Years

Since December 2006, Catalyst Private Equity Partners II LP has acquired through purchases on the open market a total of 1,264,023 Ordinary Shares, which as of the filing of this annual report represents more than 5% ownership in the Company.

Interest of Management and their Family Members in Certain Transactions

There were no related party transactions during 2010 or through the date of filing of this Form 20-F.

Item 8. Financial Information.

See Item 18: Financial Statements.  If the Company decides to distribute a cash dividend out of income that has been tax exempt due to an “approved enterprise” status under the Law for the Encouragement of Capital Investments, 5719-1959, the amount of cash dividend will be subject to corporate tax at the rate then in effect under Israeli law. The Company has never declared or paid cash dividends on its Ordinary Shares.  However, the Company has not adopted a policy not to pay cash dividends and therefore may declare a dividend in the future. The Company’s current plans are to retain future earnings primarily to finance the development of its business and for other corporate purposes.

While we have brought a few relatively minor lawsuits for collection actions, we are not a party to any litigation, and we are not aware of any threatened litigation which, in the aggregate, would be material to the business of the Company.

Except as otherwise disclosed in this Annual Report, there has been no material change in our financial position since December 31, 2010.

Item 9. The Offer and Listing.

The Company’s Ordinary Shares have been traded publicly on NASDAQ as follows:

a. From July 13, 1999 through June 29, 2004, under the symbol “CTCH” (up to June 7, 2002 on the National Market, and subsequently on the Small Cap Market, which during 2005 was renamed the “Capital Market”);

b. From June 30, 2004 through June 26, 2005, under the symbol “CTCHC”;

c. From June 27, 2005 through January 1, 2008, under the symbol “CTCH”;

d. From January 2, 2008 through January 29, 2008, under the symbol “CTCHD”; and

e. From January 30, 2008, under the symbol CTCH.

Since December 16, 2009, the Company’s Ordinary Shares have also been traded on the Tel Aviv Stock Exchange, or “TASE”, under the symbol CTCH.

The following table lists the high and low closing sales prices for the Company’s Ordinary Shares on the NASDAQ Capital Market for the periods indicated:

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	High		Low
2006:	$	4.08	$	2.10
2007:	$	7.44	$	3.69
2008:	$	6.22	$	1.50
2009:	$	4.30	$	1.57
2010:	$	3.90	$	1.35
2009:
First Quarter	$	2.12	$	1.57
Second Quarter	$	2.04	$	1.71
Third Quarter	$	3.73	$	2.63
Fourth Quarter	$	4.30	$	3.39
2010:
First Quarter	$	4.30	$	3.70
Second Quarter	$	4.13	$	2.96
Third Quarter	$	3.90	$	2.85
Fourth Quarter	$	2.50	$	1.50
Most Recent Six Months:
December 2010	$	3.72	$	3.40
January 2011	$	3.95	$	3.75
February 2011	$	3.98	$	3.67
March 2011	$	3.72	$	3.23
April 2011	$	3.52	$	3.34
May 2011	$	3.50	$	3.20

The following table lists the high and low closing sales prices for the Company’s Ordinary Shares on the TASE for the periods indicated.Share prices on the TASE are quoted in NIS:

	High		Low
2010:
First Quarter	NIS	16.60	NIS	13.50
Second Quarter	NIS	15.50	NIS	11.50
Third Quarter	NIS	15.60	NIS	11.00
Fourth Quarter	NIS	14.60	NIS	11.50
Most Recent Six Months
December 2010	NIS	13.60	NIS	11.90
January  2011	NIS	14.40	NIS	12.80
February  2011	NIS	14.60	NIS	12.70
March  2011	NIS	13.50	NIS	11.80
April 2011	NIS	12.50	NIS	11.20
May  2011	NIS	12.40	NIS	11.20

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Item 10. Additional Information.

We are registered under the Israel Companies Law as a public company with registration number 52-004418-1.  The objective stated in our memorandum of association is to engage in any lawful activity.

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 Amended and Restated Articles of Association, copies of which are filed with this report or have been filed as exhibits to certain of our prior filings with the SEC.

As of April 30, 2011, our authorized share capital consisted of 55,353,340 Ordinary Shares, NIS 0.15 par value. As of April 30, 2011, there were 23,511,636 Ordinary Shares issued and outstanding.

DESCRIPTION OF ORDINARY SHARES

All issued and outstanding Ordinary Shares of Commtouch are duly authorized and validly issued, fully paid and non-assessable.

The Ordinary Shares do not have preemptive rights. Our Memorandum of Association, Amended and Restated Articles of Association and the laws of the State of Israel do not 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 are entitled to their full proportion of any cash or share dividend declared.

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. Declaration of a dividend requires Board of Directors approval.

Under current Israeli regulations, any dividends or other distributions paid in respect of Ordinary Shares purchased by non–residents of Israel with certain non–Israeli currencies (including U.S. dollars) will be freely repatriable in such non–Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on, or withheld from, such payments.

MODIFICATION OF CLASS RIGHTS

If at any time the share capital is divided into different classes of shares, then, unless the conditions of allotment of such class provide otherwise, the rights, additional rights, advantages, restrictions and conditions attached or not attached to any class, at any given time, may be modified, enhanced, added or abrogated by resolution at a meeting of the holders of the shares of such class.

Pursuant to Israel’s securities laws, a company registering its shares for trade on the Tel Aviv Stock Exchange may not have more than one class of shares for a period of one year following registration, after which it is permitted to issue preferred shares, if the preference of those shares is limited to a preference in the distribution of dividends and these preferred shares have no voting rights.

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SPECIAL PROVISIONS IN AMENDED AND RESTATED ARTICLES OF ASSOCIATION RELATING TO DIRECTORS

The discussion regarding approval of director compensation and transactions with the Company under “Item 6. Directors, Senior Management and Employees - Approval of Certain Transactions; Obligations of Directors, Officers and Shareholders” is incorporated herein by reference.

VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS

Holders of Ordinary Shares have one vote for each share held on all matters submitted to a vote of shareholders.

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 at least 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 Board of Directors may determine in a notice to shareholders. At such reconvened meeting any two shareholders entitled to vote and present in person or by proxy will constitute a quorum.  Rule 5620(c) to Nasdaq Listing Rules requires that an issuer listed on Nasdaq should have a quorum requirement that in no case be less than 33 1/3% of the outstanding shares of the company’s common voting stock. However, as mentioned above, our articles of association, consistent with the Companies Law, provides for a lower quorum requirement at an adjourned meeting.

Generally, shareholder resolutions 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.  For certain matters as described under the Israel Companies law, there is a requirement that the majority include the affirmative vote of at least one-third of the votes cast by shareholders who are not controlling shareholders of the Company or interested parties in the matter to be voted upon (or their representatives) or, alternatively, the total shareholdings of the votes cast against the proposal (other than by the Company’s controlling shareholders or interested parties in the matter to be voted upon) must not represent more than one percent of the voting rights in the Company.

ANTI–TAKEOVER PROVISIONS UNDER ISRAELI LAW

Under the Companies Law, a merger is generally required to be approved by the shareholders and board of directors of each of the merging companies. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required. In addition, a merger can be completed only after 30 days have passed from the shareholders’ approval of each of the merging companies, all approvals have been submitted to the Israeli Registrar of Companies and at least fifty days have passed from the time that a proposal for approval of the merger was filed with the Registrar.

The 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 hold 25% or more of the voting rights in the company, unless there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of tender offer if as a result of the acquisition the purchaser would hold more than 45% of the voting rights in the company, unless someone else already holds 45% of the voting power of the company.

Finally, Israeli tax law treats specified acquisitions, including a stock–for–stock swap between an Israeli company and a foreign company, less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his Ordinary Shares for shares in a foreign corporation to taxation before it would become taxable in the United States, even though the investment has not become liquid, although in the case of shares of a foreign corporation that are traded on a stock exchange, the tax may be postponed subject to certain conditions.

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TRANSFER OF SHARES AND NOTICES

Fully paid Ordinary Shares that are issued and not subject to any legal restrictions on transference may be transferred freely. Each shareholder of record is entitled to receive at least twenty-one days' prior notice (and for certain matters, thirty-five days’ prior notice) before the date of a shareholder meeting and at least five days notice before the record date for the meeting. For purposes of determining the shareholders entitled to notice and to vote at such meeting, the Board of Directors may fix a record date not exceeding 40 days prior to the date of any shareholder meeting.

CHANGES IN OUR CAPITAL

Changes in our capital are subject to the approval of the shareholders by a majority of the votes of shareholders present by person or by proxy and voting at the shareholders meeting.

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 Israeli Registrar of Companies its Amended and Restated Articles of Association and any further amendments thereto. 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.

We are subject to certain of the information reporting requirements of the Exchange Act.  As a “foreign private issuer,” we are exempt from the rules and regulations under the Exchange Act prescribing the furnishing and content of proxy statements, 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 purchase and sale of the Ordinary Shares.  In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.  However, we file with the SEC an Annual Report on Form 20-F containing financial statements audited by an independent registered public accounting firm.  We also furnish quarterly reports on Form 6-K containing unaudited financial information after the end of each quarter and other reports on Form 6-K from time to time.  We post our Annual Report on Form 20-F on our Website (www.commtouch.com) promptly following the filing of our Annual Report with the Securities and Exchange Commission. The information on our website is not incorporated by reference into this Annual Report.

This report and other information filed or to be filed by us can be inspected and copied at the public reference facilities maintained by the SEC at:

100 F Street, NE

Public Reference Room

Washington, D.C. 20549

The SEC maintains a Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

In addition, since we are also listed on the Tel Aviv Stock Exchange we submit copies of all our filings with the Securities and Exchange Commission to the Israeli Securities Authority and the Tel Aviv Stock Exchange. Such copies can be retrieved electronically through the Tel Aviv Stock Exchange’s internet messaging system (www.maya.tase.co.il) and through the MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il).

MATERIAL CONTRACTS DURING PAST TWO YEARS

Cost Investments. Commtouch made a $750,000 investment in Mirapoint Software, Inc., a secure messaging vendor and an OEM licensee, as part of Mirapoint's larger financing round in the fourth quarter of 2007.  In connection therewith, Commtouch received a minority ownership interest in Mirapoint of approximately 8%.  During early 2009, Commtouch made an additional investment in Mirapoint, as part of a larger financing round, in the amount of $477,000. In total, Commtouch investments in Mirapoint as of December 31, 2010 amounted to $1,227,000. By way of a merger, Mirapoint is now a part of Critical Path, Inc., with Commtouch having an ownership interest of approximately 2% in Critical Path.

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Asset Purchases. On September 3, 2010, we acquired certain assets comprising the Command Antivirus business unit of Authentium (now known as SafeCentral, Inc.), including:

i. the antivirus services known as “AV SDK” and “CSAM”, which are aimed at protecting customers against viruses, spyware, Trojan downloaders and other such Internet related threats;

ii. certain contracts with OEM customers pursuant to which such OEM customers are authorized to integrate the AV SDK into their solutions and to sell and support such integrated solutions;

iii. certain contracts with resellers pursuant to which such resellers are authorized to sell the CSAM solutions;

iv. all such products’ intellectual property (including all interests in the Authentium and Command Software brand names and all associated trademarks, trade names and related property); and

v. certain furniture, computers and office equipment.

At the closing, Commtouch also employed 13 new employees, based in a Florida office, and engaged 4 independent contractors providing remote services to the operation.

In consideration for the sale of this division, Commtouch paid Authentium the sum of $4.6 million in cash, $920,000 of which was placed in escrow for distribution to Authentium in two installments during 2011, provided those funds are not needed to satisfy certain obligations, as defined in the Asset Purchase Agreement. Additionally, following the conclusion of the 2011 year and based on achievement of certain revenue milestones, Commtouch shall pay SafeCentral in cash the Earnout of approximately $3 million, subject to adjustment upward or downward based on the performance level of the purchased OEM contracts. The fair value of the Earnout obligation as of December 31, 2010 is $ 2.8 million.

Amended and Restated Articles of Association

See the discussion under Item 4 “Information on the Company- Overview” for instructions on how to locate the Company’s Amended and Restated Articles of Association. In addition, the Articles are incorporated by reference to this Form 20-F under Exhibit 1.2 below.

EXCHANGE CONTROLS

Non-residents of Israel who own our Ordinary Shares may freely convert all amounts received in Israeli currency in respect of such Ordinary Shares, whether as a dividend, liquidation distribution or as proceeds from the sale of the Ordinary Shares, into non-Israeli currencies at the rate of exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).

Until May 1998, Israel imposed extensive restrictions on transactions in foreign currency.  These restrictions were largely lifted in May 1998.  Since January 1, 2003, all exchange control restrictions have been eliminated although there are still reporting requirements for foreign currency transactions.  Legislation remains in effect, however, pursuant to which currency controls can be imposed by administrative action at any time.

The State of Israel does not restrict in any way the ownership or voting of our Ordinary Shares by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel.

ISRAELI TAXATION

The following is a summary of the principal tax laws applicable to companies in Israel, including special reference to their effect on us, and Israeli government programs benefiting us. This section also contains a discussion of the material Israeli tax consequences to you if you acquire Ordinary Shares of our company. This summary does not discuss all the acts of Israeli tax law that may be relevant to you in light of your personal investment circumstances or if you are subject to special treatment under Israeli law. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in this discussion will be accepted by the tax authorities. The discussion should not be understood as legal or professional tax advice and is not exhaustive of all possible tax considerations.

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General Corporate Tax Structure

Generally, Israeli companies are subject to “Corporate Tax” on their taxable income. The applicable rate was 29% in 2007, 27% in 2008, 26% in 2009, is 25% in 2010 and is scheduled to decline to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter.

Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969

The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. An industrial company is defined as a company resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.

Under the Industry Encouragement Law, industrial companies are entitled to a number of corporate tax benefits, including:

· deduction of purchase of know-how and patents and/or right to use a patent over an eight-year period;

· the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company;

· accelerated depreciation rates on equipment and buildings.

· Expenses related to a public offering on TA stock exchange and as of 1.1.2003 on recognized stock markets outside of Israel, are deductible in equal amounts over three years.

Under some tax laws and regulations, an industrial enterprise may be eligible for special depreciation rates for machinery, equipment and buildings. These rates differ based on various factors, including the date the operations begin and the number of work shifts. An industrial company owning an approved enterprise may choose between these special depreciation rates and the depreciation rates available to the approved enterprise.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.

We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. We cannot assure you that the Israeli tax authorities will agree that we qualify, or, if we qualify, that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.

In December 2010, the "Knesset" (Israeli Parliament) passed the Law for Economic Efficiency for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among others, amendments in the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the Investment Law were modified and a flat tax rate applies to the Company's entire preferred income. The Company will be able to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates that are: 2011 and 2012 - 15%, 2013 and 2014 - 12.5% and in 2015 and thereafter - 12%.

The Company is not in development area A. The Company is examining the possible effect of the amendment on the financial statements, if at all, and has not yet decided whether to apply the amendment. 

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Special Provisions Relating to Measurement of Taxable Income

Our company is taxed until tax year 2007 (including) under the Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law. The Inflationary Adjustments Law is highly complex and represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. Its features, which are material to us, are summarized as follows:

· Where a company’s equity, as calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of its fixed assets (as defined in the Inflationary Adjustments Law), a deduction from taxable income is permitted equal to the excess multiplied by the applicable annual rate of inflation. The maximum deduction permitted in any single tax year is 70% of taxable income, with the unused portion permitted to be carried forward, linked to the Israeli consumer price index. The unused portion that was carried forward may be deductible in full in the following year.

· Where a company’s depreciated cost of fixed assets exceeds its equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income. (hereinafter: “inflation supplement”). Note, the inflation supplement will only be added to the corporate income but not to other incomes such as capital gains.

· Subject to specified limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the change in the consumer price index.

In February 2008, the Inflationary Adjustments Law was repealed.

Capital Gains Tax on Sales of Our Ordinary Shares

Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.

As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “material shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of shares, unless such companies were not subject to the Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2006, in which case the applicable tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).

Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel, such shareholders are not subject to the Adjustments Law, and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

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In some instances where our shareholders may be liable to Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.

Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of Ordinary Shares by a person who (i) holds the Ordinary Shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of Ordinary Shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.

Taxation of Non-Resident Holders of Shares

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares, or stock dividends, income tax is withheld at the source at the following rates: for dividends distributed on or after January 1, 2006 - 20%, or 25% for a shareholder that is considered a “material shareholder” at any time during the 12-month period preceding such distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of Ordinary Shares who is a Treaty U.S. Resident is 25%. Furthermore, dividends not generated by an Approved Enterprise (or Benefited Enterprise) paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%.

For information with respect to the applicability of Israeli capital gains taxes on the sale of Ordinary Shares by United States residents, see above “Capital Gains Tax on Sales of Our Ordinary Shares.”

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER 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.

U.S. Federal Income Taxation

Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder” arising from the purchase, ownership and sale of the Ordinary Shares. For this purpose, a “U.S. Holder” is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury Regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations, or (6) any person otherwise subject to U.S. federal income tax on a net income basis in respect of the Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty.

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This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our Ordinary Shares. This summary generally considers only U.S. Holders that will own our Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, not does it describe the rules applicable to determine a taxpayer’s status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,administrative and judicial interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations.  Commtouch will not seek a ruling from the U.S. Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.

This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular shareholder based on such shareholder’s particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or “financial services entity”; (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other then the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold Ordinary Shares through a partnership or other pass-through entity are not considered.

Each prospective investor is advised to consult such person’s own tax advisor with respect to the specific U.S. federal and state income tax consequences to such person of purchasing, holding or disposing of the Ordinary Shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.

Distributions on Ordinary Shares

Subject to the discussion under the heading “Passive Foreign Investment Companies” below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on Ordinary Shares (including the amount of any Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for the Ordinary Shares to the extent thereof, and then capital gain. Corporate holders generally will not be allowed a deduction for dividends received. In general, preferential tax rates not exceeding 15% for “qualified dividend income” and long-term capital gains are applicable for U.S. Holders that are individuals, estates or trusts (these preferential rates are scheduled to expire for taxable years beginning after December 31, 2012, after which time dividends are scheduled to be taxed at ordinary income rates and long-term capital gains are scheduled to be taxed at rates not exceeding 20%). For this purpose, “qualified dividend income” means, inter alia, dividends received from a “qualified foreign corporation.” A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.

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In addition, our dividends will be qualified dividend income if our Ordinary Sharesare readily tradable on NASDAQ or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to the preferential rate: (i) if the U.S. Holder has not held our Ordinary Shares or ADRs for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (ii) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our Ordinary Shares are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.

The amount of a distribution with respect to our Ordinary Shares will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above under “Taxation of Non-Resident Holders of Shares.”) Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain or loss in respect of suchNIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.

Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of the Ordinary Shares. In general, these rules limit the amount allowable as a foreign tax credit in any year to the amount of regular U.S. tax for the year attributable to foreign source taxable income. This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. Holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual’s gross income for the taxable year from non-U.S. sources consists solely of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to the Ordinary Shares if such U.S. Holder has not held the Ordinary Shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. Holder has substantially diminished his or her risk of loss with respect to the Ordinary Shares will not count toward meeting the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds the Ordinary Shares in an arrangement in which the U.S. Holder’s reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their deductions.

Disposition of Shares

Except as provided under the PFIC rules described below, upon the sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s tax basis for the Ordinary Shares and the amount realized on the disposition (or its U.S. dollar equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale or exchange or other disposition of Ordinary Shares will be long-term capital gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition.

In general, gain realized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares will generally be treated as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares is generally allocated to U.S. source income. However, U.S. Treasury Regulations require such loss to be allocated to foreign source income to the extent specified dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of Ordinary Shares is subject to limitations.

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Medicare Contribution Tax

For taxable years beginning after December 31, 2012, U.S. Holders who are individuals, estates or trusts will generally be required to pay a new 3.8% Medicare tax on their net investment income (including dividends on and gains from the sale or other disposition of our Ordinary Shares), or in the case of estates and trusts on their net investment income that is not distributed, in each case to the extent that their total adjusted income exceeds applicable thresholds.

Passive Foreign Investment Companies

Special U.S. federal income tax laws apply to a U.S. Holder who owns shares of a corporation that was (at any time during the U.S. Holder’s holding period) a PFIC.  We would be treated as a PFIC for U.S. federal income tax purposes for any tax year if, in such tax year, either:

· 75% or more of our gross income (including our pro rata share of gross income for any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive (the “Income Test”); or

· At least 50% of our assets, averaged over the year and generally determined based upon value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value), in a taxable year are held for the production of, or produce, passive income (the “Asset Test”).

For this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.

If we are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing fund by making a “QEF election”, or who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition of our Ordinary Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest tax rates on ordinary income plus interest on such tax, as if the distribution or gain had been recognized ratably over the taxpayer’s holding period for the Ordinary Shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to special U.S. federal income tax rules.

The PFIC rules described above would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder’s pro rata share of our ordinary earnings as ordinary income and such U.S. Holder’s pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. Although we have no obligation to do so, we intend to comply with the applicable information reporting requirements for U.S. Holders to make a QEF election.

A U.S. Holder of PFIC shares which are traded on qualifying public markets, including the NASDAQ, can elect to mark the shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. Holder’s adjusted tax basis in the PFIC shares. Losses are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for prior taxable years.

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In light of the complexity of PFIC rules, we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC in the future. U.S. Holders who hold Ordinary Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to specified exceptions for U.S. Holders who made a QEF or mark-to-market election. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules, including the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares in the event we that qualify as a PFIC. For those U.S. Holders who determine that we were a PFIC in any of our taxable years and notify us in writing of their request for the information required in order to effectuate the QEF election described above, we will promptly make such information available to them.

Information Reporting and Withholding

With respect to cash dividends and proceeds from a disposition of Ordinary Shares, a U.S. Holder may be subject to backup withholding (currently at a rate of 28%, with such rate being frozen at this level through December 31, 2012). In general, back-up withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.

Under the Hiring Incentives to Restore Employment Act of 2010 (the “HIRE Act”), some payments made after December 31, 2012 to “foreign financial institutions” in respect of accounts of U.S. stockholders at such financial institutions may be subject to withholding at a rate of 30%. U.S. Holders should consult their tax advisors regarding the effect, if any, of the HIRE Act on their ownership and disposition of our common stock. See “Non-U.S. Holders of Ordinary Shares.”

Non-U.S. Holders of Ordinary Shares

Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares.

A non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds from the disposition of our Ordinary Shares if: (i) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or, in the case of a non-U.S. Holder that is a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. Holder, a fixed place of business in the United States; (ii) in the case of a disposition of our Ordinary Shares, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and other specified conditions are met; (iii) the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.

In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides on an applicable Form W-8 (or a substantially similar form) a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships with the United States.

The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

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The HIRE Act may impose withholding taxes on some types of payments made to “foreign financial institutions” and some other non-U.S. entities. Under the HIRE Act, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. Holders that own Ordinary Shares through foreign accounts or foreign intermediaries and specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Ordinary Shares paid from the United States to a foreign financial institution or to a foreign nonfinancial entity, unless (i) the foreign financial institution undertakes specified diligence and reporting obligations or (ii) the foreign nonfinancial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. In addition, if the payee is a foreign financial institution, it generally must enter into an agreement with the U.S. Treasury that requires, among other things, that it undertake to identify accounts held by specified U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to other specified account holders. The HIRE Act applies to payments made after December 31, 2012. You should consult your tax advisor regarding the HIRE Act.

Item 11. Qualitative and Quantitative Disclosure about Market Risk.

We develop our technology in Israel and seek to provide our services worldwide. As a result, our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, against the NIS and Euro. We are exposed to the risk of fluctuation in the U.S. dollar/NIS and the U.S. dollar/Euro exchange rate. Our shekel-denominated expenses consist principally of salaries and related personnel expenses, as well as vehicle lease payments. Although the majority of our revenues are in US dollars, a substantial portion of our sales are derived from the Euro currency. Neither a ten percent increase nor decrease in current exchange rates would have a material effect on our consolidated financial statements in the next six months.

Due to the fact that we do not have any material debt, we have concluded that there is currently no material interest market risk exposure.

Therefore, no quantitative tabular disclosures are provided.

Item 12. Description of Securities Other than Equity Securities.

The Company does not have any outstanding American Depositary Shares or American Depositary Receipts.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.

None.

Item 15. Controls and Procedures.

(a) As of December 31, 2010, we performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of December 31, 2010, to provide reasonable assurance that the information required to be disclosed in filings and submissions under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, and that such information related to us and our consolidated subsidiary is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.

(b) and (c) Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Security Exchange Act. Our internal control over financial reporting system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective can only provide reasonable assurance with respect to financial statements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed our internal control over financial reporting as of December 31, 2010. Our assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the antivirus business of Authentium Inc. acquired on September 3, 2010, which is included in our 2010 consolidated financial statements. Our management based its assessment on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, our management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective.

(d) Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, independently assessed the effectiveness of the Company's internal control over financial reporting. Kost, Forer, Gabbay & Kasierer,  has issued an attestation report in respect of our internal control over financial reporting as of December 31, 2010, which is included under Item 18 on page F-3 of this annual report.  We note that this report is provided voluntarily for 2010, as non-accelerated filers are not required to include it in their Form 20-F filing.

(e) During the period covered by this annual report on Form 20-F, there were no  changes to our internal control over financial reporting that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert.

The Board of Directors of the Company has determined that Mr. Yair Shamir, a member of the Audit Committee, is an audit committee financial expert as that term is defined in Item 16A of Form 20-F and is independent as that term is defined in NASDAQ Listing Rule 5605(a)(2).

Item 16B. Code of Ethics.

The Company, by way of Board of Directors resolution, has adopted a Code of Ethics applicable to its senior financial officers, including its principal executive, financial and accounting officers.  The Code of Ethics is posted on the Company’s website at www.commtouch.com, under the link “Investor relations documents” on the “investor relations” page.

Item 16C. Principal Accountant Fees and Services.  

Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, has served as our Independent Registered Public Accounting Firm for each of the fiscal years in the three-year period ended December 31, 2010, for which audited financial statements appear in this annual report on Form 20-F. The following table presents the aggregate fees for professional and other services rendered by Kost, Forer, Gabbay & Kasierer for 2010 and 2009:

	Year ended December 31,
	2010		2009
	Fees		Fees
Audit related fees (1)	$	189,000	$	133,000
Tax Fees and other(2)	$	81,000	$	18,000
Total	$	270,000	$	151,000

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(1) Audit fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the Independent Registered Public Accounting Firm can reasonably provide, and include the group audit including statutory audits; consents; attest services; and assistance in connection with documents filed with the SEC. Thesefees also include the attestation of our internal control over financial reporting.

(2) Tax fees and other include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, transfer pricing, and requests for rulings or technical advice from taxing authority; and tax planning services. Also included are fees related to services provided in connection with the Command Antivirus unit acquisition.

Audit Committee Pre-approval Policies and Procedures

Below is a summary of our current Policies and Procedures:

The main role of the Company’s audit committee is to assist the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. The Audit Committee oversees the appointment, compensation, and oversight of the Company’s independent registered public accounting firm engaged to prepare or issue an audit report on the financial statements of the Company. The audit committee’s specific responsibilities in carrying out its oversight role include the approval of all audit and non-audit services to be provided by the external auditor and the quarterly review of the firm’s non-audit services and related fees. These services may include audit services, audit-related services, tax services and other services, as described above. It is the policy of the audit committee to approve in advance the particular services or categories of services to be provided to the Company periodically. Additional services may be pre-approved by the audit committee on an individual basis during the year.  The audit committee did not avail itself of section (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during 2007, which allows for an exemption from the pre-approval process under certain limited circumstances.

Item 16D. Exemptions from the Listing Standards for Audit Committees.

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Following completion of its first Ordinary Share buyback plan during 2009 (see Item 16E of the annual report on Form 20-F filed for 2009), in March 2010, the Company announced the commencement of its second Ordinary Share buyback plan, under which the Company purchased almost $4 million worth of its Ordinary Shares through the end of 2010.  The Company completed this buyback plan in December 2010 and, in total, it expended $3.82 million to repurchase 1,030,466 Ordinary Shares at an average price of $3.82 per share.  Repurchases during 2010 are summarized in the following table:

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ISSUER PURCHASES OF SECURITIES DURING 2010

Period	Total Number Of Shares Purchased		Average Price Paid Per Share ($)		Total Number Of Shares Purchased As Part of Publicly Announced Plan		Maximum U.S. Dollar Value That May Yet Be Purchased Under The Plan
March1- March 31		545,163		3.71		545,163		2,977,836
April 1 – April 30		141,304		3.91		141,304		2,424,854
May 1 –  May 31		70,658		3.57		70,658		2,172,834
August 1-  August 31		56,648		3.42		56,648		1,978,869
September 1 – September 30		75,900		3.98		75,900		1,676,985
November 1 – November 30		50,143		3.54		50,143		1,499,344
December 1 - December 31		90,650		3.53		90,650		1,179,020
Total		1,030,466		3.71		1,030,466		N/A

Item 16F. Change in Registrant’s Certifying Accountant.

Not applicable.

Item 16G. Corporate Governance.

Under NASDAQ Listing Rule 5615(a)(3), foreign private issuers, such as our Company, are permitted to follow certain home country corporate governance practices instead of certain provisions of certain NASDAQ Listing Rules.   We do not comply with the following requirements of the NASDAQ Listing Rules, and instead follow Israeli law and practice with respect to such corporate governance practices:

NASDAQ Listing Rule 5250(d) requires that an annual report be delivered to shareholders in accordance with three alternative delivery methods set forth in the rule.  One of those delivery methods allows for the posting of the annual report on the Company’s website.  However, that method also requires that i) a prominent undertaking be posted on the website indicating that, upon request, shareholders may receive a hard copy of the annual report free of charge, and ii)simultaneous with this posting, the Company issue a press release stating that its annual report has been filed with the SEC (or other appropriate regulatory authority). This press release must also state that the annual report is available on the Company's website and include the website address and that shareholders may receive a hard copy free of charge upon request.

While the Company’s most current annual report on Form 20-F, inclusive of consolidated financial statements, is available on its website at www.commtouch.com, and the Company has indicated publicly that it will provide copies of that report free of charge, upon shareholder request, nevertheless the Company is not in strict compliance with the NASDAQ rule.  The Company does not include a statement on its website in the form noted above and does not issue a press release upon the posting of the annual report to its website; rather, the Company is following its home country practice (in Israel, which, in addition to the Company’s activities noted above, also enables shareholders to inspect the Company’s annual consolidated financial statements in person at its principal offices).

Rule 5620(c) to Nasdaq Listing Rules requires that an issuer listed on Nasdaq should have a quorum requirement that in no case be less than 33 1/3% of the outstanding shares of a company’s common voting stock.  However, the Company’s articles of association, consistent with the Companies Law, provides for a lower quorum in the event of a meeting adjourned for lack of a quorum, in which case any two shareholders entitled to vote and present in person or by proxy at such adjourned meeting shall constitute a quorum.  Our quorum requirements for an adjourned meeting do not comply with the NASDAQ requirements and we instead follow our home country practice.

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As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, composition of the board of directors, director nomination process and regularly scheduled meetings at which only independent directors are present.  In addition, we may follow our home country practice, instead of the NASDAQ Listing Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

PART III

Item 17. Financial Statements.

The Company has responded to Item 18

Item 18. Financial Statements.

See pages F-1 to F-31.

See pages FF-1 to FF-9.

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COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2010

U.S. DOLLARS IN THOUSANDS

INDEX

	Page
Reports of Independent Registered Public Accounting Firm	F-2 - F-3
Consolidated Balance Sheets	F-4 - F-5
Consolidated Statements of Operations	F-6
Statements of Changes in Shareholders' Equity	F-7
Consolidated Statements of Cash Flows	F-8 - F-9
Notes to Consolidated Financial Statements	F-10 - F-31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

COMMTOUCH SOFTWARE LTD.

We have audited the accompanying consolidated balance sheets of Commtouch Software Ltd. ("the Company") and its subsidiary as of December 31, 2009 and 2010, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (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 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 the Company and its subsidiary as of December 31, 2009 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 6, 2011 expressed an unqualified opinion thereon.

Tel-Aviv, Israel	/s/KOST FORER GABBAY & KASIERER
June 6, 2011	A Member of Ernst & Young Global

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

COMMTOUCH SOFTWARE LTD.

We have audited Commtouch Software Ltd.'s ("Commtouch" or the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). Commtouch's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the antivirus business of Authentium Inc. (“antivirus business”), which is included in the Company’s 2010 consolidated financial statements and constituted $1.6 million and $0.4 million of total assets and net assets, respectively, as of December 31, 2010 and $1.1 million and $0.4 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the antivirus business.

In our opinion, Commtouch maintained in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Commtouch and its subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010 and our report dated June 6, 2011 expressed an unqualified opinion thereon.

Tel-Aviv, Israel	/s/KOST FORER GABBAY & KASIERER
June 6, 2011	A Member of Ernst & Young Global

F-3

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31
	2009		2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,275	$	13,432
Trade receivables		1,932		2,968
Deferred income taxes		1,417		1,940
Prepaid expenses and other accounts receivable		643		384
Total current assets		21,267		18,724
LONG-TERM ASSETS:
Investment in affiliates		1,227		1,227
Intangible assets, net		-		4,510
Goodwill		-		3,792
Deferred income taxes		987		1,560
Long-term lease deposits		63		41
Property and equipment, net		701		920
Severance pay fund		945		1,208
Total long-term assets		3,923		13,258
Total assets	$	25,190	$	31,982

The accompanying notes are an integral part of the consolidated financial statements.

F-4

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data

	December 31
	2009			2010
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	357		$	550
Employees and payroll accruals		996			1,073
Accrued expenses and other liabilities		228			330
Deferred revenues		2,834			3,178
Total current liabilities		4,415			5,131
LONG-TERM LIABILITIES:
Long-term deferred revenues		848			964
Other long-term liabilities		-			2,831
Accrued severance pay		1,050			1,303
Total long-term liabilities		1,898			5,098
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Ordinary Shares nominal value NIS 0.15 par value-
Authorized: 55,353,340 shares as of December 31, 2009 and 2010; Issued: 26,122,587 and 26,700,005 shares as of December 31, 2009 and 2010, respectively; Outstanding:  23,958,761 and 23,505,713 shares as of December 31, 2009 and 2010, respectively		842			812
Additional paid-in capital		183,731			186,012
Treasury shares (2,163,826 and 3,194,292 Ordinary Shares at December 31, 2009 and 2010, respectively)		(4,788	)		(8,566	)
Accumulated other comprehensive income		23			23
Accumulated deficit		(160,931	)		(156,528	)
Total shareholders' equity		18,877			21,753
Total liabilities and shareholders' equity	$	25,190		$	31,982

The accompanying notes are an integral part of the consolidated financial statements.

F-5

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except share and per share data

	Year ended December 31,
	2008		2009			2010
Revenues	$	14,092	$	15,189		$	18,161
Cost of revenues		1,828		2,260			2,918
Gross profit		12,264		12,929			15,243
Operating expenses:
Research and development, net		3,152		2,958			3,397
Sales and marketing		3,992		4,212			4,575
General and administrative		3,189		3,063			3,911
Total operating expenses		10,333		10,233			11,883
Operating income		1,931		2,696			3,360
Financial (expenses) income, net		346		60			(55	)
Income before taxes on income (tax benefit)		2,277		2,756			3,305
Taxes on income (tax benefit)		7		(2,404	)		(1,098	)
Net income	$	2,270	$	5,160		$	4,403
Basic net earnings per share	$	0.09	$	0.21		$	0.19
Diluted net earnings per share	$	0.08	$	0.20		$	0.18
Weighted average number of shares used in computing basic net earnings per share		25,618,933		24,531,810			23,575,354
Weighted average numbers of shares used in computing diluted net earnings per share		26,929,407		25,291,517			24,873,778

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

F-6

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share data

	Ordinary Shares			Ordinary Shares amount			Additional paid-in capital		Treasury stock			Accumulated other comprehensive income *)		Accumulated deficit			Total comprehensive income		Total
Balance as of January 1, 2008		25,346,042		$	893		$	179,793	$	-		$	23	$	(168,361	)			$	12,348
Purchase of treasury shares		(706,078	)		(28	)		-		(1,306	)		-		-					(1,334	)
Issuance of shares upon exercise of options and warrants		566,695			25			819		-			-		-					844
Stock-based compensation related to employees		-			-			1,495		-			-		-					1,495
Stock-based compensation related to options granted to non-employees		-			-			37		-			-		-					37
Net income		-			-			-		-			-		2,270		$	2,270		2,270
Total comprehensive income																	$	2,270
Balance as of December 31, 2008		25,206,659			890			182,144		(1,306	)		23		(166,091	)				15,660
Purchase of treasury shares		(1,457,748	)		(56	)		-		(3,482	)		-		-					(3,538	)
Issuance of shares upon exercise of options		209,850			8			210		-			-		-					218
Stock-based compensation related to employees		-			-			1,345		-			-		-					1,345
Stock-based compensation related to options granted to non-employees		-			-			32		-			-		-					32
Net income		-			-			-		-			-		5,160		$	5,160		5,160
Total comprehensive income																	$	5,160
Balance as of December 31, 2009		23,958,761			842			183,731		(4,788	)		23		(160,931	)				18,877
Purchase of treasury shares		(1,030,466	)		(42	)		-		(3,778	)		-		-					(3,820	)
Issuance of shares upon exercise of options and warrants		577,418			12			785		-			-		-					797
Stock-based compensation related to employees		-			-			1,465		-			-		-					1,465
Stock-based compensation related to options granted to non- employees		-			-			31		-			-		-					31
Net income		-			-			-		-			-		4,403		$	4,403		4,403
Total comprehensive income																	$	4,403
Balance as of December 31, 2010		23,505,713		$	812		$	186,012	$	(8,566	)	$	23	$	(156,528	)			$	21,753

*) Relates to foreign currency translation adjustments

The accompanying notes are an integral part of the consolidated financial statements.

F-7

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2008			2009			2010
Cash flows from operating activities:
Net income	$	2,270		$	5,160		$	4,403
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		466			491			520
Compensation related to options granted to employees and non-employees		1,532			1,377			1,496
Amortization of intangible assets		-			-			158
Increase in deferred income taxes		-			(2,404	)		(1,096	)
Changes in assets and liabilities:
Increase in trade receivables		(504	)		(318	)		(1,036	)
Decrease (increase) in prepaid expenses and other accounts receivable		(46	)		(271	)		287
Increase (decrease)in accounts payable		(69	)		112			138
Increase (decrease) in employees and payroll accruals, accrued expenses and other liabilities		(198	)		261			163
Increase (decrease) in deferred revenues		(459	)		706			(697	)
Increase (decrease) in accrued severance pay, net		27			(32	)		(10	)
Capital gain from sale of Fixed Assets		-			-			(9	)
Net cash provided by operating activities		3,019			5,082			4,317
Cash flows from investing activities:
Change in short-term cash deposit		860			740			-
Decrease (increase) in long-term lease deposits		(31	)		1			22
Sale of marketable securities		-			2,000			-
Investment in affiliate		-			(477	)		-
Proceeds from sale of fixed assets		-			-			9
Acquisition of antivirus business		-			-			(4,600	)
Purchase of property and equipment		(504	)		(412	)		(568	)
Net cash provided by (used in) investing activities		325			1,852			(5,137	)
Cash flows from financing activities:
Purchase of treasury shares at cost		(1,334	)		(3,538	)		(3,820	)
Proceeds from options and warrants exercised		844			218			797
Net cash used in financing activities		(490	)		(3,320	)		(3,023	)
Increase (decrease) in cash and cash equivalents		2,854			3,614			(3,843	)
Cash and cash equivalents at the beginning of the year		10,807			13,661			17,275
Cash and cash equivalents at the end of the year	$	13,661		$	17,275		$	13,432

The accompanying notes are an integral part of the consolidated financial statements.

F-8

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2008			2009			2010
Non-cash transactions:
Purchase of property and equipment - trade payables	$	(13	)	$	(9	)	$	(55	)

		Acquisition date
		(September 3, 2010
(a)	Acquisition of antivirus business, net
	Equipment and other assets	$	128
	Deferred revenues		(1,157	)
	Intangible assets		4,668
	Goodwill		3,792
			7,431
	Less:
	Earn-out payment		2,831
	Net cash paid	$	4,600

The accompanying notes are an integral part of the consolidated financial statements.

F-9

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1: GENERAL

a. Commtouch Software Ltd. ("Commtouch" or the Company") was incorporated under the laws of Israel in 1991. The Company and its subsidiary (Commtouch Inc.) develop and provide internet security solutions to OEM partners and enterprises. The Company's business is to develop and sell, through a variety of third party distribution channels, these solutions to various customers. The Company's messaging solutions are comprised of anti-spam, Zero-Hour Virus Outbreak Protection and GlobalView Mail Reputation solutions, its Web security solution is known as GlobalView URL filtering, and its antivirus solution is known as Command Antivirus.

b. The Company expects that it will continue to be dependent upon third-party distribution channels for a significant portion of its revenues, which are expected to be derived from sales of the Company's anti-spam, Zero-Hour, anti-virus, IP reputation, URL filtering solutions and Command Antivirus.

c. Acquisition of antivirus business

On September 3, 2010, the Company completed the acquisition of the assets of the antivirus business of Authentium Inc. (now known as SafeCentral Inc.), a private Florida based company providing various security software services. As a result of this transaction, the Company will generate additional revenues and be able to sell the new acquired antivirus services as additional offering to new and existing customers. The consideration in respect of the acquisition is payable as follows: $ 4,600 was paid in cash at the closing date (of which $920 is placed in escrow until 2011) and an amount of $ 3,000 in cash is a contingent consideration payable to Authentium Inc. based on the antivirus business's 2011 revenues, due in May 2012 as defined in the Asset Purchase Agreement. The contingent consideration is subject to adjustments upward or downward based on the revenue derived from the purchased customer contracts. As of December 31, 2010, the fair value of the contingent consideration of $ 2,831 is presented in long term liabilities. The expenses incurred with respect of the acquisition were $ 300.

The acquisition was accounted for as a business using the purchase method of accounting in accordance with ASC 805.

F-10

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1: GENERAL (Cont.)

Under purchase accounting, the total purchase price was allocated to the antivirus business's net tangible and identifiable intangible assets based on their estimated fair values at the acquisition date as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was assigned to goodwill. The fair value of the contingent consideration and the intangible assets was made by management with the assistance of third party valuation.

Equipment and other assets	$	128
Deferred revenue		(1,157	)
Technology		1,546
Customer contracts and relationships		2,476
Covenants not-to-compete		646
Goodwill		3,792
Total purchase price	$	7,431

Technology includes a virus detection technology (AV SDK and CSAM products) developed by Authentium, which are aimed at protecting customers against viruses, spyware, Trojan downloaders and other such Internet related threats. The technology is being amortized on a straight-line basis over an estimated useful life of eight years.

Customer contracts and relationships is comprised of the antivirus business's main customers and respective contracts. The customer contracts and relationships is being amortized on an accelerated basis over an estimated useful life of ten years.

Covenants not-to-compete states that Authentium Inc. cannot compete against the Company by soliciting customers, employees etc.The covenant not to compete is being amortized on a straight-line basis over an estimated useful life of six years.

Goodwill represents the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and intangible assets.

F-11

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of estimates:

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

b. Financial statements in U. S. dollars:

A majority of the revenues of the Company and its subsidiary is generated in United States dollars ("dollars"). In addition, a substantial portion of their costs is incurred or denominated in dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company and its subsidiary operate. Thus, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars, in accordance with ASC Topic 830, "Foreign Currency Matters". All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.

c. Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All inter-company balances and transactions have been eliminated upon consolidation.

d. Cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less when purchased.

e. Short-term bank deposits:

Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. Such short-term bank deposits are stated at cost.

F-12

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

f. Investment in affiliates:

For the purposes of these financial statements, an affiliated company is a company held to the extent of 20% or more, or a company less than 20% held, in which the Company can exercise significant influence over the affiliate's operating and financial policies. If the Company lacks the ability to exercise significant influence over the affiliate's operating and financial policies, the investment should be accounted for on a cost basis.

The Company's investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. As of December 31, 2010 and 2009, the Company's investments are accounted for on a cost basis and no impairment losses have been identified.

g. Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight line method over the estimated useful lives of the assets at the following annual rates:

	%
Computers and peripheral equipment	33.33
Office furniture and equipment	7 – 20
Motor vehicles	15
Leasehold improvements	Over the shorter of the term of the lease or the life of the assets

h.  Impairment of long-lived assets:

The Company and its subsidiary's long-lived assets and certain identifiable intangibles are reviewed for impairment inaccordance with ASC 360 "Property, Plant and Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment losses were recorded in 2008 through 2010.

F-13

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

i. Goodwill:

Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350 (formerly SFAS No. 142), "Intangibles - Goodwill and Other", goodwill acquired in a business combination should not be amortized. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is allocated to one reporting unit and fair values are determined using market capitalization. In 2010, no impairment losses were identified.

j.  Intangible assets:

Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method for a period of six-ten years.

During 2008, 2009 and 2010, no impairment losses have been identified.

k. Fair value measurements

Concurrently with the adoption of ASC 820, the Company adopted ASC Topic 825, "Financial Instruments," ("ASC 825") which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of December 31, 2009 and 2010, the Company did not elect the fair value option under ASC 825 for any financial assets and liabilities that were not previously measured at fair value.

The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, prepaid expenses, other accounts receivable and accounts payable, approximate their fair values due to the short-term maturities of financial instruments.

l. Revenue recognition:

The Company derives revenues from Anti-Spam, Command Antivirus, Zero-Hour Virus Outbreak Protection, GlobalView Mail Reputation, GlobalView URL filtering Services and Command Antivirus.  The service component of the Company's solutions is considered essential to the functionality of the software components. Furthermore, the software components cannot be effectively used on a standalone basis, or with a third party's service. The customer has no ability to effectively run the software or the Software Development Kit ("SDK") on its own hardware. As the software portion of the solution cannot effectively stand on its own, the Company considers each sale as a service arrangement.

F-14

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Therefore, revenues from such services are recognized over the service term, which generally includes a term period of one to three years.

Revenue is recognized in accordance with ASC 605 – 25 "Revenue Recognition" and Staff Accounting Bulletin Topic 13, when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collectability is probable.

Deferred revenues include unearned amounts received from customers, but not yet recognized as revenues.

m. Research and development costs:

ASC 985-20, "Costs of Software to be Sold, Leased or 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. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release, have been insignificant. Therefore, all research and development costs have been expensed.

n. Government grants:

Royalty-bearing grants from the Government of Israel for funding certain approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the related costs incurred and recorded as a deduction of research and development costs. Research and development grants from the Government of Israel amounted to $ 774, $ 263 and $ 0 in 2010, 2009 and 2008, respectively

o. Concentrations of credit risk:

The Company and its subsidiary have no significant off-balance-sheet concentration of credit risk.

F-15

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables and cash and cash equivalents. The majority of the Company's short-term deposits and cash and cash equivalents are invested in dollars and dollar linked investments and are deposited in major banks in the United States and Israel. Such investments in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments.

The trade receivables of the Company are derived from transactions with companies located primarily in North America, Europe, Israel and Asia. An allowance for doubtful accounts is determined with respect to those amounts that the Company and its subsidiary have determined to be doubtful of collection. The allowance for doubtful accounts was $0 and $ 45 at December 31, 2009 and 2010 respectively. Bad debt expense for each of the years ended December 31, 2008, 2009 and 2010 was $ 0, $0 and $ 77, respectively.

p. Accounting for stock-based compensation:

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

The Company applies ASC 718, and ASC 505-50, "Equity Based Payments to Non-Employees" ("ASC 505-50"), with respect to options and warrants issued to non-employees. ASC 718 requires the use of an option valuation model to measure the fair value of the options and warrants at the measurement date as defined in ASC 505-50.

The Company recognizes compensation expense for the value of its awards on a straight line basis over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

F-16

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 The fair value for options granted in 2008, 2009 and 2010 is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

	Year ended  December 31,
Employee stock options	2008	2009	2010
Volatility	80%	82%	71%-73%
Risk-free interest rate	1.8%-2.8%	1.3%-1.6%	1.1%-1.6%
Dividend yield	0%	0%	0%
Expected life (years)	3.03	3.35	3.7-4.6

q. Basic and diluted net earnings per share:

Basic and diluted net earnings per share are presented in accordance with ASC Topic 260, "Earnings per Share", for all periods presented.

Basic net earnings per share have been computed using the weighted-average number of Ordinary Shares outstanding during the year. Diluted net earnings 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.

In 2008, 2009 and 2010, the difference between the denominator of basic and diluted net earnings per share is due to the effect of dilutive securities for stock options and warrants. In 2008, 2009 and 2010 1,563,038, 2,584,732 and 1,211,247, respectively, weighted average number of shares related to options and warrants outstanding were excluded from calculation of the diluted earnings per share since they would have an anti-dilutive effect.

r. Severance pay:

The Company's liability for severance pay in Israel is calculated pursuant to Israel's 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 obligation for all of its Israeli employees is fully provided by monthly deposits with severance pay funds and insurance policies, and by an accrual. The value of those funds and policies is recorded as an asset in the Company's balance sheet.

The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies.

F-17

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Severance (income) expense for the years ended December 31, 2008, 2009 and 2010 was approximately $ 26, $ (31) and $ (10), respectively.

s.  Treasury shares:

The Company repurchases its Ordinary Shares from time to time on the open market and holds such shares as Treasury shares. The Company presents the cost to repurchase Treasury shares as a reduction in shareholders' equity.

t. Income taxes:

The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes" ("ASC 740"). ASC 740  prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.

Deferred tax assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting.

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. No liability for unrecognized tax benefits was recorded as a result of the implementation of ASC 740.

F-18

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u. Recently issued accounting pronouncements:

ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. These amendments establish a selling price hierarchy for determining the selling price of a deliverable, which is based on: a) vendor-specific objective evidence; b) third-party evidence; or c) estimates. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company has not early adopted the guidance. Management believes that the adoption of the new guidance will not have a material impact on its consolidated financial statements.

v. Adoption of new accounting standards during the period:

ASU 2010-06 - In January 2010, the FASB updated the "Fair Value Measurements Disclosures" codified in ASC 820. More specifically, this update require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. As applicable to the Company, this update became effective as of the first quarter ended December 31, 2010, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting of December 31, 2010. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

F-19

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3: PROPERTY AND EQUIPMENT

	December 31
	2009			2010
Cost:
Computers and peripheral equipment	$	3,224		$	4,233
Office furniture and equipment		614			627
Motor vehicles		88			45
Leasehold improvements		1,191			1,182
		5,117			6,087
Less accumulated depreciation		(4,416	)		(5,167	)
Property and Equipment, net	$	701		$	920

Depreciation expense amounted to approximately $ 466, $ 491 and $520 in 2008, 2009 and 2010, respectively.

NOTE 4:- INTANGIBLE ASSETS

Intangible assets, net, are comprised of the following:

	Cost				Accumulated  amortization				Intangible assets, net
	December 31,
	2009		2010		2009		2010		2009		2010
Customers  contracts and relationships	$	-	$	2,476	$	-	$	57	$	-	$	2,419
Technology		-		1,546		-		65		-		1,481
Covenants not-to-compete		-		646		-		36		-		610
	$	-	$	4,668	$	-	$	158	$	-	$	4,510

Amortization of intangible assets charged to expense was $ 0, $ 0 and $ 158 for 2008, 2009 and 2010, respectively.

F-20

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 5: COMMITMENTS AND CONTINGENCIES

a. Commtouch Software Ltd. which is incorporated in Israel, partially financed its research and development expenditures under programs sponsored by the Office of Chief Scientist ("OCS") for the support of certain research and development activities conducted in Israel.

In connection with its research and development, the Company received $1,050 in participation payments from the OCS. In return for the OCS's participation, the Company is committed to pay royalties at a rate of 3% of sales of the developed product, up to 100% of the amount of grants received (100% plus interest at LIBOR). The Company's total commitment for royalties payable with respect to future sales, based on OCS participations received or accrued, net of royalties paid or accrued, totaled approximately $ 1,025 as of December 31, 2010. For the years ended December 31, 2010 and 2009, the amounts of $ 0 and $ 17, respectively, were recorded as cost of revenues with respect to royalties due to the OCS.

b. Operating leases:

The Company leases its facility in Israel under an operating lease agreement expiring on December 31, 2011. The subsidiary leases its facility in the U.S. under an operating lease agreement expiring on February 28, 2013.

Facilities rent expense for 2008, 2009 and 2010 was approximately $ 202, $ 259 and $ 352, respectively.

Annual minimum future lease payments due under the above agreements (and motor vehicle leases, which expire in 2013), at the exchange rate in effect on December 31, 2010, are approximately as follows:

2011	501
2012	229
2013	61
	791

F-21

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6: SHAREHOLDERS' EQUITY

a. General:

The Ordinary Shares of the Company have been traded on the Nasdaq National Market  (now known as the Nasdaq Global Market) and Nasdaq Capital Market (formerly The NASDAQ SmallCap Market), since July 1999 and 2002, respectively.

On December 16, 2009, the Company's Ordinary Shares became listed for trading publicly on the Tel Aviv Stock Exchange, or "TASE", thus making the Company a "dual listed" company.

The Ordinary Shares confer upon their holders the right to receive notice to participate and vote in general shareholder meetings of the Company and to receive dividends, if declared. In January 2008, the Board of Directors and shareholders approved a 3:1 reverse stock split of the Company's share capital. As a result of this action, every three shares (including all authorized, issued and outstanding shares and all outstanding warrants and options to purchase shares) were combined into one share of the same respective class of shares bearing a par value of NIS 0.15 each.

b. Warrants to investors:

As of December 31, 2010, the Company's outstanding warrants issued to various parties were as follows:

Issuance date	Warrants granted for Ordinary Shares		Exercise price per share		Remaining warrants exercisable		Exercisable through
May 2006		23,364	$	3.21		23,364	May 2011
		23,364				23,364

c. Employee stock options:

In 1996, the Company adopted the 1996 CSI Stock Option Plan for granting options to its U.S. employees and consultants to purchase Ordinary Shares of the Company, which was replaced in 2006 by the 2006 U.S. Stock Option Plan. Until 1999, the Company issued options to purchase Ordinary Shares to its Israeli employees pursuant to individual agreements. In 1999, the Company approved the 1999 Section 3(i) share option plan for its Israeli employees and consultants, (which was amended in 2003 and renamed the "Amended and Restated IsraeliShare Option Plan").As of December 31, 2010, an aggregate of 2,017,585 Ordinary Shares of the Company are still available for future grant to employees and directors.

F-22

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6: SHAREHOLDERS' EQUITY (Cont.)

\

Options granted under such plans and agreements up to September 2005, expire generally after ten years from the date of grant, with grants from September 2005 having six-year terms from the date of grant. Options cease vesting upon termination of the optionee's employment or other relationship with the Company. The options generally vest over a period of four years. 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. Any options that are canceled or not exercised within the option term become available for future grant.

A summary of the Company's employees share option activity under the plans is as follows:

	Number of options			Weighted average exercise price		Aggregate intrinsic value
	2010			2010		2010
Outstanding at the beginning of the year		3,739,868		$	2.67
Granted		333,333			3.85
Exercised		(158,911	)		0.66
Expired and Forfeited		(324,033	)		3.55
Outstanding at the end of the year		3,590,257			2.79	$	4,593
Options vested and expected to vest at the end of the year		3,464,403			2.78	$	4,521
Exercisable options at the end of the year		2,588,476			2.58	$	3,841
Weighted average fair value of options granted during the year					1.96

The aggregate intrinsic value of the Company's options is the difference between the Company's closing share price on the last trading day of the fiscal year 2010 and the exercise price, times the number of options.

F-23

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6:  SHAREHOLDERS' EQUITY (Cont.)

The options outstanding as of December 31, 2010, have been separated into ranges of exercise prices, as follows:

			Weighted		Weighted				Weighted average exercise
Exercise			average remaining		average remaining				price per share of
price per	Options		contractual		price per		Options		exercisable
share	outstanding		life in years		share		exercisable		options
$0.03-$0.27		86,437		0.62	$	0.04		86,437	$	0.04
$0.33-$0.60		414,724		1.80	$	0.35		414,724	$	0.35
$0.81-$0.84		28,667		0.79	$	0.81		28,667	$	0.81
$0.93-$1.89		598,546		3.66	$	1.40		469,210	$	1.35
$1.93-$2.91		645,988		2.90	$	2.24		371,018	$	2.42
$3.12-$4.35		1,359,756		3.02	$	3.46		871,277	$	3.22
$4.69-$6.60		456,139		2.90	$	6.27		347,143	$	6.26
		3,590,257		2.87	$	2.79		2,588,476	$	2.58

d. Non-employee directors stock option plan:

In 1999, the Company adopted the 1999 Non-Employee Directors Stock Option Plan, and in 2008 shareholders approved an extension of the term of this plan through July 13, 2019. The original allotment of shares to this plan was 1,263,333. On December 15, 2006, the Company combined the remaining pool of options in the employee stock option plans reserve with the amount of options remaining in the Non-Employee Directors Stock Option Plan reserve.

Since the annual meeting of shareholders in 2003 and up until December 31, 2008, new directors joining the Board areentitledto an option grant of 50,000 Ordinary Shares.Directors who are re-elected at the annual meeting of shareholders are entitled to additional grants of 16,667 options, though at the annual meeting held October 26, 2009 shareholders approved a one-time increase in the grants to re-elected directors to 30,000 options.

Each option granted under the Non-Employee Directors Stock Option Plan becomes exercisable at a rate of 1/16th of the shares every three months. Each option has an exercise price equal to the fair market value of the Ordinary Shares on the grant date of such option. Until September 2005, each option granted had a maximum term of ten years, but since September 2005, the term of granted options is six years. Options will terminate earlier if the optionee ceases to be a member of the Board of Directors.

F-24

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6: SHAREHOLDERS' EQUITY (Cont.)

During 2009, the Company granted 150,000 options to non-employee directors at a weighted average exercise price of $ 3.29 per share. Weighted average fair value of options granted during the year is $ 1.84. As of December 31, 2009, 286,440 options were vested and unexercised and 608,337 were outstanding under the Non-Employee Directors Stock Option Plan.

During 2010, the Company granted 318,335 options to non-employee directors at a weighted average exercise price at $3.46 per share. Weighted average fair value of options granted during the year is $1.98. As of December 31, 2010, 402,073 options were vested and unexercised and 926,672 were outstanding under the Non-Employee Directors Stock Option Plan.

e. Options to non-employees:

Issuance date	Options granted for Ordinary Shares		Exercise price per share	Options exercisable		Exercisable through
May 2006-2008 (i)		83,334	$3.21-$5.73		74,998	May 2013
		83,334			74,998

(i) As a consideration for consulting services, on May 7, 2006 the Company issued 50,000 options to a service provider to purchase the Company's Ordinary Shares at a price of $ 3.21 per option. On May 5, 2007, the Company issued an additional 16,667 options to the service provider to purchase the Company's Ordinary Shares at a price of $ 5.73 per option. On May 6, 2008, the Company issued an additional 16,667 options to purchase Ordinary Shares to the service provider at a price of $ 3.85 per option. The options shall vest and become exercisable at a rate of 1/16 of the options every three months. The Company has accounted for this grant under the fair value method of ASC 505-50. The fair value for these options was estimated using a Black-Scholes option-pricing model. Compensation expense for 2008, 2009 and 2010 amounted to $ 37, $ 32 and $ 31, respectively.

f. The total unrecognized estimated compensation cost related to non-vested stock options granted until December 31, 2010 was $ 2,479 which is expected to be recognized over a period of up to four years.

F-25

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6: SHAREHOLDERS' EQUITY (Cont.)

g.  Total stock-based compensation expenses recognized in 2008, 2009 and 2010:

The total stock-based compensation expense related to all of the Company's equity-based awards, recognized for the years ended December 31, 2008, 2009 and 2010, was comprised as follows:

	Year ended  December 31,
	2008		2009		2010
Cost of revenues	$	45	$	40	$	38
Research and development		319		302		316
Selling and marketing		298		300		373
General and administrative		870		735		769
	$	1,532	$	1,377	$	1,496

NOTE 7: INCOME TAXES

a. Corporate tax structure:

The rate of the Israeli corporate tax is as follows: 2008 - 27%, 2009 - 26%, 2010 - 25%.  Tax at a reduced rate of 25% applies on capital gains arising after January 1, 2003, instead of the regular tax rate. In July 2009, the "Knesset" (Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), which prescribes, among others, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.

In December 2010, the "Knesset" (Israeli Parliament) passed the Law for Economic Efficiency for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among others, amendments in the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the Investment Law were modified and a flat tax rate applies to the Company's entire preferred income. The Company will be able to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates that are: 2011 and 2012 - 15%, 2013 and 2014 - 12.5% and in 2015 and thereafter - 12%.

The Company is not in development area A. The Company is examining the possible effect of the amendment on the financial statements, if at all, and has not yet decided whether to apply the amendment.

F-26

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7: INCOME TAXES (Cont.)

b. Tax benefits under Israel's Law for the Encouragement of Industry (Taxation), 1969:

The Company may currently qualify as an "industrial company" within the definition of the Law for the Encouragement of Industry (Taxation), as such, it may be eligible for certain tax benefits, including, inter alia, special depreciation rates for machinery, equipment and buildings, amortization of patents, certain other intangible property rights and deduction of share issuance expenses.

c. Net operating loss carryforwards:

As of December 31, 2010, the Company's net operating loss carryforwards for tax purposes amounted to approximately $ 80,000 (including capital loss carry forward of     $ 16,000) which may be carried forward and offset against taxable income in the future, for an indefinite period.

As of December 31, 2010, for federal income tax purposes, the U.S. subsidiary had net operating loss carry-forwards of approximately $ 92,000. These losses may offset any future U.S. taxable income of the U.S. subsidiary and will expire in the years 2012 through 2025.

Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization.

Management currently believes that since the Company has history of losses it is more likely than not that some of the deferred tax assets regarding the loss carry forwards will not be utilized in the foreseeable future. Thus, a valuation allowance was provided to reduce deferred tax assets to their realizable value.

F-27

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7: INCOME TAXES (Cont.)

d. Deferred income taxes:

Deferred 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. As of December 31, 2009 and 2010, the Company's deferred taxes were in respect of the following:

	December 31,
	2009			2010
Net operating loss carry-forwards (*)	$	37,207		$	37,471
Reserves and allowances		274			492
Property and Equipment		52			52
Research and development costs		642			669
Deferred tax assets before valuation allowance		38,171			38,684
Valuation allowance		(35,771	)		(35,184	)
Deferred tax asset	$	2,404		$	3,500
Domestic:
Current deferred tax asset, net	$	1,283		$	1,559
Non-current deferred tax asset, net		986			1,535
		2,269			3,094
Foreign:
Current deferred tax asset, net		134			381
Non-current deferred tax asset, net		1			25
		135			406
	$	2,404		$	3,500

(*)_Including capital loss carry forward of $ 4,000 in Israel

Current deferred tax asset, net, is included within other current assets in the balance sheets.

F-28

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7: INCOME TAXES (Cont.)

e. For the year ended December 31, 2008, the main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of the benefits from accumulated net operating loss carry forward due to the uncertainty of the realization of such tax benefits. For the year ended December 31, 2009, the main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of the benefits from accumulated net operating loss carry forward due to the uncertainty of the realization of such tax benefits, as well as recognition of a deferred tax asset of $2,404 in respect of net operating loss carry forwards and temporary differences that are more likely than not to be realized in the foreseeable future. For the year ended December 31, 2010, the main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of the benefits from accumulated net operating loss carry forward due to the uncertainty of the realization of such tax benefits, as well as utilization of deferred tax asset of approximately $500 during 2010, offset by a recognition of a deferred tax asset of approximately $1,600 in respect of net operating loss carry forwards and temporary differences that are more likely than not to be realized in the foreseeable future

f. Income before taxes on income (tax benefit) consists of the following:

	Year ended  December 31,
	2008		2009		2010
Israel	$	2,011	$	2,573	$	3,124
U.S.		266		183		181
	$	2,277	$	2,756	$	3,305

The Company is required to calculate and account for income taxes in each jurisdiction in which the Company or its subsidiary operate. Significant judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities.

F-29

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7: INCOME TAXES (Cont.)

g. Taxes on income (tax benefit) are comprised of the following:

	Year ended  December 31,
	2008		2009			2010
Current taxes:
Foreign	$	7	$	-		$	(2	)
Deferred taxes:
Foreign	$	-	$	(135	)	$	(270	)
Domestic		-		(2,269	)		(826	)
	$	7	$	(2,404	)	$	(1,098	)

h. Tax assessments:

The Company has final tax assessments in Israel through 2004.

NOTE 8: GEOGRAPHIC INFORMATION

The Company conducts its business on the basis of one reportable segment. The Company has adopted ASC 280, "Segment Reporting".

a. Revenues from external customers:

	Year ended December 31,
	2008		2009		2010
Israel	$	1,080	$	1,544	$	2,047
North America		8,018		8,032		9,184
Europe		3,160		3,776		4,454
Asia		1,497		1,508		1976
Other		337		329		500
	$	14,092	$	15,189	$	18,161

For the years ended December 31, 2008, 2009 and 2010, there are no major customers.

F-30

COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 8: GEOGRAPHIC INFORMATION (Cont.)

b. The Company's net amount of long-lived assets is as follows:

	December 31
	2009		2010
Israel	$	198	$	261
U.S.A.		503		5,169
	$	701	$	5,430

NOTE 9:- FINANCIAL INCOME, NET

	Year ended December 31,
	2008			2009			2010
Income:
Interest on cash and cash equivalents and short term deposit	$	434		$	108		$	20
Capital gain on sale of marketable securities		-			38			-
Expenses:
Foreign currency exchange differences and other		(88	)		(86	)		(75	)
	$	346		$	60		$	(55	)

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

F-31

ANTIVIRUS BUSINESS OF AUTHENTIUM INC.

SPECIAL PURPOSE STATEMENTS

AS OF DECEMBER 31, 2009

U.S. DOLLAR IN THOUSANDS

INDEX

	Page
Report of Independent Auditors	FF-2
Statements of Assets Acquired and Liabilities Assumed	FF-3
Statements of Attributable Direct Revenues and Expenses	FF-4
Notes to Special Purpose Statements	FF-5 - FF-9

REPORT OF INDEPENDENT AUDITOR

To the Board of Directors and Shareholders of

COMMTOUCH SOFTWARE LTD.

We have audited the accompanying special purpose statement of attributable direct revenues and expenses, and the statement of assets acquired and liabilities assumed of Authentium Inc.  ("the Company") antivirus business line ("antivirus business line") as of and for the year ended December 31, 2009. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the assets acquired and liabilities assumed of the antivirus business line as of December 31, 2009, and the attributable direct revenues and direct expenses for the year then ended , in conformity with accounting principles generally accepted in the United States of America.

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
June 6, 2011	A Member of Ernst & Young Global

FF-2

Statement of Assets Acquired and Liabilities Assumed

in thousands of dollars unless otherwise stated

	December 31,			June 30,
	2009			2010
				(Unaudited)
Assets to be sold
Current assets
Other receivables		38			25
Non-current asset
Equipment, net		112			130
		150			155
Liabilities assumed and net investment in product line
Current liabilities
Deferred revenues		(4,183	)		(3,795	)
Total net investment in product line		(3,984	)		(3,644	)

The accompanying notes are an integral part of these carve-out financial statements.

As a consequence of submitting statements of assets acquired and liabilities assumed the Product Line cannot prepare statements of cash flows and statements of changes in equity and comprehensive income (loss).

FF-3

Statements of Attributable Direct Revenues and Expenses

in thousands of dollars unless otherwise stated

	For the year ended		For the six months ended
	December 31,		June 30,
	2009		2010		2009
			(Unaudited)
Revenues		5,526		2,790		2,534
Cost of revenues		1,513		653		835
Other direct expenses		3,349		1,670		1,655
Revenues in Excess of Attributable Direct Expenses		664		467		44

The accompanying notes are an integral part of these carve-out financial statements.

FF-4

Notes to the special purpose statements

in thousands of dollars unless otherwise stated

1           Background and Basis of Presentation

Background

On September 3, 2010, the Company's wholly-owned subsidiary, Commtouch Software Inc., entered into an Asset Purchase Agreement ("APA") with Authentium, Inc. ("Authentium"), pursuant to which the Company's subsidiary agreed to acquire the assets of the antivirus business line (the "Product Line") of Authentium (the "Acquisition"), a private Florida-based company, for $ 4.6 million in cash and contingent cash payment estimated to be $ 3 million (fair value of $ 2.8 million as of acquisition date), payable in 2012, based on future revenue performance of the business acquired in 2011. Pursuant to the APA, the Company acquired the intellectual property rights (technology), research and development personnel, certain sales personnel, customer contracts, certain fixed assets and deferred revenues of the Product Line.

Commtouch develops and provides messaging and web security solutions to OEM partners and enterprises. The Company's business is to develop and sell these solutions to various customers through a variety of third party distribution channels.

Prior to the Acquisition, the Product Line operated as a part of Authentium. The Product Line was not a legal entity or a stand-alone business and Authentium did not account for the Product Line as a separate entity, subsidiary or division of its business.

Basis of Presentation of Special Purpose Financial Statements

The accompanying special purpose financial statements have been prepared from the historical accounting records of the Product Line and present the assets acquired and the liabilities assumed as of December 31, 2009 and June 30, 2010, and the direct revenues and expenses attributable to the Product Line for the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009 pursuant to the APA, including allocations of certain expenses based upon selected criteria.  US GAAP financial statements were not previously prepared for the Product Line as it had no separate legal status.  Furthermore, there was no general ledger for the Product Line on a stand-alone basis and neither complete balance sheets nor complete balance sheet detail had been prepared for it. Cash management functions were part of the Authentium organization and were not performed within the Product Line. Based on the foregoing and since only certain assets of the Product Line have been acquired and certain liabilities assumed, statements of operations and cash flows are not applicable. As a result, full audited financial statements are not provided.

The accompanying statements of direct revenues and expenses were prepared to present the net revenues and direct operating costs attributable to the Product Line.  The statements of direct revenues and expenses do not include interest expense and corporate overhead expenses, as these expenses were determined at the consolidated level of Authentium and it is not practical to isolate or allocate such expenses and income to the Product Line.  Management believes the assumptions and allocations underlying the statement of assets to be sold and liabilities to be assumed and the related statements of attributable  direct revenues and expenses are reasonable and appropriate under the circumstances.

Management believes that the substantial efforts involved with performing an assessment for full US GAAP-conformant financial statements is not commensurate with the limited potential benefit to be derived by Commtouch's investors.  Limiting the financial information as presented to the assets acquired and liabilities assumed decreases the required efforts without unduly decreasing the value of the information to Commtouch's investors.

FF-5

As a result, the accompanying special purpose financial statements are not intended to be a complete presentation of the Product Line's results of operations and financial position and they do not purport to reflect the revenues and direct operating expenses that would have resulted if the Product Line had operated as an unaffiliated independent business.   Consequently, future results of operations after the separation of the Product Line from Authentium will include costs and expenses to operate as a business unit of Commtouch, and these costs and expenses as well as revenues may be materially different than the historical results of operations and financial position.  Accordingly, the financial statements of the Product Line for these periods are not indicative of future results and the financial position of Commtouch inclusive of the Product Line.

2           Accounting policies and new accounting standards

Accounting policies

The special purpose financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP). Historical cost is used as the measurement basis unless otherwise indicated.

Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the special purpose financial statements in order to conform with generally accepted accounting principles. Actual results could differ from those estimates.

Information by Segment and Main countries

Authentium has various product offerings: antivirus and antimalware, multifunction consumer security suites and security software products and services. Consequently, no segment information is available at the Product Line level and it is not practical to prepare segment information at the Product Line level. Hence, segment information relating to the Product Line is omitted from the special purpose financial statements.

Foreign currencies

A majority of the revenues and substantially all expenses of the Company are generated in United States dollars ("dollars"). The Company's management believes that the dollar is the currency of the primary economic environment in which the Company operates. Thus, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars, in accordance with ASC Topic 830, "Foreign Currency Matters". All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.

Equipment

Property and equipment are stated at cost, net of accumulated depreciation, using the accelerated method over the respective estimated useful lives of the assets.

FF-6

Impairment of long-lived assets

The Product Line's long-lived assets are reviewed for impairment in accordance with ASC 360 "Property, Plant and Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverabililty of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such  assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009, no impairment losses have been identified.

Research and development

Research and development costs incurred in the process of developing new products or product improvements, are charged to expense as incurred.

Advertising

Advertising costs are expensed when incurred.

Revenue recognition

The Company derives revenues from antivirus and antimalware services. The service component of the Company's solutions is considered essential to the functionality of the software components. Furthermore, the software component cannot be effectively used on a standalone basis, or with a third party's service. The customer has no ability to effectively run the software or the Software Development Kit ("SDK") on its own hardware. As the software portion of the product cannot effectively stand on its own, the Company considers each sale as a service arrangement.

Therefore, revenues from such services are recognized over the service term, which generally includes a term period of one to three years.

Revenue is recognized in accordance with ASC 605 - 25, "Revenue Recognition" and Staff Accounting Bulletin Topic 13, when the earnings process is complete, as evidenced by an agreement between the customer and the Company, when delivery has occurred or services have been rendered, when the fee is fixed or determinable and when collectability is probable.

Deferred revenues include unearned amounts received from customers, but not yet recognized as revenues.

Share based compensation

ASC 718, "Share - Based Payment" requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods of the Product Line's Statement of Attributable Direct Revenues and Expenses.

The Product Line recognizes compensation expense for the value of its awards on a straight line basis over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was derived from companies with similar behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

FF-7

The fair value for options granted in the Product Line in 2009 and for the six months ended June 30, 2010 and 2009 is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

	Year ended December 31,			Six months ended June30,
	2009			2009			2010
				Unaudited
Volatility		70.0	%		70.0	%		70.0	%
Risk-free interest rate		2.5	%		2.5	%		2.5	%
Dividend yield		0.0	%		0.0	%		0.0	%
Expected life (years)		5.0			5.0			5.0

The share based compensation recorded in the Product Line was $41, $21 and $21 for the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009 (unaudited), respectively.

Recently Issued Accounting Pronouncements

ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. These amendments establish a selling price hierarchy for determining the selling price of a deliverable, which is based on: a) vendor-specific objective evidence; b) third-party evidence; or c) estimates. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company has not early adopted the guidance. Management believes that the adoption of the new guidance will not have a material impact on its financial statements.

FF-8

3           Shared services with Authentium

The Product Line participates in shared services with other product lines of Authentium in areas such as:

·           Hosting and network operations services and personnel

·           Leased facilities and equipment

The costs of these services for the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009  were allocated to  the Product Line either based on the revenues recognized by the Product Line as a proportion of total revenues recognized by Authentium, or based on the headcount of the Product Line as a proportion of the total  headcount of Authentium.

Authentium incurred certain interest and corporate overhead expenses to support the Product Line that were not allocated and due to the shared nature of such expenses could not be readily identified.  As these amounts are not specifically identifiable and there was no methodology utilized by Authentium for allocating these expenses to the Product Line, such expenses are not recorded in these financial statements.

4           Concentration of risk

The Product line's sales are for a large part dependent on a limited number of customers, of which one individually exceeds 10% of total revenue. This customer accounted for 35% in 2009 (and 36% and 29%  for the six months ended June 30, 2010 and 2009, respectively). No other customers individually account for more than 10% of total Product Line revenues.

5           Equipment, net

	December 31,			June 30,
	2009			2010
				(Unaudited)
Computer equipment and software		361			409
Less:  accumulated depreciation		(249	)		(279	)
Equipment, net		112			130

Depreciation expense amounted to $ 55, $ 32 and $ 28 for the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009 (unaudited), respectively.

FF-9

Item 19. Exhibits.

The list of exhibits required by this Item is incorporated by reference to the Exhibit Index which precedes the exhibits to this report.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20–F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

COMMTOUCH SOFTWARE LTD.
By:	/s/ Ron Ela
	Ron Ela
	Chief Financial Officer
	June 7, 2011

53

Item 19. Exhibits

ExhibitNumber	DescriptionofDocument
1.1	Memorandum of Association of the Company.(1)
1.2	Amended and Restated Articles of Association of the Company, as amended on December 14, 2007.(2)
4.1	Commtouch Software Ltd. 2006 U.S. Stock Option Plan.(3)
4.2	Amended and Restated Commtouch Software Ltd. 1999 Non–Employee Directors Stock Option Plan.(4)
4.3	Extension of Amended and Restated Commtouch Software Ltd. 1999 Non-Employee Directors Stock Option Plan.(5)
4.4	Commtouch Software Ltd. Amended and Restated Israeli Share Option Plan [successor plan to 1999 Section 3(i) Share Option Plan].(6)
4.5	Commtouch Software Ltd. Amended and Restated 1996 CSI Stock Option Plan.(7)
4.6	Amended and Restated 1999 Section 3(i) Share Option Plan.(8)
4.7	Summary of Director Compensation.
4.8	Asset Purchase Agreement by and between Commtouch Inc.and Authentium, Inc. dated July 26, 2010.
8	List of Subsidiaries of the Company.
12.1	Certification of Company’s Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
12.2	Certification of Company’s Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
13	Certification of Company’s Principal Executive Officer and Principal Financial Officer Pursuant  to 18 U.S.C. 1350.
15	Consents of Kost, Forer, Gabbay & Kasierer, independent auditors.

(1)	Incorporated by reference to exhibits in Amendment No. 1 to Registration Statement on Form F–1 of Commtouch Software Ltd., File No. 333–78531. [filed June 3, 1999]
(2)	Incorporated by reference to Exhibit 1.2 to Annual Report on Form 20–F for the year ended December 31, 2007. [filed March 31, 2008]
(3)	Incorporated by reference to Exhibit 99.4 to Registration Statement on Form S–8 No. 333–141177. [filed March 9, 2007]
(4)	Incorporated by reference to Exhibit 99.1 to Registration Statement on Form S–8 No. 333–141177. [filed March 9, 2007]
(5)	Incorporated by reference to Exhibit 4.6 to Annual Report on form 20-F for the year ended December 31, 2008.
(6)	Incorporated by reference to Exhibit 99.3 to Registration Statement on Form S–8 No. 333–141177. [filed March 9, 2007]
(7)	Incorporated by reference to Exhibit 99.2 to Registration Statement on Form S–8 No. 333–141177. [filed March 9, 2007]
(8)	Incorporated by reference to Exhibit 5 to Schedule TO, filed July 20, 2001.

54

EX-4.7

Exhibit 4.7

SUMMARY OF DIRECTOR COMPENSATION

The following is a summary of the currently effective compensation of the non-employee directors of Commtouch Software Ltd. (the “Company”) for services as directors:

· Directors are granted stock options, with new directors receiving an initial grant of 50,000 options and continuing directors receiving an “evergreen” option grant of 16,667 options.  At the annual meeting in October 2009, shareholders approved a one-time increase of the evergreen option grant to 30,000 options.

· Through 2008, directors did not receive cash compensation for their services.  However, at the annual meeting in December 2008, shareholders approved the payment of cash compensation, in addition to the stated options compensation, according to the following:

1. NIS 31,700 base annually per director, as linked to the applicable Israeli consumer price index, payable in four equal installments at the beginning of each calendar quarter; and

2. NIS 1,590 per director per face to face Board or committee meeting or NIS954 (60% of NIS 1590) in case of telephonic participation at such meeting, payable at the beginning of each calendar quarter following the quarter during which a Board member participated in a meeting. No separate per meeting compensation will be paid for committee meetings that are held on the same day immediately prior or subsequent to a Board meeting.  In that event, a Board and committee meeting will be considered one meeting.

3. For non-Israeli based directors, the amounts set forth will be paid in United States dollars, according to the representative rate of exchange published by the Bank of Israel on the date of payment.

Other than the foregoing option grants, cash compensation and reimbursement of expenses, the Company does not compensate its directors for serving on its board of directors.

EX-4.8

Exhibit 4.8

Execution Copy

ASSET PURCHASE AGREEMENT

BY AND BETWEEN

COMMTOUCH INC.,

AND

AUTHENTIUM, INC.

Dated as of

July 26, 2010

		Page
ASSET PURCHASE AGREEMENT			1
ARTICLE 1 PURCHASE AND SALE			2
1.1	Purchase and Sale of Assets.		2
1.2	Assumption of Liabilities.		3
1.3	Purchaser Assignment.		4
1.4	Closing.		4
1.5	Purchase Price; Closing.		4
1.6	Adjustment to Initial Payment.		4
1.7	Earnout Payment.		5
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY			6
2.1	Organization and Qualification.		6
2.2	Authority Relative to this Agreement.		7
2.3	No Conflicts.		7
2.4	Organizational Documents.		8
2.5	Audited Financial Statements.		8
2.6	Absence of Changes.		8
2.7	No Undisclosed Liabilities.		8
2.8	Taxes.		8
2.9	Legal Proceedings.		9
2.10	Compliance with Laws and Orders.		9
2.11	Employees; Labor Relations.		9
2.12	Benefit Plans.		11
2.13	Real Property.		11
2.14	Purchased Assets.		12
2.15	Intellectual Property.		12
2.16	Contracts.		14
2.17	Insurance.		15
2.18	Affiliate Transactions.		15
2.19	Environmental Matters.		16
2.20	Substantial Customers and Suppliers.		16
2.21	Accounts Receivable.		16
2.22	Brokers.		16
2.23	Warranty Obligations.		16
2.24	Payments.		17
2.25	Financial Projections/Forecast.		17
2.26	Approvals.		17
2.27	Export Controls Compliance.		18
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER			18
3.1	Organization and Qualification.		18
3.2	Authority Relative to this Agreement.		18
3.3	No Conflicts.		18
3.4	No Brokers.		19
3.5	Sufficiency of Funds.		19
3.6	Legal Proceedings.		19
3.7	Legal or Regulatory Restraints.		19

i

		Page
ARTICLE 4 CONDUCT PRIOR TO THE CLOSING			19
4.1	Conduct of Business of the Company.		19
4.2	Filings with Governmental Authorities.		20
4.3	No Solicitation.		21
ARTICLE 5 ADDITIONAL AGREEMENTS			22
5.1	Access to Information.		22
5.2	Confidentiality.		22
5.3	Expenses.		23
5.4	Post-Closing Correction of Improper Receipts of and/or Requests for Payment.		23
5.5	Public Disclosure.		23
5.6	Approvals.		23
5.7	Notification of Certain Matters.		23
5.8	Certain Matters Relating to the Earnout Payment.		23
5.9	Additional Documents and Further Assurances; Cooperation.		24
5.10	Company Auditors.		24
5.11	Information Technology Access		25
5.12	Intellectual Property.		26
5.13	Allocation of Aggregate Consideration.		26
5.14	Taxes.		26
5.15	Name.		27
ARTICLE 6 CONDITIONS TO THE TRANSACTIONS			28
6.1	Conditions to Obligations of Each Party to Consummate the Transaction.		28
6.2	Additional Conditions to Obligations of the Company.		28
6.3	Additional Conditions to the Obligations of the Purchaser.		28
ARTICLE 7 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; ESCROW PROVISIONS			30
7.1	Survival of Representations, Warranties, Covenants and Agreements.		30
7.2	Escrow Provisions.		31
ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER			34
8.1	Termination.		34
8.2	Effect of Termination.		35
8.3	Amendment.		35
8.4	Extension; Waiver.		35
ARTICLE 9 MISCELLANEOUS PROVISIONS			35
9.1	Notices.		35
9.2	Entire Agreement.		36
9.3	Further Assurances; Post-Closing Cooperation.		36
9.4	Waiver.		36
9.5	Third Party Beneficiaries.		37
9.6	No Assignment; Binding Effect.		37
9.7	Headings.		37
9.8	Invalid Provisions.		37
9.9	Governing Law, Consent to Jurisdiction and Waiver of Trial by Jury.		37
9.10	Construction.		38
9.11	Counterparts.		38
9.12	Specific Performance.		38
ARTICLE 10 DEFINITIONS			38
10.1	Definitions.		38
10.2	Construction.		46

ii

EXHIBIT A	Form of Escrow Agreement
EXHIBIT B	Form of Assumption Document
EXHIBIT C	Form of AV SDK License Agreement
EXHIBIT D	Form of Legal Opinion of Gary Davis, Esq.
EXHIBIT E	Form of the Company's Officers' Certificate
EXHIBIT F	Form of Legal Opinion of Carl L. Spataro, Jr., Esq.
EXHIBIT G	Form of Non-Competition Agreement
EXHIBIT H	Form of Transition Services Agreement
EXHIBIT I	Form of Development Services Agreement
EXHIBIT J	Form of Bill of Sale
EXHIBIT K	Form of Assignment of IP Rights

SCHEDULE 1.1(h)	Furniture, fixtures, equipment, etc. required by the Company to perform its obligations under the Transition Services Agreement and being transferred to the Purchaser upon the expiration or termination of such agreement
SCHEDULE 1.1(l)	Furniture, fixtures, equipment, etc. required by the Company to perform its obligations under the Transition Services Agreement and not being transferred to the Purchaser
SCHEDULE 6.3(h)	Employees and Essential Employees

iii

ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT is made and entered into as of July 26, 2010, by and between Commtouch Inc., a California corporation (the "Purchaser"), and Authentium, Inc., a Delaware corporation (the "Company").  For valuable consideration and as an inducement to the Company to enter into this Agreement, Commtouch Software Ltd., a company organized under the laws of the State of Israel and the ultimate parent company of the Purchaser (the “Purchaser Parent”), joins this Agreement in the manner set forth in the paragraph captioned “Agreement of the Purchaser Parent” on the signature page of this Agreement.  Each capitalized term used and not otherwise defined herein shall have the meaning set forth in Article 10.

RECITALS

A.           The Company is engaged in research and development, marketing, sales and support of security software products and services that use Blocking Technology to detect and prevent the installation or operation of software code that is known or suspected to be Malware (the "Business"), including (i) the licensing of the Company's anti-virus software development kit (the "AV SDK") to OEM licensees for use in gateway and end-user products, and (ii) the direct sales and support of endpoint anti-Malware products marketed under the brand name "Command Software Anti-Malware" for consumers, small businesses and enterprises ("CSAM Products").  In addition to the Business, the Company is engaged in the development, marketing, sales and support of (y) multi-function consumer security suites and related services (the "ESP-C Products") through internet service providers who market, sell and distribute such suites through their respective ISP brands, and (z) the development, marketing, sale and support of security software products and services that use TSX Technology, including a secure browsing product marketed under the brand name "SafeCentral" (the "TSX-Based Products").

B.           The Company wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Company, the assets relating to the Business (the "Transaction") in consideration of the purchase price described herein, including the Purchaser's assumption of certain liabilities and obligations of the Company described herein.  The Company will continue the development, marketing, sale and support of the ESP-C Products and the TSX-Based Products.

C.           The board of directors of each of the Purchaser and the Company believe it is in the respective best interests of the Purchaser and the Company and their respective shareholders to consummate the Transaction and, in furtherance thereof, have approved the Transaction, this Agreement and the transactions contemplated hereby.

D.           As a condition and an inducement to the Purchaser to enter into this Agreement, certain employees of the Company shall have accepted offers of employment agreements with the Purchaser, each of which acceptances shall become effective at the Closing Date.

E.           A portion of the purchase price payable in connection with the Transaction shall be placed in an escrow account by the Purchaser in accordance with an Escrow Agreement by and among the Purchaser, the Company and the Escrow Agent, substantially in the form of Exhibit A hereto, and the release of such amount shall be contingent upon certain events and conditions, all as set forth in Section 1.5 and Article 7 herein.

F.           A portion of the purchase price payable in connection with the Transaction shall be in the form of an "earn-out" payment based on the revenues recognized by Purchaser from certain OEM customers with respect to their OEM Agreements.

G.           Each of the Company and the Purchaser desires to make certain representations, warranties, covenants and agreements in connection with the Transaction.

NOW, THEREFORE, in consideration of the covenants, premises, representations and warranties set forth herein, and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by the parties), intending to be legally bound hereby, the parties agree as follows:

ARTICLE 1

PURCHASE AND SALE

1.1          Purchase and Sale of Assets.  Upon the terms and subject to the conditions set forth in this Agreement, the Purchaser agrees to purchase and acquire from the Company, and the Company agrees to sell, convey, transfer, assign and deliver to the Purchaser, on the Closing Date, free and clear of all Liens, other than Permitted Liens, all of the Company's right, title and interest in and to all of the Assets and Properties that are used or held by the Company for the primary purpose of conducting the Business (the "Purchased Assets"), including:

(a)          the Company products that use Blocking Technology to detect and remediate Malware, including the Company's AV SDK and CSAM Products and the documentation related thereto (the "Business Products");

(b)          those Contracts set forth in Section 1.1(b) of the Company Disclosure Schedule (the "OEM Agreements") with OEM licensees pursuant to which such licensees are authorized to integrate the AV SDK into their solutions and to sell and support such integrated solutions;

(c)          all Contracts with Company resellers pursuant to which such resellers are authorized to sell the CSAM Products (the "Reseller Contracts");

(d)          all Contracts with end user customers of the CSAM Products (the "End User Contracts" and, collectively with the OEM Agreements and the Reseller Contracts, the "Purchased Contracts");

(e)          all Business Products Intellectual Property, including all interests in the Authentium and Command Software brand names and all associated trademarks, trade names and related property;

(f)           all accounts receivable relating to the Business (subject to Post-Closing Correction pursuant to Section 5.4 of this Agreement);

(g)          all furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property set forth in Section 1.1(g) of the Company Disclosure Schedule;

(h)          furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property identified on Schedule 1.1(h) as being required by the Company to perform its obligations under the Transition Services Agreement, which the Company shall transfer to the Purchaser immediately upon expiration or termination of the Transition Services Agreement rather than at Closing;

(i)           the Contracts and Licenses set forth in Section 2.15(f) of the Company Disclosure Schedule pursuant to which the Company licenses-in certain Intellectual Property that is used in the Business (the "Purchased In-Licenses");

(j)           originals, or where not available, copies of the Books and Records relating to (a)-(h) above, including the applicable ledgers, accounting records, machinery and equipment files, customer lists and records, price lists, reseller lists, supplier lists, quality assurance records and procedures, customer complaint files, sales material and records (including end user license agreements, terms and conditions of sales, and marketing collateral), and research and development files relating to the Business Products Intellectual Property.

The Purchased Assets shall not include the following (collectively, the "Excluded Assets"):

(k)          the ESP-C Products;

- 2 -

(l)           furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property identified on Schedule 1.1(k) as being required by the Company to perform its obligations under the Transition Services Agreement but not being transferred to the Purchaser upon expiration or termination of the Transition Services Agreement;

(m)         all cash and accounts receivable not relating to the Business;

(n)          those Contracts that are identified in the Schedules to the Transition Services Agreement as Contracts pursuant to which a Scheduled Service is provided by Third Party Service Provider (as defined in the Transition Services Agreement);

(o)          all Company products other than the Business Products (the "Excluded Products");

(p)          all Contracts other than the Purchased Contracts;

(q)          all Intellectual Property owned by the Company other than Business Products Intellectual Property;

(r)           all furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property whose purpose is the Company's general and administrative use (including accounting, human resources, legal and reporting) and which are not used or held by the Company for the primary purpose of conducting the Business ("Administrative Assets");

(s)          all Contracts and Licenses pursuant to which the Company licenses in Intellectual Property other than the Purchased In-Licenses;

(t)           all Books and Records of the Company other than the Books and Records specified in clause (j) above; and

(u)          the Benefit Plans or any assets of the Benefit Plans.

For purposes of this Section 1.1, the "primary purpose" of an Asset or Property is the conduct of the Business if (i) the proper functioning of a Business Product depends upon the use of such Asset or Property; (ii) use of such Asset or Property by the Company for research and development, support, marketing or sales functions relating to the Business exceeds use for such functions relating to the ESP-C Products or the TSX-Based Products, or (iii) such Asset or Property has limited residual value to the Company outside of the Business.

1.2          Assumption of Liabilities.  Upon the terms and subject to the conditions set forth in this Agreement, the Purchaser agrees to assume and agrees to pay, perform and be responsible for only the following Liabilities of the Company (the "Assumed Liabilities"):

(a)          all License, service and support (including delivery of updates) Liabilities in respect of the Purchased Contracts to the extent such Liabilities have been incurred as of the Closing Date but their performance is scheduled after the Closing Date, and all other Liabilities in respect of the Purchased Assets arising after the Closing Date, except to the extent that such Liabilities with respect to a Purchased Asset relate to any failure to perform, improper performance, warranty or other breach or default under such Purchased Asset by the Company prior to the Closing Date; and

(b)          all Liabilities in respect of the Business Products Intellectual Property arising after the Closing Date.

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OTHER THAN THE ASSUMED LIABILITIES, NEITHER PURCHASER NOR ANY OF ITS AFFILIATES WILL ASSUME OR OTHERWISE BE RESPONSIBLE IN ANY WAY WHATSOEVER FOR ANY OTHER DUTIES, OBLIGATIONS OR LIABILITIES OF, OR CLAIMS AGAINST, THE COMPANY (OR ANY OF ITS EMPLOYEES, AGENTS, OFFICERS, DIRECTORS, TRUSTEES, REPRESENTATIVES, SUBSIDIARIES, SHAREHOLDERS OR THEIR AFFILIATES) WITH RESPECT TO THE PURCHASED ASSETS.  NEITHER PURCHASER NOR ANY OF ITS AFFILIATES WILL ASSUME OR OTHERWISE BE RESPONSIBLE IN ANY WAY WHATSOEVER FOR ANY OTHER DUTIES, OBLIGATIONS OR LIABILITIES OF, OR CLAIMS AGAINST, THE COMPANY (OR ANY OF ITS EMPLOYEES, AGENTS, OFFICERS, DIRECTORS, TRUSTEES, REPRESENTATIVES, SUBSIDIARIES, SHAREHOLDERS OR THEIR AFFILIATES) WITH RESPECT TO THE EXCLUDED ASSETS.

1.3         Purchaser Assignment.  Notwithstanding anything herein to the contrary, and for all purposes of this Agreement and the transactions contemplated hereby, the Company and the Purchaser agree that the Purchaser shall be entitled to assign its rights to purchase the Purchased Assets and its obligations to assume the Assumed Liabilities to any one or more Affiliates of the Purchaser, provided that with respect to any such assignment prior to the end of the Earnout Period (a) each assignee Affiliate agrees to be bound by the terms and conditions of this Agreement in the place of Purchaser, and (b) Purchaser agrees to guaranty and remain liable for its Affiliates' performance under this Agreement.

1.4         Closing. Unless this Agreement is earlier terminated pursuant to Section 8.1, the closing of the Transaction (the "Closing") will take place as promptly as practicable, but no earlier than the next Business Day after the Company first makes its regularly scheduled payroll payment to the employees of the Business following satisfaction or waiver of the conditions set forth in Article 6, at the offices of the Company at 7121 Fairway Drive, Suite 102, Palm Beach Gardens, Florida 33418, unless another place or time is agreed to by the Purchaser and the Company.  The date upon which the Closing actually occurs is herein referred to as the "Closing Date."

1.5         Purchase Price; Closing. The aggregate purchase price for the Purchased Assets shall be eight million United States Dollars (US $8,000,000) (the "Aggregate Consideration"), which shall be comprised of the Base Purchase Price and the Earnout Payment.  Payment of the Initial Payment shall be subject to adjustment as provided in Section 1.6, payment of the Earnout Payment shall be subject to adjustment as provided in Section 1.7, and disbursement of the Escrow Amount portion of the Base Purchase Price shall be made as provided in Article 7.  At the Closing, upon the terms and subject to the conditions set forth herein, in consideration for the sale, transfer, assignment, conveyance and delivery of the Purchased Assets by the Company to the Purchaser, and in addition to assuming the Assumed Liabilities, and the other transactions contemplated hereby, the Purchaser shall pay to the Company the aggregate amount of four million six hundred thousand United States Dollars (US $4,600,000) (the "Base Purchase Price") as follows:

(a)           The Purchaser shall pay to the Company three million six hundred eighty thousand United States Dollars (US $3,680,000), subject to adjustment as provided in Section 1.6 (the "Initial Payment"); and

(b)           The Purchaser shall deposit nine hundred twenty thousand United States Dollars (US $920,000) (the "Escrow Amount") with the Escrow Agent as provided in Section 7.1.

The Purchaser shall pay all amounts by wire transfer of immediately available funds to an account designated by the Company in writing (or by the Escrow Agent with respect to the Escrow Amount).

1.6        Adjustment to Initial Payment. The parties acknowledge and agree that the Company periodically receives payments from customers with respect to the OEM Agreements that cover future periods of time ("Advance Payments") and that, to the extent Advance Payments are received prior to Closing which apply to periods after Closing, such Advance Payments should be pro-rated and the Purchaser shall be entitled to receive a portion thereof based on the number of days covered by the Advance Payment that occur after the Closing Date relative to the total number of days covered by the Advance Payment.  Therefore, on the date that is ten (10) Business Days following the Closing, the Company shall deliver to the Purchaser a report showing the aggregate Advance Payments that shall have been received as of the Closing Date that apply to any extent for periods after the Closing Date, together with (i) a calculation of the portion of each such Advance Payment that should be due to the Purchaser based on the number of days covered by the Advance Payment that occur after the Closing Date versus the total number of days covered by the Advance Payment (the prorated portion of the Advance Payments that should be paid to the Purchaser shall be referred to as the "Pro-Rated Advance Payment"), (ii) sufficient background information and detail so as to permit the Purchaser to verify the accuracy of the Pro-Rated Advance Payment, and (iii) payment of the Pro-Rated Advance Payment.

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1.7         Earnout Payment.  In addition to the Base Purchase Price, promptly following the completion of the Purchaser's audited financial statements for the calendar year ending December 31, 2011 (the "Earnout Period"), the Purchaser will pay the Company an aggregate amount of three million four hundred thousand United States Dollars (US $3,400,000) (the "Earnout Payment"), subject to adjustment as provided below in this Section 1.7

(a)           For purposes of calculating revenues under this Section 1.7 (but not for purposes of keeping the Purchaser's books), (i) only the Purchaser's revenues from the OEM Agreements as reflected in the Purchaser’s financial statements shall be utilized or taken into account, and (ii) the Purchaser shall recognize revenue in accordance with GAAP as in effect as of the Closing Date.  To the extent that the Purchaser Auditors propose to recognize revenue on any of the OEM Agreements differently than the Company has recognized revenue on such OEM Agreement, the Purchaser Auditors shall consult with the Company Auditors regarding such change, provided that (y) notwithstanding such consultation, the decision of the Purchaser Auditors regarding such recognition shall be final and binding on the Company, and (z) the maximum reduction in the Earnout Payment attributable to the manner in which the Purchaser Auditors recognize revenue on the OEM Agreement identified in Section 1.7(a) of the Company Disclosure Schedule shall not exceed the amount listed in Section 1.7(a) of the Company Disclosure Schedule.

(b)           The Purchaser is obliged to provide services to OEM customers for whom deferred revenues were previously recognized and payments already received by the Company, as specified in Section 1.7(b) of the Company Disclosure Schedule.  These deferred revenues shall not be deemed to be revenues recognized during the Earnout Period, and shall not otherwise be utilized or taken into account in any manner, in relation to the calculation of the Earnout Payment.  The adjustment to the Earnout Payment shall be calculated as follows:

(i)           If the aggregate annual revenues recognized from the OEM Agreements in the Purchaser's audited financial statements for the Earnout Period are less than three million four hundred thousand United States Dollars (US $3,400,000), then the Earnout Payment will be reduced by US $2.00 for every US $1.00 of shortfall (below US $3,400,000) in aggregate 2011 annual revenues recognized by the Purchaser from the OEM Agreements; however, notwithstanding the foregoing, if the aggregate annual revenues recognized by the Purchaser during 2011 from the OEM Agreements are two million three hundred thousand United States Dollars (US $2,300,000) or less, then the Earnout Payment shall be reduced to zero.

(ii)           If the aggregate annual revenues recognized from the OEM Agreements in the Purchaser's audited financial statements for the Earnout Period exceed four million United States Dollars (US $4,000,000), then the Earnout Payment shall be increased by US $0.50 for each US $1.00 of excess (above US $4,000,000) in aggregate 2011 annual revenues recognized by the Purchaser from the OEM Agreements.

(c)           Upon reasonable request of the Company during the Earnout Period, but in no event more than quarterly during such period, the Purchaser shall provide to the Company a report and reasonable supporting detail showing the revenue recognized for each of the OEM Agreements from the beginning of the Earnout Period and until the end of the calendar quarter immediately preceding the date of such report.

(d)           The Purchaser shall present its Earnout Payment calculation (the "Earnout Payment Calculation") to the Company no later than March 31, 2012 in a written statement setting forth the calculations and supporting information (for each of the OEM Agreements) in such reasonable detail as to permit the Company to review and confirm the accuracy of the Earnout Payment Calculation.

(e)           Upon receipt of the Earnout Payment Calculation, the Company shall have the right to review and confirm or dispute the accuracy of such calculations.  The Purchaser shall provide the Company, its legal counsel, and its financial advisors with reasonable access, subject to appropriate confidentiality restrictions, to such books and records (at the location such books and records are regularly kept, which may be in Israel; provided that, if requested by the Company, the Purchaser will make such books and records available via secure email transmission to the Company or via a secure online data room), as may be reasonably necessary to enable the Company, its legal counsel, and its financial advisors to review and verify such calculations.  If the Company notifies the Purchaser of its confirmation of the Earnout Payment Calculation, or if the Company does not notify the Purchaser of a disagreement with the calculations set forth in the Earnout Payment Calculation in writing within forty-five (45) days after receipt of the Earnout Payment Calculation, the Earnout Payment Calculation will become final.

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(f)           If the Company disagrees with the calculations set forth in the Earnout Payment Calculation, the Company shall notify the Purchaser of such disagreement in writing within forty-five (45) calendar days after receipt of the Earnout Payment Calculation, which notice shall set forth the amount and nature of the disagreement in reasonable detail.

(i)           If the Purchaser does not accept the position of the Company or otherwise negotiate a settlement within thirty (30) calendar days after receipt of such written notice by the Company, then the Company shall have the right to require a final and binding determination by submission of the disputed accounting and calculation issues to a mutually agreeable neutral accountant (the "Neutral Accountant") selected by the parties.  If the parties cannot agree on a Neutral Accountant within ten (10) calendar days, the Purchaser Auditors and Company Auditors shall select the Neutral Accountant.  The final determination of the Neutral Accountant shall fall within the range of difference between the Earnout Payment Calculations provided by the Purchaser and the amounts proposed by the Company.

(ii)           If the final determination by the Neutral Accountant as to the amount of any change or correction of the Earnout Payment Calculation is not more than eighty thousand United States Dollars (US $80,000) greater in favor of the Company than the Earnout Payment Calculation provided by the Purchaser (or, if greater, the last settlement offer made by the Purchaser), then the costs and fees of such dispute resolution shall be borne solely by the Company.  Otherwise, if the final determination results in a net change or correction which is more than eighty thousand United States Dollars (US $80,000) in favor of the Company than the Earnout Payment Calculation provided by the Purchaser (or, if greater, the last settlement offer made by the Purchaser), then the costs and fees of such dispute resolution shall be borne solely by the Purchaser.

(g)           The Purchaser shall pay 80% of the amount due to the Company as shown on the Earnout Payment Calculation concurrent with delivery of the Earnout Payment Calculation, and the Purchaser shall pay the remaining 20% on the earlier of (i) the date that is fifty (50) days following the delivery of the Earnout Payment Calculation, and (ii) five (5) days following notification to the Purchaser by the Company that it agrees with the Earnout Payment Calculation and waives its right under Section 1.7(f) to dispute the Earnout Payment Calculation; provided, however, that if the Earnout Payment Calculation is disputed, the Purchaser shall not be required to pay the remaining 20% until a final determination, and in such case the Purchaser shall pay the amount finally determined to be due within fifteen (15) calendar days of a final determination in accordance with this Section 1.7.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Purchaser that the following representations and warranties are true and accurate in all respects as of the date hereof and as of the Closing Date (as though made then), subject only to such exceptions as are specifically disclosed with respect to specific numbered sections and lettered subsections of this Article 2 (or with respect to another numbered section or lettered subsection to the extent that it is reasonably apparent on the face of such disclosure that such disclosure is applicable to such other numbered section or lettered subsection) in the disclosure schedule and schedule of exceptions delivered herewith and dated as of the date hereof (the "Company Disclosure Schedule"):

2.1         Organization and Qualification.  The Company is a company duly organized, validly existing and in good standing under the Laws of the State of Delaware, and has full corporate power and authority to conduct the Business as presently conducted and to own, use, license and lease the Purchased Assets.  The Company is duly qualified, licensed or admitted to do business and is in good standing as a foreign corporation in each jurisdiction in which the ownership, use, licensing or leasing of the Purchased Assets, or the conduct or nature of the Business, makes such qualification, licensing or admission necessary except where the failure to be so qualified, licensed or admitted to do business or the failure to be in good standing would not, individually or in the aggregate, have a Company Material Adverse Effect.  Section 2.1 of the Company Disclosure Schedule sets forth each jurisdiction where the Company is so qualified, licensed or admitted to do business and separately lists each other jurisdiction in which the Company owns, uses, licenses or leases the Purchased Assets, or conducts the Business or has employees who are engaged in the Business or engages independent contractors for the Business.

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2.2         Authority Relative to this Agreement. The Company has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which the Company is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution and delivery by the Company of this Agreement and the Ancillary Agreements to which the Company is a party and the consummation by the Company of the transactions contemplated hereby and thereby, and the performance by the Company of its obligations hereunder and thereunder, have been duly and validly authorized by all necessary action by the board of directors of the Company, and no other action on the part of the board of directors of the Company is required to authorize the execution, delivery and performance of this Agreement and the Ancillary Agreements to which the Company is a party and the consummation by the Company of the transactions contemplated hereby and thereby.  This Agreement and the Ancillary Agreements to which the Company is a party have been or will be, as applicable, duly and validly executed and delivered by the Company and, assuming the due and valid authorization, execution and delivery hereof (and, in the case of the Ancillary Agreements to which the Purchaser is a party, thereof) by the Purchaser, each constitutes or will constitute, as applicable, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar Laws relating to the enforcement of creditors' rights generally and by general principles of equity.

2.3         No Conflicts. The execution and delivery by the Company of this Agreement and the Ancillary Agreements to which the Company is a party does not, and the performance by the Company of its obligations under this Agreement and the Ancillary Agreements to which the Company is a party and the consummation of the transactions contemplated hereby and thereby do not and will not:

(a)          conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Second Amended and Restated Certificate of Incorporation, Bylaws or any other charter document of the Company;

(b)          subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Section 2.3(b) of the Company Disclosure Schedule, if any, conflict with or result in a violation or breach of any Law or Order applicable to the Company, except where such conflict, violation or breach would not, individually or in the aggregate, have a Company Material Adverse Effect; or

(c)          subject to obtaining the consents, approvals and actions, and giving the notices, disclosed in Section 2.3(c) of the Company Disclosure Schedule, if any, (i) conflict with or result in a violation or breach of, (ii) constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, (iii) require the Company to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of (except for such consents approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable Laws or as would not, individually or in the aggregate, have a Company Material Adverse Effect), (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to (except to the extent that any such termination, cancellation, acceleration or modification would not, individually or in the aggregate, have a Company Material Adverse Effect), (v) result in or give to any Person any additional rights or entitlement to any increased, additional, accelerated or guaranteed payments or performance under, or (vi)  result in the loss of any material benefit under, any Purchased Contract.

(d)          subject to obtaining the consents, approvals and actions, and giving the notices, disclosed in Section 2.3(d) of the Company Disclosure Schedule, if any, result in the creation or imposition of (or the obligation to create or impose) any Lien upon the Purchased Assets.

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2.4          Organizational Documents. The Company has prior to the execution of this Agreement delivered to the Purchaser  true and complete copies of its Second Amended and Restated Certificate of Incorporation, Bylaws and other charter documents, all as amended through the date hereof.  The Company is not in violation of any provision of its Second Amended and Restated Certificate of Incorporation, Bylaws or other charter documents.

2.5          Audited Financial Statements.   Section 2.5 of the Company Disclosure Schedule sets forth the Audited Financial Statements.  The Audited Financial Statements set forth in the Company Disclosure Schedule have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto as delivered to the Purchaser prior to the date hereof).  The Audited Financial Statements present fairly and accurately the financial condition and operating results of the Company as of the dates and during the periods indicated therein.

2.6          Absence of Changes.

Since December 31, 2009, there has not been any Company Material Adverse Effect or any occurrence or event which, individually or in the aggregate, could be reasonably expected to have any Company Material Adverse Effect.  Since December 31, 2009, the Company has operated its business in the ordinary course of business consistent with past practice.

2.7          No Undisclosed Liabilities

Except as set forth in Section 2.7 of the Company Disclosure Schedule or as reflected or reserved against in the Audited Financial Statements (including the notes thereto), there is no Liability of, relating to or affecting the Business or any of the Purchased Assets, other than Liabilities incurred in the ordinary course of business consistent with past practice since the Audited Financial Statement Date and in accordance with the provisions of this Agreement which, individually and in the aggregate, are not material to the Business or Condition of the Company and are not for tort or for breach of contract.

2.8          Taxes.

Except as otherwise set forth in Section 2.8 of the Company Disclosure Schedule:

(a)           All material Tax Returns required to have been filed by or with respect to the Company or any affiliated, consolidated, combined, unitary or similar group of which the Company is or was a member (a "Relevant Group") with respect to the Purchased Assets or the Business have been duly and timely filed (including any extensions) with the appropriate Taxing Authority, and each such Tax Return correctly and completely reflects Tax liabilities and all other information required to be reported thereon.  All material Taxes due and payable by the Company or any member of a Relevant Group with respect to the Purchased Assets or the Business, whether or not shown on any Tax Return, or claimed to be due by any Tax Authority, for all periods (or portions of periods) prior to the Closing Date, have been paid. The Purchaser shall have no successor liability for Taxes of any kind.

(b)           The Company is not a party to any agreement extending the time within which to file any Tax Return.  No Claim has ever been made by a Taxing Authority of any jurisdiction in which the Company or any member of any Relevant Group does not file Tax Returns that the Company or such member is or may be subject to taxation by that jurisdiction with respect to the Purchased Assets or the Business.

(c)           The Company and each member of any Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, supplier, creditor or independent contractor.

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(d)           The Company has not received any demand for payment or notice of assessment of, and does not have knowledge of any action by any Taxing Authority in connection with assessing, additional Taxes against or in respect of it or any Relevant Group for any period with respect to the Purchased Assets or the Business.  There is no dispute or Claim concerning any Tax Liability of the Company threatened, claimed, raised or assessed by any Taxing Authority, and no basis exists for any such Claim or dispute.  There are no Liens for Taxes upon the Purchased Assets, or otherwise related to the Business, other than Liens for Taxes not yet due.  Section 2.8(d) of the Company Disclosure Schedule lists those Tax Returns, if any, of the Company and each member of any Relevant Group that have been audited or examined by Taxing Authorities, and indicates those Tax Returns of the Company and each member of any Relevant Group that currently are the subject of audit or examination.  The Company has delivered or made available to the Purchaser true, complete and correct copies of all material Tax Returns filed by, and all Tax examination reports, correspondence received by the Company from any Tax Authority, and statements of deficiencies or assessment agreements assessed against or agreed to by, the Company and each member of any Relevant Group since the fiscal year ended December 31, 2006.

2.9          Legal Proceedings.

(a)                 Except as set forth in Section 2.9 of the Company Disclosure Schedule:

(i)           There is no Action or Proceeding pending nor, to the knowledge of the Company, threatened against, relating to or affecting any of the Purchased Assets;

(ii)          There has not been since the date of the Audited Financials any Action or Proceeding pending nor, to the knowledge of the Company, threatened against, relating to or affecting any of the Purchased Assets;

(iii)         There is  no material event or circumstance known to the Company that, either alone or together with other material events and circumstances known to the Company, could reasonably be expected to give rise to any Action or Proceeding against, relating to or affecting the Business or the Purchased Assets;

(iv)         The Company has not received notice of, and does not otherwise have knowledge of, any Order outstanding against the Company;

(v)          The Company has not received notice and does not otherwise have knowledge of any defects, dangerous or substandard conditions in any product or materials sold, distributed, or currently proposed to be sold or distributed by the Company that could cause bodily injury, sickness, disease, death or damage to property, or result in loss of use of property, or any Claim, suit, demand for arbitration or notice seeking damages for bodily injury, sickness, disease, death, or damage to property, or loss of use of property.

(b)                 Prior to the execution of this Agreement, the Company has delivered to the Purchaser all responses of counsel for the Company to any requests made to the Company for information for the preceding three years (together with any updates provided by such counsel) regarding Actions or Proceedings pending or threatened against, relating to or affecting the Company.

2.10       Compliance with Laws and Orders.  Neither the Company nor any of its directors, officers, Affiliates, agents or employees is currently in default or violation in any material respect under, any Law or Order applicable to the Business or the Purchased Assets, and the Company has no knowledge of any claim that the Company is currently or has been in violation of any such Law or Order relating to the Purchased Assets or the Business in any material respect.

2.11       Employees; Labor Relations.

(a)                 The Company is, and during the three (3) years immediately preceding the date of this Agreement has been, in compliance in all material respects with all applicable Laws then in effect respecting employment and employment practices, labor, terms and conditions of employment and wages and hours with respect to the Transferring Employees

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(b)                 There are no labor disputes or union organization activities pending or, to the knowledge of the Company, threatened, relating to the Transferring Employees.  The Company has not failed to pay as of the most recent payroll date prior to the date hereof any amounts due and owing as of such payroll date to any of its Transferring Employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed through the date hereof or amounts required to be reimbursed to them through the date fourteen days prior to the date hereof for which a complete and correct expense reimbursement form had been completed and approved prior to such date.  The Company is neither bound by nor subject to (and none of the Purchased Assets is bound by or subject to) any written or oral commitment or arrangement with any labor union, and no labor union has, to the best of the Company's knowledge, sought to represent any of the Company's employees, representatives or agents.  There is no labor strike, dispute, slowdown or stoppage pending or, to the best of the Company's knowledge, threatened against or involving the Company.  There is no unfair labor practice complaint pending or, to the knowledge of Seller or the Company, threatened against the Company before the National Labor Relations Board.  Each Transferring Contractor is properly classified as an independent contractor for purposes of all employment related Laws and all Laws concerning the status of independent contractors.  Section ‎2.11(b) of the Company Disclosure Schedule sets forth, individually and by category, the name of each Transferring Contractor, together with such person's position or function, annual base salary or wage and any applicable commission, incentive, severance, perquisite or bonus arrangements.  The consummation of the transactions contemplated by this Agreement will not result in any payment or increased payment becoming due to any Transferring Person, and to the knowledge of the Company no Transferring Person has made any threat, or otherwise revealed an intent, to terminate such person's relationship with the Company for any reason, including because of the consummation of the transactions contemplated by this Agreement.

(c)                 Each Transferring Employee is employed at will and, except as set forth in Section 2.11(c) of the Company Disclosure Schedule, there is no employment agreement with any Transferring Employee requiring that the Company pay severance in connection with termination of such Transferring Employee's employment with the Company in accordance with Section 6.3(h) of this Agreement and no Transferring Employee is represented by a union.  To the knowledge of the Company no Transferring Employee has made any threat, or otherwise revealed an intent, to terminate such employee's relationship with the Company, for any reason, including because of the consummation of the transactions contemplated by this Agreement.

(d)                 There have been no Claims during the three (3) years immediately preceding the date of this Agreement based on sex, sexual or other harassment, age, disability, race or other discrimination or common law Claims, including Claims of wrongful termination, by any employee of the Company or by any employee performing work for the Company but provided by an outside employment agency, and there are no facts or circumstances known to the Company that could reasonably be expected to give rise to such complaint or Claim.  The Company has not received any notice during the three (3) years immediately preceding the date of this Agreement of any Claim that it has not complied in any material respect with any Laws relating to the employment of employees, including any provisions thereof relating to wages, hours, collective bargaining, the payment of social security and similar taxes, equal employment opportunity, employment discrimination, the WARN Act, employee safety, or that it is liable for any arrearages of wages or any Tax or penalty for failure to comply with any of the foregoing.

(e)                 The Company has no written policies or employee handbooks or manuals except as previously provided to the Purchaser and as described in Section 2.11(e) of the Company Disclosure Schedule.

(f)                 To the knowledge of the Company, no Transferring Employee is bound by, subject to or obligated under any Contract or other agreement or subject to any Law that would interfere with the ability of such Transferring Employee to be employed by the Purchaser in the Business as presently conducted.

(g)                 All amounts which the Company is required by Law or by agreement with the Transferring Employees to deduct from such employees' salaries or transfer to such employees' pension, life insurance, incapacity insurance or other plans have been duly paid into the appropriate fund or funds as of the most recent Company scheduled bi-weekly payroll date prior to the date hereof, and the Company does not have any outstanding obligation to make any such transfer or provision until the next scheduled bi-weekly payroll date.  Except as set forth in Section 2.11(g) of the Company Disclosure Schedule, there are no agreements or arrangements (whether or not legally enforceable) for the payment of any pensions, allowances, lump sums or other like benefits on retirement, death or termination or during periods of sickness or disablement for the benefit of any Transferring Employee or for the benefit of the dependents of any such person in effect as of the date hereof.

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2.12       Benefit Plans.

(a)                 Neither the Company nor any ERISA Affiliate has any Liability under any Benefit Plan or Multiemployer Plan or Pension Plan that will become a Liability of Purchaser or any Affiliate of Purchaser or result in any Lien on the Purchased Assets or on any other assets of Purchaser and Purchaser’s Affiliates.

(b)                 The Company and its ERISA Affiliates, if any, have complied and will comply, both before and after the Closing, with the requirements of COBRA.

2.13       Real Property.

(a)                 Section 2.13(a) of the Company Disclosure Schedule contains a true and complete list of (i) each parcel of real property leased, used in or necessary for the conduct of the Business as currently conducted (as lessor or lessee or otherwise) (the "Leased Real Property") and (ii) all Liens relating to or affecting any parcel of real property referred to in clause (i) to which the Company is a party.  The Company owns no real property other than Company-owned leasehold improvements, if any, on the Leased Real Property.

(b)                 Subject to the terms of its respective leases, the Company has a valid and subsisting leasehold estate in and the right to quiet enjoyment in the Leased Real Property for the full term of the leases relating thereto.  Each lease referred to in clause (i) of Section 2.13(a) above is a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company and of each other Person that is a party thereto, and there is no, and the Company has not received notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder.  The Company does not owe brokerage commissions or finder's fees with respect to any such Leased Real Property, except to the extent that the Company may renew the term of any such lease, in which case, any such commissions and fees would be in amounts that are reasonable and customary for the spaces so leased, given their intended use and terms.

(c)                 To the knowledge of the Company, the improvements on the Leased Real Property (i) comply with and are operated in accordance with applicable Laws (including Environmental Laws) and all applicable covenants and restrictions under the lease for such Leased Real Property, and (ii) are in all material respects in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and such improvements are in all material respects adequate and suitable for the purposes for which they are currently being used.  The Company has not received notice of any condemnation or appropriation proceedings that are pending against any of such real property or any of the improvements thereon nor does the Company have knowledge that any such proceedings are threatened.

(d)                 True copies of the lease documents under which the Leased Real Property is leased, subleased (to or by the Company or otherwise), utilized or operated (the "Lease Documents") have been delivered to the Purchaser.  The Lease Documents are unmodified and in full force and effect, and there are no other Contracts between the Company and any other Person or by and among any other Persons, claiming an interest in the leasehold interest of the Company in the Leased Real Property or otherwise relating to the use and occupancy of the Leased Real Property.

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2.14       Purchased Assets.

(a)                 The Company is in possession of and has good and marketable title to, or has valid leasehold interests in the Purchased Assets.  The Purchased Assets represent all of the Assets and Properties required to conduct the Business, as conducted by the Company on the date hereof, except for (i) Excluded Assets required to conduct the Business that are readily available for purchase and which have an aggregate replacement cost not in excess of fifteen thousand United States Dollars (US $15,000); (ii) Excluded Assets that are Administrative Assets; (iii) furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property identified on Schedule 1.1(l) as being required by the Company to perform its obligations under the Transition Services Agreement; and (iv) Contracts that are identified in the Schedules to the Transition Services Agreement as Contracts pursuant to which a Scheduled Service is provided by Third Party Service Provider (as defined in the Transition Services Agreement).  All such Purchased Assets (including leasehold interests) are free and clear of Liens, except for (A) those items set forth in Section 2.14(a)(1) of the Company Disclosure Schedule, which shall be discharged by the Company no later than the Closing, and (B) the following (collectively referred to as “Permitted Liens”):

(i)                 those items set forth in Section 2.14(a)(2) of the Company Disclosure Schedule, all of which will be released prior to or at the Closing;

(ii)                liens for Taxes not yet due and payable or being contested in good faith by appropriate procedures and disclosed in Section 2.14(a)(3) of the Company Disclosure Schedule;

(iii)               mechanics', carriers', workmen's, repairmen's or other like liens arising or incurred in the ordinary course of business consistent with past practice or amounts that are not delinquent and which are not, individually or in the aggregate, material to the Business or the Purchased Assets; or

(iv)               easements, rights of way, zoning ordinances and other similar encumbrances affecting Leased Real Property which are not, individually or in the aggregate, material to the Business or the Purchased Assets, which do not prohibit or interfere with the current operation of any Leased Real Property

(b)                 Section 2.14(b) of the Company Disclosure Schedule sets forth a list of each item of equipment included in the Purchased Assets.  Each item of equipment included in the Purchased Assets is in good operating condition (normal wear and tear excepted) and none of such equipment is in need of maintenance or repair, except for ordinary, routine maintenance and repairs that are not material in nature or cost.

2.15       Intellectual Property.

(a)                 Section 2.15(a) of the Company Disclosure Schedule lists all Business Registered Intellectual Property (including all trademarks and service marks that the Company has used with the intent of creating or benefiting from any common law rights relating to such marks) and lists any proceedings or actions pending as of the date hereof before any court or tribunal (including the PTO or equivalent authority anywhere in the world) related to any of the Business Registered Intellectual Property.

(b)                 The Company has all requisite right, title and interest in or valid and enforceable rights under Contracts or Licenses to use all Business Products Intellectual Property necessary to the conduct of the Business.  Each item of Business Products Intellectual Property, including all Business Registered Intellectual Property listed in Section 2.15(a) of the Company Disclosure Schedule, is owned exclusively by the Company (excluding Intellectual Property licensed to the Company under any License, as noted on the Company Disclosure Schedule) and is free and clear of all Liens.  Except as set forth in Section 2.15(a) of the Company Disclosure Schedule, the Company owns exclusively all trademarks, service marks and trade names used by the Company in connection with the Business Products and all such trademarks, service marks and trade names are included in the Purchased Assets.

(c)                 The Company has entered into binding, written agreements with every current and former employee of the Company who has developed or created any Business Products Intellectual Property, and with every current and former independent contractor who has developed or created any Business Products Intellectual Property, whereby such employees and independent contractors are or have been obligated to assign to the Company any ownership interest and right they may have in the Business Products Intellectual Property.

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(d)                 Except pursuant to agreements described in Section 2.15(d) of the Company Disclosure Schedule and pursuant to the Purchased Contracts, the Company has not transferred ownership of or granted any License of or other right to use any Intellectual Property that is or was Business Products Intellectual Property, to any other Person, nor has the Company authorized any other Person to retain any right to use any Intellectual Property that is or was Business Products Intellectual Property.

(e)                 The Business Products Intellectual Property included in the Purchased Assets constitutes all the Intellectual Property used in and/or necessary to the conduct of the Business as it presently is conducted.

(f)                 Section 2.15(f) of the Company Disclosure Schedule lists (i) all Contracts and Licenses pursuant to which the Company licenses-in Intellectual Property that are included in the Purchased Assets; and (ii) all Contracts and Licenses pursuant to which the Company licenses the AV SDK to OEM Licensees.  The Company has provided Purchaser a copy of the Company standard form reseller agreement and the Company standard End User License Agreement for end-point customers and a summary of any material deviations from same in any material Contracts.

(g)                 Section 2.15(g) of the Company Disclosure Schedule lists all Contracts, Licenses and agreements included in the Purchased Assets between the Company and any other Person wherein or whereby the Company has agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume or incur any obligation or Liability or provide a right of rescission with respect to the infringement or misappropriation by the Company or such other Person of the Intellectual Property of any Person other than the Company.

(h)                 The operation of the Business as presently conducted does not (i) to the Company's knowledge, infringe or misappropriate the Intellectual Property of any Person, or (ii) violate any term or provision of any License or Contract relating to the Business Products Intellectual Property by which the Company is bound, and the Company has not received notice from any Person claiming that such operation or any product, technology or service included in the Purchased Assets infringes or misappropriates the Intellectual Property of any Person or constitutes unfair competition or unfair trade practices under any Law.

(i)                 Except as set forth in Section 2.15(i) of the Company Disclosure Schedule, all necessary registration, maintenance, renewal fees, annuity fees and Taxes in connection with the Business Registered Intellectual Property have been paid and all necessary documents and certificates in connection with such Business Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Registered Intellectual Property.

(j)                 There is no dispute (and, to the Company's knowledge, there are no facts or circumstances that may reasonably be expected to lead to a dispute) regarding the scope of any of the Contracts or Licenses set forth in Section 2.15(f) and Section 2.15(g) of the Company Disclosure Schedule regarding performance under such Contract or License, including with respect to any payments to be made or received by the Company thereunder.

(k)                 To the knowledge of the Company, no Person is infringing or misappropriating any Business Products Intellectual Property.

(l)                  The Company has taken all commercially reasonable steps to protect the Company's rights in confidential information and trade secrets of the Company relating to the Business or provided by any other Person to the Company and relating to the Business subject to a duty of confidentiality.  Without limiting the generality of the foregoing, the Company has, and enforces, a policy requiring (i) each employee that has access to confidential information and trade secrets of the Company relating to the Business to execute a proprietary information, confidentiality, and invention and copyright assignment agreement substantially in the form set forth in or attached to Section 2.15(l) of the Company Disclosure Schedule and (ii) each independent contractor or consulting agreement with any independent contractor or consultant to the Company that has access to confidential information and trade secrets of the Company relating to the Business to include appropriate confidential information and assignment of invention provisions (such agreements providing, among other things, the "work for hire" doctrine) and all current and former employees, consultants and independent contractors of the Company have executed such agreements, as applicable, and copies of all such agreements for Transferring Persons have been provided to the Purchaser or made available to the Purchaser for review.

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(m)                No Business Products Intellectual Property is subject to any Order, Action or Proceeding that restricts, or that could reasonably be expected to restrict in any manner, the use, transfer or licensing of any Business Products Intellectual Property by the Company or that may affect the validity, use or enforceability of such Business Products Intellectual Property.

(n)                 No (i) product, technology, service or publication of the Company, (ii) material published or distributed by the Company or (iii) conduct or statement of Company constitutes obscene material, a defamatory statement or material, false advertising or otherwise violates any Law.

(o)                 Neither this Agreement nor any transactions contemplated by this Agreement will result in the granting of any rights or licenses with respect to the Business Products Intellectual Property to any Person pursuant to any Contract, arrangement or commitment to which the Company is a party or by which any of its Assets and Properties are bound.

(p)                 Section 2.15(p) of the Company Disclosure Schedule sets forth a list of all "freeware" and "shareware" incorporated into any product included in the Purchased Assets.  The Company has all rights necessary for its current use of such "freeware" and "shareware" and has included in its End-User Contracts and Reseller Agreements all pass-through licenses required by such "freeware" and "shareware."

(q)                 The Company's products included in the Purchased Assets comply in all material respects with all applicable standards and with the feature specifications and performance standards set forth in the Company's product data sheets.  There are no outstanding Claims (or facts that may reasonably lead to a Claim) for breach of warranties by the Company in connection with the foregoing.  All product performance comparisons heretofore furnished by the Company to customers or the Purchaser are accurate in all material respects as of the dates so furnished (except that, in the case of product performance comparisons made as of a specified earlier date, such comparisons shall be accurate as of such specified earlier date, and, in the case of product performance comparisons superseded by a subsequent product performance comparison furnished to the customer before the customer's acquisition of a license on the product covered by the superseded comparison, the superseding comparison shall be accurate in all material respects and the superseded comparison shall be disregarded).

(r)                 Except as set forth in Section 2.15(r) of the Company Disclosure Schedule, (i) All Business Products Intellectual Property is freely transferable, conveyable, and/or assignable by the Company to the Purchaser without any restriction, constraint, control, supervision, or limitation whatsoever, and (ii) there exists no restriction, constraint, control, supervision, or limitation on the place, method and scope of exploitation of any Business Products Intellectual Property (including the operation of the Business as it is currently conducted, including, without limitation, the design, development, use, import, branding, advertising, promotion, marketing, manufacture and sale of products incorporating any of the Business Products Intellectual Property).

2.16       Contracts.

(a)                 Section 2.16(a)(1) of the Company Disclosure Schedule contains a  true and complete list of each of the OEM Agreements, and each of the Reseller Contracts and End User Contracts whose value is, has been or is reasonably expected to equal or exceed twenty-five thousand United States Dollars (US $25,000) in any twelve month period.  Copies of all such Purchased Contracts (if written), together with all amendments and supplements thereto and all waivers of any terms thereof, have been provided to the Purchaser prior to the execution of this Agreement.  Section 2.16(a)(2) of the Company Disclosure Schedule contains a true and complete list of each Purchased Contract listed on Section 2.16(a)(1) of the Company Disclosure Schedule (i) not terminable by the Company upon thirty (30) days (or less) notice by the Company without penalty or obligation to make any payment based on such termination or (ii) which provides for continuing services (including support and maintenance services) by the Purchaser after the Closing Date.  Complete copies of each Contract listed or required to be listed in Section 2.16(a)(2) of the Company Disclosure Schedule have been provided to the Purchaser.  Except as set forth in Section 2.16(a)(3) of the Company Disclosure Schedule the Company is entitled to assign its rights and obligations under each Purchased Contract relating to the Business to which it is a party or by which any of the Purchased Assets are bound to the Purchaser and will be entitled to assign its rights and obligations thereunder with the prior approval of one or more parties to such Purchased Contract.

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(b)                 Each Purchased Contract required to be disclosed in Sections 2.16(a)(1) and 2.16(a)(2) of the Company Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms.  To the knowledge of the Company, the Company and the counterparty to each such Purchased Contract have complied in all material respects with the provisions thereof.  The Company has not received notice that the Company, nor given any notice that the counterparty to any such Purchased Contract, is in violation or breach of or default under any such Purchased Contract.

(c)                 Section 2.16(c) of the Company Disclosure Schedule sets forth each Purchased Contract that  (i) by its express terms automatically terminates or allows termination by the other party thereto upon consummation of the transactions contemplated by this Agreement or (ii) by its express terms contains any covenant or other provision which limits the Company's ability to compete with any Person in any line of business or in any area or territory.

2.17       Insurance.

(a)                 Section 2.17(a) of the Company Disclosure Schedule contains a true and complete list (including the names and addresses of the insurers and the expiration dates of the policies) of all liability, property, workers' compensation, E&O, directors' and officers' liability and other insurance policies currently in effect that insure the operation of the Business, the Transferring Persons or the Purchased Assets and that have been issued to the Company.  All premiums due under the policies set forth in Section 2.17(a) of the Company Disclosure Schedule have been paid when due and the Company has not received any notice of cancellation or termination in respect of any such policy, and the Company has no knowledge of any reason or state of facts that could reasonably be expected to lead to the cancellation of such policies or of any threatened termination of any such policies.  The insurance policies listed in Section 2.17(a) of the Company Disclosure Schedule, in the reasonable judgment of the Company, (i) are, in light of the operation of the Business and the Purchased Assets, in amounts and have coverages that are reasonable and customary for Persons engaged in similar businesses and operations and having similar Assets and Properties and (ii) are in amounts and have coverages as required by any Purchased Contract.

(b)                 Section 2.17(b) of the Company Disclosure Schedule contains a list of all claims relating to the Business or the Purchased Assets made under any insurance policies covering the Company in the three years immediately preceding the date of this Agreement.  The Company has not received notice that any insurer under any policy listed (or required to be listed) in Section 2.17(b) of the Company Disclosure Schedule is denying, disputing or questioning liability with respect to a claim thereunder or defending under a reservation of rights clause.

2.18       Affiliate Transactions.

(a)                 Except as disclosed in Sections 2.11(c) and 2.18(a) of the Company Disclosure Schedule, there are no Purchased Contracts or Assumed Liabilities between the Company, on the one hand, and (i) any current or former officer, director, shareholder, or to the Company's knowledge, any Affiliate or Associate of the Company or (ii) any Person who, to the Company's knowledge, is an Associate of any such officer, director, shareholder or Affiliate, on the other hand.

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(b)                 Each of the Contracts and Liabilities listed in Section 2.18(a) of the Company Disclosure Schedule was entered into or incurred, as the case may be, on terms no less favorable to the Company (in the reasonable judgment of the Company) than if such Contract or Liability was entered into or incurred on an arm's length basis on competitive terms.  Any Contract to which the Company is a party and in which any director or shareholder of the Company has a financial interest in such Contract was approved by a majority of the disinterested members of the board of directors of the Company or shareholders of the Company, as the case may be, in accordance with applicable Law.

2.19       Environmental Matters.

(a)                 The Company's operation of the Business is in compliance with all applicable Environmental Laws and the Company has obtained and is in compliance with all Environmental Permits applicable to the operation of the Business and such Environmental Permits are valid and in full force and effect.

(b)                 There are no material Liabilities of or relating to the operation of the Business, arising under or relating to any Environmental Law, and there are no facts, conditions, situations or set of circumstances known to the Company which could reasonably be expected to result in or be the basis for any such Liability.  To the knowledge of the Company, there are no Environmental Claims pending or threatened against the Company.

(c)                 The Company does not own, lease or operate any real property related to the Business, and has not owned, leased or operated any real property related to the Business in New Jersey or Connecticut.

2.20       Substantial Customers and Suppliers.  Section 2.20(a) of the Company Disclosure Schedule lists the fifteen largest customers of the Business, collectively, on the basis of revenues collected or accrued for the most recent complete fiscal year.  Section 2.20(b) of the Company Disclosure Schedule lists the fifteen largest suppliers of the Business on the basis of cost of goods or services purchased for the most recent complete fiscal year.  Except as disclosed in Section 2.20(c) of the Company Disclosure Schedule, there has been no material adverse change in the business relationship of the Company with any customer or supplier and no such customer or supplier has ceased or materially reduced its purchases from or sales or provision of services to the Company since January 1, 2010, or has threatened to cease or materially reduce such purchases or sales or provision of services after the date hereof.  Except as disclosed in Section 2.20(d) of the Company Disclosure Schedule, to the knowledge of the Company, no such customer or supplier is threatened with bankruptcy or insolvency.

2.21       Accounts Receivable. The accounts and notes receivable of the Business as of June 30, 2010 are all summarized in Section 2.21 of the Company Disclosure Schedule, and (a) arose from bona fide sales transactions in the ordinary course of business, consistent with past practice, and are payable on ordinary trade terms, (b) are valid and binding obligations of the respective debtors, (c) are not subject to any valid set-off, defense or counterclaim and are fully collectable in the ordinary course of business, except to the extent described in Section 2.21 of the Company Disclosure Schedule, and (d) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement.

2.22       Brokers. No broker, investment banker, financial advisor or other Person is entitled to any broker's, finder's, financial advisor's or similar fee or commission in connection with this Agreement and the transactions contemplated hereby based on arrangements made by or on behalf of the Company.

2.23       Warranty Obligations.

(a)                 Section 2.23(a) of the Company Disclosure Schedule sets forth (i) a list of all forms of written warranties, guarantees and written warranty policies of the Company in respect of any of the  products and services of the Business that are not otherwise contained in the Purchased Contracts and Assumed Liabilities and are currently in effect (the "Extraneous Warranty Obligations"), and the duration of each such Extraneous Warranty Obligation, and (ii) each of the Extraneous Warranty Obligations which is subject to any dispute or, to the knowledge of the Company, threatened dispute.

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(b)                 Except as disclosed in Section 2.23(b) of the Company Disclosure Schedule, (i) there have not been any material deviations from the warranty obligations contained in the Purchased Contracts and Assumed Liabilities or the Extraneous Warranty Obligations, and no salesperson, employee or agent of the Company is authorized to undertake obligations to any customer or other Person in excess of such warranty obligations or Extraneous Warranty Obligations without the prior written authorization of an officer of the Company and (ii) the Company has not made any reserves for Extraneous Warranty Obligations.

2.24       Payments. The Company has not, directly or indirectly, paid or delivered any fee, commission or other sum of money or item or property, however characterized, to any finder, agent, client, customer, supplier, government official or other party, in the United States or any other country, which is in any manner related to the Business or the Purchased Assets, which is, or may be with the passage of time or discovery, illegal under any federal, state or local laws of the United States (including without limitation the U.S. Foreign Corrupt Practices Act) or any other country having jurisdiction; and the Company has not participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers and has at all times done business in an open and ethical manner.

2.25       Financial Projections/Forecast.

(a)                 The Company has made available to the Purchaser certain financial projections with respect to the Business, which projections were prepared for internal use only.  Such projections were prepared in good faith and are based on assumptions believed by the Company to be reasonable as of the date that they were made available to the Purchaser.

(b)                 On May 2, 2010, the Company provided to the Purchaser and the Purchaser has reviewed and approved a copy of the Company's written annual forecast of the revenues and costs for the period ending December 31, 2010 and December 31, 2011 relating to the Business (the "Forecast").  The Forecast was prepared in good faith and is based on assumptions believed by the Company to be reasonable as of the date provided to the Purchasers and as of the date hereof.

(c)                 The projections and Forecast referred to in (a) and (b) above, and the assumptions upon which such projections and Forecast were based may or may not prove to be correct.  Such projections, Forecast and any other forward-looking statements included therein or related thereto have been provided on a good faith basis to assist in an evaluation of the Business and the Purchased Assets, but are not to be viewed as factual and should not be relied upon as an accurate representation of future results.  The actual results will vary from the anticipated results and such variations may be material.

2.26       Approvals.

(a)                 Section 2.3(b) of the Company Disclosure Schedule sets forth a list of all material Approvals of Governmental or Regulatory Authorities relating to the Business which are required to be given to or obtained by the Company from any and all Governmental or Regulatory Authorities in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

(b)                 Section 2.3(c) of the Company Disclosure Schedule sets forth a list of all material Approvals which are required to be given to or obtained by the Company from any and all Persons other than Governmental or Regulatory Authorities in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

(c)                 This Agreement and the Transaction have been approved by the requisite stockholder action of the Company, in accordance with its charter documents and applicable Law.

(d)                 The Company has obtained all material Approvals from Governmental or Regulatory Authorities necessary to conduct the business conducted by the Company in the manner presently being conducted and there has been no written notice received by the Company of any material violation or material non-compliance with any such Approvals.  All material Approvals from Governmental or Regulatory Authorities necessary to conduct the business conducted by the Company as it is currently being conducted are set forth in Section 2.26(d) of the Company Disclosure Schedule.

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2.27       Export Controls Compliance. To the Company's knowledge, except as set forth in Section 2.27 of the Company Disclosure Schedule, there have been no violations by the Company of the International Traffic in Arms Regulations, 22 CFR Parts 120-130, administered by the Department of State, the Export Administration Regulations, 15 CFR Parts 730-774, administered by the Department of Commerce (the "EAR"), the U.S. economic sanctions programs administered by the Department of Treasury, or Office of Foreign Assets Control, 31 CFR Parts 500 to 598 (collectively, the "Export Controls Laws").

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF PURCHASER

The Purchaser hereby represents and warrants to the Company that the following representations and warranties are true and accurate in all respects as of the date hereof and as of the Closing Date (as though made then), subject only to such exceptions as are specifically disclosed with respect to specific numbered sections and lettered subsections and subsections of this Article 3 (or with respect to another numbered section or lettered subsection to the extent that it is reasonably apparent on the face of such disclosure that such disclosure is applicable to such other numbered section or lettered subsection) in the disclosure schedule and schedule of exceptions delivered herewith and dated as of the date hereof (the "Purchaser Disclosure Schedule"), and organized with corresponding numbered sections and lettered subsections, as set forth in this Article 3:

3.1          Organization and Qualification. The Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of California.

3.2          Authority Relative to this Agreement.  The Purchaser has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution and delivery by the Purchaser of this Agreement and the Ancillary Agreements to which it is a party and the consummation by the Purchaser of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action by the board of directors of the Purchaser, and no other action on the part of the board of directors of the Purchaser is required to authorize the execution, delivery and performance of this Agreement and the Ancillary Agreements to which the Purchaser is a party and the consummation by the Purchaser of the transactions contemplated hereby and thereby.  This Agreement and the Ancillary Agreements to which the Purchaser is a party have been or will be, as applicable, duly and validly executed and delivered by the Purchaser and, assuming the due and valid authorization, execution and delivery hereof (and, in the case of the Ancillary Agreements to which the Company and/or the other parties is or are a party, thereof) by the Company and/or the other parties thereto, each constitutes or will constitute, as applicable, a legal, valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar Laws relating to the enforcement of creditors' rights generally and by general principles of equity.

3.3          No Conflicts. The execution and delivery by Purchaser of this Agreement and the Ancillary Agreements to which it is a party do not, and the performance by the Purchaser of its obligations under this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby do not and will not:

(a)                 conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Articles of Incorporation or the Bylaws of the Purchaser;

(b)                 conflict with or result in a violation or breach of any Law or Order applicable to the Purchaser or its Assets or Properties except where such conflict, violation or breach would not, individually or in the aggregate, have a Purchaser Material Adverse Effect; or

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(c)                 (i) conflict with or result in a violation or breach of, (ii) constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, (iii) require the Purchaser to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result of the terms of (except for such consents approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable Laws) or as would not, individually or in the aggregate, have a Purchaser Material Adverse Effect), (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to (except to the extent that any such termination, cancellation, acceleration or modification would not, individually or in the aggregate, have a Purchaser Material Adverse Effect), (v) result in or give to any Person any additional rights or entitlement to any material increased, additional, accelerated or guaranteed payments or performance under, or (vi) result in the creation or imposition of (or the obligation to create or impose) any Lien upon the Purchaser or any of its Assets and Properties under, any of the terms, conditions or provisions of any Contract or License (including any Contract or License relating to Intellectual Property) to which the Purchaser is a party or by which any of the Purchaser's Assets and Properties is bound.

3.4          No Brokers. No broker, investment banker, financial advisor or other Person is entitled to any broker's, finder's, financial advisor's or similar fee or commission in connection with this Agreement and the transactions contemplated hereby based on arrangements made by or on behalf of the Purchaser.

3.5          Sufficiency of Funds. The Purchaser will have sufficient cash on hand or other sources of immediately available funds to enable it to make payment of the Base Purchase Price and consummate the transactions contemplated by this Agreement and the Purchaser reasonably believes that it will have sufficient cash on hand or cash from operations or other sources of then immediately available funds to make payment of the Earnout Payment and consummate the transactions contemplated by the Ancillary Agreements.

3.6          Legal Proceedings. There is no Action or Proceeding pending nor, to the knowledge of the Purchaser, threatened against, relating to or affecting the Purchaser or any Affiliate of Purchaser that would challenge or seek to prevent, enjoin or otherwise delay the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.  There is no material event or circumstance known to the Purchaser that, either alone or together with material events and circumstances known to the Purchaser, could reasonably be expected to give rise to any such Action or Proceeding.

3.7          Legal or Regulatory Restraints.  There is no Law or Order enacted, promulgated or issued or deemed applicable to the Transaction, by any Governmental Authority, which would:  (i) prohibit the Purchaser's ownership or operation of all or any portion of the Purchased Assets or the Business, or (ii) compel the Purchaser to dispose of or hold separate all or any portion of the Purchased Assets or the Business, or limit its operation of the Business as a result of the Transaction; and the Purchaser does not have knowledge of any such pending Law or Order.

ARTICLE 4

CONDUCT PRIOR TO THE CLOSING

4.1          Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement and the Closing, the Company agrees (unless the Company is required to take such action pursuant to this Agreement or the Purchaser shall give its prior consent in writing which consent shall not be unreasonably withheld or delayed) to carry on the Business in the usual, regular and ordinary course consistent with past practice and in any event consistent with the Forecast provided prior to the date of this Agreement to the Purchaser, to pay all Liabilities and Taxes applicable to the Business consistent with the Company's past practices (and in any event when due), to pay or perform other obligations applicable to the Business when due consistent with the Company's past practices (other than Liabilities, Taxes and other obligations, if any, contested in good faith through appropriate proceedings), and, to the extent consistent with the Business, to use all commercially reasonable efforts to preserve unimpaired the goodwill and ongoing business of the Purchased Assets until the Closing.  Except as expressly required by this Agreement, the Company shall not, without the prior written consent of the Purchaser (which consent will not be unreasonably withheld or delayed) take or agree in writing or otherwise to take, any action that would reasonably be anticipated to make any of its representations or warranties contained in this Agreement untrue or incorrect in any material respect or prevent the Company from performing or cause the Company not to perform its agreements and covenants hereunder or cause any Closing condition not to be satisfied.  Without limiting the generality of the foregoing, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with Article 8 or the Closing, except as required by this Agreement or the Ancillary Agreements or in the ordinary course of business consistent with past practice, the Company shall not do, cause or permit any of the following, without the prior written consent of the Purchaser, which consent will not be unreasonably withheld or delayed:

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(a)                 Contracts:  enter into any Contract or commitment directly or indirectly relating to the Purchased Assets, or violate, amend or otherwise modify or waive any of the terms of any of the Purchased Contracts;

(b)                 Intellectual Property:  dispose of, license or transfer to any person or entity any rights to any Business Products Intellectual Property;

(c)                 Exclusive Rights:  enter into or amend any Contract pursuant to which any other party is granted any exclusive marketing or other exclusive rights of any type or scope with respect to Business Products Intellectual Property;

(d)                 Dispositions:  sell, lease, license or otherwise dispose of or encumber any of the Purchased Assets;

(e)                 Capital Expenditures:  make any capital expenditure, capital addition or capital improvement directly or indirectly relating to the Business except in accordance with the Company's Forecast or unless such capital expenditure has been agreed to in writing by the Purchaser;

(f)                 Insurance:  reduce the amount of any insurance coverage provided by existing insurance policies applicable to the Purchased Assets or willingly allow or permit to be done, any act by which such existing insurance policies may be suspended, impaired or canceled;

(g)                 Termination or Waiver:  terminate or waive any right of substantial value directly or indirectly relating to the Purchased Assets;

(h)                 Employee Benefit Plans; Pay Increases:  adopt or amend any Plan or increase the salary, wage rate or compensation of any such Transferring Employee;

(i)                 Lawsuits:  commence any lawsuit directly or indirectly relating to the Business, the Purchased Assets or the Purchased Contracts other than (i) for the routine collection of bills or (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of the Business, provided that the Company shall notify the Purchaser prior to the filing of such a suit;

(j)                 Compliance:  fail to comply in any material respect with all regulations applicable to the Purchased Assets;

(k)                 Other:  take or agree in writing or otherwise to take, any actions described in Section 4.1(a) through Section 4.1(j) above, or any other action that would prevent the Company from performing, or cause the Company not to perform, any of its covenants and agreements hereunder.

4.2         Filings with Governmental Authorities.

(a)                 The Purchaser and the Company shall cooperate with one another in taking any reasonable actions by or in respect of, or making any filings with, or obtaining any consents, approvals, or authorizations from, Governmental Authorities as are necessary for the consummation of the transactions contemplated by this Agreement and by the other Acquisition Documents.

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(b)                 The Company shall provide the Purchaser with the final determination of EAR counsel to the Company with respect to the ECCN for the Business Products within five (5) Business Days after the date of this Agreement.  Should such determination be different from that set forth in Sections 2.15(m) and 2.15(r) of the Company Disclosure Schedule, then, as promptly as practicable after receipt of such determination (but in any event no later than ten (10) Business Days after the date of this Agreement), the Purchaser and the Company will cooperate to prepare and file a joint voluntary notice with CFIUS under Exon-Florio with respect to the transactions expressly contemplated by this Agreement.

4.3          No Solicitation.

(a)                 Until the earlier of the Closing Date and the date of termination of this Agreement pursuant to the provisions of Section 8.1, the Company shall not, and the Company shall not authorize the Company's officers, directors, employees, shareholders, attorneys, investment advisors, agents, representatives, Affiliates or Associates (collectively, "Representatives") to, directly or indirectly:  (i) initiate, solicit or knowingly encourage or facilitate any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution, sale of substantially all of the Company's assets, or any of the Purchased Assets, or similar transaction involving the Company, in a single transaction or series of related transactions, or any issuance or sale of, or tender or exchange offer for, in a single transaction or series of related transactions, its voting securities that, if consummated, would result in any person (or the shareholders of such Person) beneficially owning securities representing 50% or more of the Company's total voting power (or of the surviving parent entity in such transaction) (any such proposal or offer (other than a proposal or offer made by Purchaser) being hereinafter referred as a "Competing Proposed Transaction"), (ii) have any discussions with or provide any confidential information or data to any person relating to a Competing Proposed Transaction, or engage in any negotiations concerning a Competing Proposed Transaction, or knowingly facilitate any effort or attempt by any person to make or implement a Competing Proposed Transaction, (iii) approve or recommend, or propose publicly to approve or recommend, any Competing Proposed Transaction, or (iv) approve or recommend, or publicly propose to approve or recommend, or execute or enter into, any letter of intent, agreement in principle, merger agreement, asset purchase or share exchange agreement, option agreement or other similar agreement related to any Competing Proposed Transaction or publicly propose or agree to do any of the foregoing.  Notwithstanding the foregoing provisions of this Section 4.3(a), in the event that after the date of this Agreement the Company receives an unsolicited bona fide Competing Proposed Transaction, the Company may, and may permit the Company’s Representatives to:  (x) furnish or cause to be furnished confidential information or data, (y) participate in such negotiations or discussions and (z) approve or recommend, or propose publicly to approve or recommend, any Competing Proposed Transaction if the Company’s Board of Directors concludes in good faith after consultation with its outside legal counsel and financial advisors that, in the case of any action described in clauses (x) or (y) above, such Competing Proposed Transaction constitutes or is reasonably likely to result in a Superior Proposal (defined below) and, in the case of any action described in clause (z) above, such Competing Proposed Transaction constitutes a Superior Proposal; provided that prior to providing (or causing to be provided) any confidential information or data permitted to be provided pursuant to this sentence, the Company shall have entered into a confidentiality agreement with such third party on terms no less favorable to the Company than any confidentiality agreement between the Company and the Purchaser (provided that the Company may enter into a confidentiality agreement without a standstill provision, or with standstill or other provisions less favorable to the Company, if it waives or similarly modifies the corresponding provisions in any confidentiality agreement with the Purchaser).

(b)                 Notwithstanding anything in this Agreement to the contrary, if the Company’s Board of Directors determines in good faith, after consultation with its financial advisors and outside legal counsel, in response to a Competing Proposed Transaction that was not solicited in material violation of Section 4.2(a)4.3(a), that such proposal is a Superior Proposal, the Company may terminate this Agreement; provided, however, that the Company shall not be permitted to exercise its right to terminate this Agreement pursuant to this Section 4.3(b) until after three (3) Business Days following the provision of written notice to the Purchaser advising the Purchaser that Company’s Board of Directors intends to cause the Company to accept such Superior Proposal, specifying the material terms and conditions of the Superior Proposal, during which time the Company shall negotiate in good faith with the Purchaser to make such adjustments in the terms and conditions of this Agreement as would enable the Company to proceed with the transactions contemplated by this Agreement if and to the extent the Purchaser elects to make any such adjustments.

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(c)                 For purposes of this Agreement, “Superior Proposal” with respect to the Company means a bona fide written Competing Proposed Transaction involving, or any purchase or acquisition of, all or substantially all of the voting power of the Company’s capital stock or all or substantially all of the consolidated assets of the Company, for cash and/or readily marketable securities, which Competing Proposed Transaction the Board of Directors of the Company concludes in good faith, after consultation with its financial advisors and outside legal advisors, taking into account all legal, financial, regulatory and other aspects of the proposal and the Person making the Competing Proposed Transaction is more favorable to the Company from a financial point of view than the transactions contemplated by this Agreement, and that the failure to pursue such Competing Proposed Transaction would or could reasonably be expected to breach its fiduciary obligations under applicable law.

(d)                 The Company will immediately cease and cause to be terminated any activities, discussions, or negotiations conducted before the date of this Agreement with any persons other than the Purchaser with respect to any Competing Proposed Transaction.  The Company will promptly (within one Business Day) following the receipt of any Competing Proposed Transaction, or of any inquiry that could reasonably be expected to lead to a Competing Proposed Transaction, advise the Purchaser of the material terms thereof and will keep the Purchaser reasonably apprised of any material developments related thereto.

ARTICLE 5

ADDITIONAL AGREEMENTS

5.1          Access to Information. Between the date of this Agreement and the earlier of the Closing Date or the termination of this Agreement in accordance with Section 8.1, upon reasonable notice and during the Company's normal business hours, and subject to such limitations as are imposed by the applicable antitrust Laws (if any), the Company shall (a) give the Purchaser and its officers, employees, accountants, counsel, and other agents and representatives full access to all buildings, offices, and other facilities and to all Books and Records of the Company applicable to the Purchased Assets, whether located on the premises of the Company or at another location; (b) permit the Purchaser to make such inspections as the Purchaser may reasonably require; (c) cause its officers to furnish the Purchaser such financial, operating, technical and product data and other information as is reasonably applicable to the Purchased Assets as the Purchaser from time to time may reasonably request in writing; (d) allow the Purchaser the opportunity to interview such employees and other personnel who are involved in the conduct of the Business and Affiliates of the Company with the Company's prior written consent, which consent shall not be unreasonably withheld or delayed; and (e) provide reasonable assistance and cooperation to  the Purchaser in the development of plans to transition all required support and services for the operation of the Purchased Assets from the Company to the Purchaser on or before the end of the initial term of the Transition Services Agreement.

5.2          Confidentiality. The parties acknowledge that the Purchaser and the Company have previously executed a non-disclosure agreement dated February 5, 2010 (the "Confidentiality Agreement") and a letter of intent dated April 28, 2010 (the "LOI"), the confidentiality provisions of which agreements shall continue in full force and effect in accordance with their terms for the following periods: all information furnished to the Purchaser and its officers, employees, accountants and counsel by or on behalf of the Company and relating solely to the Purchased Assets shall be governed by the confidentiality provisions of the Confidentiality Agreement and the LOI until the Closing Date (whereupon such provisions shall lapse, except Confidential Information disclosed in connection with each party's performance under the Transition Services Agreement, for which such provisions shall continue until the end of the third full calendar year following the termination of the Transition Services Agreement – for example, if the Transition Services Agreement is terminated in March 2011, then until December 31, 2014), all other information furnished to the Purchaser and its officers, employees, accountants and counsel by or on behalf of the Company shall be governed by the confidentiality provisions of the Confidentiality Agreement and the LOI for the time periods set forth therein; and all information furnished to the Company by or on behalf of the Purchaser and its officers, employees, accountants and counsel shall be governed by the confidentiality provisions of the Confidentiality Agreement and the LOI for the time periods set forth therein, and the Purchaser and the Company shall be fully liable and responsible under the Confidentiality Agreement and the LOI for any breach of the terms and conditions thereof by their respective subsidiaries, officers, employees, accountants, counsel and other representatives.

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5.3          Expenses. Whether or not the Transaction is consummated, all fees and expenses incurred in connection with the Transaction incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses and shall not be assumed by the other party pursuant to the Transaction.

5.4          Post-Closing Correction of Improper Receipts of and/or Requests for Payment.  The parties acknowledge and agree that after the Closing it is possible that (i) one party may receive a payment all or a portion of which should have been appropriately received by and be deemed the property of the other party or (ii) one party may be presented a request for payment all or a portion of which should have been appropriately received by and be deemed the obligation of the other party.  Each party agrees to cooperate with the other to ensure that all such payments are delivered to for the benefit of, and such requests for payment are delivered to, as the obligation of, the correct party.  For the avoidance of doubt, the Purchaser shall remit to the Company the portion of license fees under any OEM Agreement received by the Purchaser on or after the Closing Date attributable to license periods (or portions of periods) before the Closing Date.  Any party receiving a proper request for payment under this Section 5.4 shall pay the obligation within the time set forth on the request for payment, which shall be no less than five Business Days and no more than 30 days after the date of the request.  Purchaser shall be entitled to set off any amount to which it is entitled under this Section 5.4 from the Escrow Amount; provided, however, that, to the extent the Company disputes any payment amounts under this Section 5.4, the Purchaser’s right to set off the disputed amount from the Escrow Amount shall be subject to satisfactory resolution in favor of the Purchaser pursuant to Section 7.2(g).

5.5          Public Disclosure.  Any public disclosure by a Party or any Affiliate of a Party regarding this Agreement or the Transaction shall, to the extent reasonably possible, be coordinated between the Parties.  To the extent reasonably possible, each Party will give the other party prior notice of such disclosure and the opportunity to review and comment upon such public announcement.

5.6          Approvals. The Company shall use commercially reasonable efforts to obtain all Approvals from Governmental or Regulatory Authorities or under any of the Purchased Contracts as may be required in connection with the Transaction (all of which Approvals are identified in the Company Disclosure Schedule) so as to preserve all substantial rights of and benefits to the Company thereunder, and the Purchaser shall provide the Company with such assistance and information as is reasonably required to obtain such Approvals.

5.7          Notification of Certain Matters. The Company shall give prompt notice to the Purchaser, and the Purchaser shall give prompt notice to the Company, of (a) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of the Company or the Purchaser, respectively, contained in this Agreement to be untrue or inaccurate at or prior to the Closing Date and (b) any failure of the Company or the Purchaser, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.7 shall not limit or otherwise affect any remedies available to the party receiving such notice.

5.8          Certain Matters Relating to the Earnout Payment.

(a)                 The Purchaser will continue to support the assigned OEM Agreements and will not take any action to shift revenue that would otherwise be recognized during the Earnout Period so that it will be recognized after the Earnout Period or assign OEM Agreements or the revenue from the OEM Agreements to another Person.  For purposes of Section 1.7, to the extent that a decline in 2011 revenues is attributable to a breach of the foregoing covenant, such decline will not be treated as reduced revenues for the purposes of calculating a reduction to the Earnout Payment.

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(b)                 The Purchaser is obliged to provide services to OEM customers for whom deferred revenues were previously recognized and payments already received by the Company.  These deferred revenues shall not be utilized or taken into account in any manner in relation to the provisions of Section 1.7 above.

5.9         Additional Documents and Further Assurances; Cooperation.  Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things (including all action reasonably necessary to seek and obtain any and all Approvals of any Governmental Authority or Person required in connection with the Transaction; provided, however, that the Purchaser shall not be obligated to consent to any divestitures or operational limitations or activity in connection therewith and no party shall be obligated to make a payment of money as a condition to obtaining any such Approval) as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.  Each party agrees to use commercially reasonable efforts to cause the conditions set forth in Article 6 to be satisfied, where the satisfaction of such conditions depends on action or forbearance from action by such party.  If, at any time after the Closing Date, any further action on the part of the Company is reasonably necessary or desirable to vest the Purchaser or its assignees with full right, title and possession to the Purchased Assets, or to effect the assignment to the Purchaser or its assignees of any and all Business Products Intellectual Property, the Company shall promptly take such action following written notice of such requirement from Purchaser.  Immediately upon expiration or termination of the Transition Services Agreement, the Company shall transfer to the Purchaser the furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property identified on Schedule 1.1(h) as being required by the Company to perform its obligations under the Transition Services Agreement.  Moreover, if, at any time after the Closing Date, the Purchaser advises the Company that the Purchased Assets do not include any Asset or Property owned by or licensed to the Company as of the date hereof and required to conduct the Business, as conducted by the Company on the date hereof (except for (i) Excluded Assets required to conduct the Business, which are readily available for purchase and which have an aggregate replacement cost not in excess of fifteen thousand United States Dollars (US $15,000); (ii) Excluded Assets that are Administrative Assets; (iii) furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers and other tangible personal property identified on Schedule 1.1(l) as being required by the Company to perform its obligations under the Transition Services Agreement; and (iv) Contracts that are identified in the Schedules to the Transition Services Agreement as Contracts pursuant to which a Scheduled Service is provided by Third Party Service Provider (as defined in the Transition Services Agreement), the Company shall promptly, following written notice from the Purchaser, transfer or license, as applicable, any such Asset and Property owned or licensed by the Company.

5.10       Company Auditors.

(a)                 Delivery of Carve-out Financial Statements for the Business. The Company shall prepare and deliver to the Purchaser (x) audited financial statements that include the balance sheet of the Business as of December 31, 2009 and December 31, 2008 and related audited statements of income and cash flows of the Business for the fiscal years ended December 31, 2009 and 2008 together with notes thereon and the reports thereon of the Company Auditors (collectively, the "Business Financial Statements"), and (y) interim, reviewed financial statements of the Business as of June 30, 2010 and for the six months then ended (or as of September 30, 2010 and for the nine months then ended, as applicable based on the Closing Date).  Further, it is understood and agreed that (i) the Business Financial Statements will be prepared in accordance with carve-out accounting guidelines as promulgated by the SEC and that are consistent with U.S. GAAP, (ii) such carve-out accounting guidelines have not been applied to the Audited Financial Statements, and (iii) any differences between the Audited Financial Statements and the Business Financial Statements arising out of or related to the application of such carve-out accounting guidelines to the Business Financial Statements or any modifications that would have been made to the Audited Financial Statements had such carve-out accounting principles been utilized therefor (including as a result of corporate and other allocations, such as goodwill and other intangibles) shall not be the sole basis for any claim against the Company by the Purchaser or any of its Affiliates.  The Purchaser shall provide the Company with reasonable access to the services of any former employees of the Company who may be employed by Purchaser or may be contractors to the Purchaser as required by Company to prepare the Business Financial Statements and all necessary and appropriate access to the Books and Records of the Business and other cooperation with respect to the Company's preparation of the Business Financial Statements (collectively, "Purchaser Assistance").  The Company will not be deemed to be in breach of this covenant if the Purchaser shall fail to provide Purchaser Assistance as reasonably requested by the Company.  The Company shall (i) coordinate and manage the respective efforts of Company and Purchaser personnel in the preparation of the Business Financial Statements, (ii) promptly engage the Company Auditors to prepare and audit the Business Financial Statements, (iii) promptly respond to requests for information from the Company Auditors, and (iv) keep the Purchaser reasonably informed regarding the status of the preparation and audit of the Business Financial Statements.  The Purchaser shall promptly reimburse the Company for all documented third-party costs and expenses reasonably incurred by the Company in the preparation and audit of the Business Financial Statements up to a cap of fifty thousand United States Dollars (US $50,000).  The Company’s obligation to deliver the Business Financial Statements is conditioned on receipt by the Purchaser and the Company of a written analysis prepared by SEC Counsel to the Purchaser determining that the Business Financial Statements are required in order for Purchaser to comply with Purchaser reporting obligations under applicable securities or other Law (the “Reporting Determination”).The Company shall deliver the Business Financial Statements on or before (A) December 31, 2010, if the Reporting Determination is received on or before the Closing Date, or (B) March 31, 2011, if the Reporting Determination is received after the Closing Date; provided that, in any event, the Company shall have no less than one hundred twenty (120) days after receipt of the Reporting Determination to deliver the Business Financial Statements.

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(b)                 The Company will use commercially reasonable efforts to cause its management and the Company Auditors to facilitate on a timely basis (a) the review of any Company audit or review work papers, including the examination of selected interim financial statements and data, (b) the delivery of such representations from the Company Auditors as may be reasonably requested by the Purchaser or the Purchaser Auditors, and (c) the securing of a binding fee commitment (on terms similar to those in place on the date of this Agreement) from the Company Auditors with respect to consents and comfort letters requested by the Purchaser after the Closing.  The Purchaser shall bear the reasonable fees of the Company Auditors in connection with the assistance specified in this paragraph.

(c)                 The Company will, promptly following the completion of its audited financial statements as of December 31 of each of 2008 and 2009, and the related audited consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years then ended, but in any event no later than December 31, 2010, provide a copy of such financial statements to the Purchaser, in each case including the notes thereto and the report of the Company's independent accountants with respect thereto.

5.11       Information Technology Access .  In order to facilitate the prompt integration following the Closing into the Purchaser's systems of the Company's information technology ("IT") inventory related to the Business (including, without limitation, voice and data network services and software and hardware, financial/accounting software, licenses to the foregoing, and IT budgets), the Company shall provide the Purchaser and its Representatives with access to the Company's IT inventory, and the Company personnel responsible for such IT inventory.  Because of the substantial lead time that may be required to order and install new software and hardware to integrate the Company's IT systems with the Purchaser's, and the importance of a smooth integration of such IT systems promptly after the Closing, the Company agrees that the Purchaser may order in the Purchaser's name any new IT services, hardware and software that the Purchaser believes will be needed at the Company's facilities in order to integrate the Purchaser's and the Company's respective operations following the Closing.  The Company shall cooperate with the Purchaser in the installation of such IT systems, hardware and software prior to and in anticipation of the Closing, including providing the Purchaser with reasonable access to and use of appropriate Company personnel.  For clarity, it is the intent of the Purchaser and the Company not to connect any of the ordered services or systems prior to the Closing.  The Purchaser and the Company agree to cooperate with each other to minimize any potential disruption to the Company's business from the IT integration efforts; provided, however, that the Purchaser shall not have any Liability to the Company for any such disruption or as may otherwise result from the IT integration efforts, except as may be directly caused by the Purchaser's gross negligence or willful misconduct.  If the Closing does not occur, other than because of the Company's breach of this Agreement, the Purchaser shall reimburse the Company for its reasonable and documented out-of-pocket costs incurred by the Company in connection with the ordering and installation of Purchaser-authorized IT services, hardware and software.  If the Purchaser is so required to reimburse the Company, the Purchaser shall own any such hardware and software and shall pay for its removal from Company premises.  The Purchaser and the Company shall cooperate in the removal of any such hardware or software so as to minimize any disruption to the Company's business.  In addition, if the Closing does not occur, the Company shall cooperate with the Purchaser in canceling any orders for IT services, hardware or software and shall otherwise act to minimize the costs which might be incurred in connection with the IT integration efforts.

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5.12       Intellectual Property. The Company shall give the Purchaser prompt notice if any Person shall have (a) commenced, or shall have notified the Company that it intends to commence, an Action or Proceeding or (b) provided the Company with notice, in either case which allege(s) that any of the Business Products Intellectual Property infringes or otherwise violates the intellectual property rights of such Person.  The Company shall cooperate with the Purchaser in making arrangements to effect the assignment to the Purchaser of the Business Products Intellectual Property at the Closing.  Prior to the Closing, the Company shall take commercially reasonable actions (x) to maintain, perfect, preserve or renew the Business Registered Intellectual Property, including the payment of any registration, maintenance, renewal fees, annuity fees and Taxes or the filing of any documents, applications or certificates related thereto, and (y) to promptly respond and prepare to respond to all requests, related to the Business Registered Intellectual Property, received from Governmental or Regulatory Authorities.

5.13       Allocation of Aggregate Consideration.  Prior to the Closing, the Purchaser shall prepare an analysis and a proposed allocation of the Aggregate Consideration among the Purchased Assets (the “Proposed Price Allocation”) in a manner reasonably determined under the methods and principles required by Section 1060 of the Code, and the Treasury regulations promulgated thereunder.  Within fifteen (15) days of receipt of the Proposed Price Allocation, the Company shall notify the Purchaser of any objection. If there is no objection, then the Purchaser and the Company agree that any and all Tax Returns filed with any taxing authority or other governmental entity shall be consistent with the Proposed Price Allocation. If the Company objects to the Proposed Price Allocation, the parties agree to use their prompt and good faith efforts to reach agreement on a revised price allocation (the “Revised Price Allocation”). Once agreement is reached on a Revised Price Allocation, then the Purchaser and the Company agree that any and all Tax Returns filed with any taxing authority or other governmental entity shall be consistent with the Revised Price Allocation. If the parties are unable to reach agreement on a Revised Price Allocation within fifteen (15) days of the Company’s objection to the Proposed Price Allocation, then the parties will mutually select an independent accounting firm to make a final and binding determination of the Aggregate Consideration allocation as the earliest date practicable. The cost of such independent accounting firm shall be borne equally by the Purchaser and the Company.

5.14       Taxes.

(a)                 Books & Records; Cooperation.  The Purchaser, on one hand, and the Company, on the other hand, agree to furnish or cause to be furnished to the other, upon request, as promptly as practicable, such information and assistance relating to the Purchased Assets and Assumed Liabilities, including, without limitation, access to Books and Records, as is reasonably necessary for the filing of all Tax Returns by the Purchaser or the Company, the making of any election relating to Taxes, the preparation for any audit by any Taxing Authority, and the prosecution or defense of any claim, suit or proceeding relating to any Taxes.  Each of the Purchaser and the Company shall retain all Books and Records with respect to Taxes pertaining to the Purchased Assets and Assumed Liabilities, for a period of at least seven (7) years following the Closing Date.  At the end of such period, each party shall provide the other with at least ten (10) days prior written notice before transferring, destroying or discarding any such Books and Records, during which period the party receiving such notice can elect to take possession, at its own expense, of such Books and Records.  The Purchaser and the Company shall cooperate fully with each other in the conduct of any audit, litigation or other proceeding relating to Taxes involving the Purchased Assets and Assumed Liabilities.  The Purchaser and the Company further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental or Regulatory Body or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

(b)                 Transfer Taxes.  The Purchaser shall be liable for all sales, use, transfer, documentary, stamp, registration, conveyance, value added or other similar Taxes (including all applicable real estate transfer Taxes), duties, fees, excises or governmental charges (including any penalties and interest) imposed by any Taxing Authority, domestic or foreign, and all recording or filing, notarial fees and other similar costs incurred in connection with this Agreement and the transactions contemplated by this Agreement.  The Company shall, at its own expense, file in a timely fashion all Tax Returns and other documentation relating to such Taxes.

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(c)                 Allocation of Company Taxes.  Except as otherwise provided herein or in Section 5.14(b) hereof relating to Transfer Taxes, the Company shall be responsible for and shall promptly pay when due any and all Taxes levied with respect to the ownership of the Purchased Assets or the Business for any Pre-Closing Tax Period, and any other Taxes of the Company for any periods.  In the case of any property Taxes imposed with respect to the ownership of the Purchased Assets, the portion of such Taxes allocable to the Pre-Closing Period shall be deemed to be the amount of such Tax for the taxable period multiplied by a fraction, the numerator of which is the number of days within the portion of the taxable period ending on the Closing Date and the denominator of which is the number of days in the entire taxable period.

Upon receipt by the Purchaser or the Company of any bill for such Taxes relating to the Purchased Assets, the party receiving such bill shall present a statement to the other setting forth the amount of reimbursement to which each is entitled under this Section 5.14(c)together with such supporting evidence as is reasonably necessary to calculate the proration amount.  The proration amount shall be paid by the party owing it to the other within ten (10) days after delivery of such statement.  In the event that the Purchaser or the Company shall make any payment for which it is entitled to reimbursement under this Section 5.14(c), the applicable party shall make such reimbursement promptly but in no event later than ten (10) days after the presentation of a statement setting forth the amount of reimbursement to which the presenting party is entitled along with such supporting evidence as is reasonably necessary to calculate the amount of reimbursement.  Notwithstanding the foregoing, none of the Purchaser Indemnitees shall be liable for, and the Company shall indemnify and hold the Purchaser Indemnitees harmless, from and against, (i) any Taxes of Company levied with respect to the Purchased Assets or Business attributable to Pre-Closing Tax Periods or (ii) any other Taxes of Company for any periods. Correspondingly, the Company shall not be liable for, and the Purchaser shall indemnify and hold the Company harmless, from and against, (i) any Taxes levied with respect to the Purchased Assets or Business attributable to Post-Closing Tax Periods or (ii) any other Taxes of the Purchaser for any periods.

(d)                 Notices.  The Company shall promptly notify the Purchaser in writing upon receipt by the Company of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments relating to the income, properties or operations of the Company that reasonably may be expected to relate to the Purchased Assets or the Assumed Liabilities.

(e)                 FIRPTA Certificate.  At the Closing, the Company shall deliver to the Purchaser all necessary forms and certificates complying with applicable Law, duly executed and acknowledged, certifying that the transactions contemplated hereby are exempt from withholding under Section 1445 of the Code.

5.15       Name.  Within thirty (30) days after the Closing, the Company shall file an amendment to its Second Amended and Restated Certificate of Incorporation and all other corporate documents to eliminate therefrom the word "Authentium" or any other name or mark that has such a near resemblance thereto as may reasonably be likely to cause confusion or mistake to the public, or to otherwise deceive the public.  In addition, within thirty (30) days after the Closing, the Company and all respective Affiliates shall cease all use of the names "Authentium" and "Command" in its activities (including with respect to any existing inventory or packaging).  During the foregoing thirty-day period, the Purchaser shall grant the Company a limited, royalty-free license to use the "Authentium" and "Command" brand names and marks.  Notwithstanding the foregoing, if the Purchaser reasonably determines that the use of the name "Authentium" or "Command" by the Company negatively affects the value of the "Authentium" or "Command" names, it shall provide written notice to the Company identifying the reason for such determination.  If the Company does not cease the activity giving rise to such reason or dispute in writing such determination within five (5) Business Days following receipt of such written notice, the Purchaser may revoke such license with immediate effect upon delivery of a written notice to the Company.  If the Company disputes such determination, the Company and Purchaser shall attempt in good faith to resolve such dispute; provided, however, that if the Company or the Purchaser fails to respond within two (2) Business Days after receipt of a written request from the other party to commence discussion toward such resolution or otherwise fails to cooperate then the non-cooperating party shall be deemed to have agreed to resolve such dispute in favor of the cooperating party; provided, further, however, that if and Purchaser are unable to resolve such dispute within five (5) Business Days following commencement of attempts to do so, then the Purchase may revoke such license with immediate effect upon delivery of a written notice to the Company. Upon such revocation the Company shall immediately cease all use of the "Authentium" and "Command" names.

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ARTICLE 6

CONDITIONS TO THE TRANSACTIONS

6.1          Conditions to Obligations of Each Party to Consummate the Transaction.  The respective obligations of each party to this Agreement to consummate the Transaction shall be subject to the satisfaction at or prior to the Closing of the following conditions:

(a)                 Governmental and Regulatory Approvals.  All Governmental Authority Approvals necessary for consummation of the Transaction contemplated hereby shall have been obtained.

(b)                 No Injunctions or Regulatory Restraints; Illegality.  No temporary restraining order, preliminary or permanent injunction or other Order issued by any court of competent jurisdiction or Governmental Authority or other legal or regulatory restraint or prohibition preventing the consummation of the Transaction shall be in effect; nor shall there be any action taken, or any Law or Order enacted, entered, enforced or deemed applicable to the Transaction or the other transactions contemplated by the terms of this Agreement that would prohibit the consummation of the Transaction or which would permit consummation of the Transaction only if certain divestitures were made or if the Purchaser or the Company were to agree to limitations on its business activities or operations.

(c)                 Ancillary Agreements.  Each of the Company and the Purchaser shall have executed and delivered the Ancillary Agreements.

6.2          Additional Conditions to Obligations of the Company.  The obligations of the Company to consummate the Transaction and the other transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Company:

(a)                 Representations and Warranties.  The representations and warranties of the Purchaser contained in this Agreement shall each be true, correct and complete in all material respects as of the date of this Agreement and shall each be true, correct and complete in all material respects as of the Closing Date as if made on and as of the Closing Date (other than representations and warranties which by their express terms are made solely as of a specified earlier date, which shall be true, correct and complete in all material respects as of such specified earlier date).

(b)                 Performance.  The Purchaser shall have performed and complied in all material respects with each agreement, covenant and obligation required by this Agreement to be so performed or complied with by the Purchaser at or before the Closing.

(c)                 Assumption Document.  The Purchaser shall have delivered to the Company an instrument of assumption substantially in the form attached hereto as Exhibit B, evidencing the Purchaser's assumption, pursuant to Section 1.2, of the Assumed Liabilities (the "Assumption Document").

(d)                 Delivery of Agreement.  The Purchaser and the Company shall have entered into a license-back agreement for the use by the Company of the AV SDK in the form attached hereto as Exhibit C, for the sole purpose of permitting the Company to integrate the AV SDK into its ESP-C Products and continue to operate its consumer security suite business.

(e)                 Legal Opinion.  The Company shall have received a legal opinion from Gary Davis, Esq., General Counsel of the Purchaser, as to the matters set forth in Exhibit D hereto.

6.3          Additional Conditions to the Obligations of the Purchaser.  The obligations of the Purchaser to consummate the Transaction and the other transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Purchaser:

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(a)                 Representations and Warranties.  The representations and warranties of the Company contained in this Agreement shall be true, correct and complete in all material respects as of the date of this Agreement and shall be true, correct and complete in all material respects as of the Closing Date as if made on and as of the Closing Date (other than representations and warranties which by their express terms are made solely as of a specified earlier date, which shall be true, correct and complete in all material respects as of such specified earlier date).

(b)                 Performance.  The Company shall have performed and complied in all material respects with each agreement, covenant and obligation required by this Agreement to be so performed or complied with by the Company on or before the Closing Date.

(c)                 Officers' Certificates.  The Company shall have delivered to the Purchaser certificates, dated the Closing Date and executed by its President and Chief Executive Officer and by its Chief Financial Officer, substantially in the form set forth in Exhibit E hereto.

(d)                 Third Party Consents.  The Purchaser shall have been furnished with the consents, approvals and waivers listed (or required to be listed) in Section 2.3 of the Company Disclosure Schedule (other than consents, approvals and waivers with respect to Reseller Contracts and End User Contracts representing less than fifteen thousand United States Dollars (US$ 15,000) in annual revenues) and all such consents, approvals and waivers shall be in full force and effect.  In addition, if the Purchaser and the Company shall have filed joint voluntary notice with CFIUS under Exon-Florio pursuant to Section 4.2(b) of this Agreement, then CFIUS shall have advised the Purchaser in writing of its determination not to investigate the acquisition by the Purchaser of the operations of the Business located in the United States; or if CFIUS determines to investigate, the Purchaser shall not have received notice from the President of the United States of a decision to take action by no later than midnight on the fifteenth (15th) calendar day after the completion or termination of the investigation by CFIUS or, if the fifteenth (15th) calendar day is not a Business Day in the United States, no later than the next Business Day in the United States following the fifteenth (15th) calendar day.

(e)                 Legal Opinion.  The Purchaser shall have received a legal opinion from Carl L. Spataro, Jr., Esq., Vice President, General Counsel of the Company, as to the matters set forth in Exhibit F hereto.

(f)                 Non-Competition Agreements.  The Company shall have executed and delivered to the Purchaser a Non-Competition Agreement in the form attached hereto as Exhibit G, and such Non-Competition Agreement shall be in full force and effect.

(g)                 Delivery of Agreements.

(i)           The Company and the Purchaser shall have entered into a Transition Services Agreement in the form of Exhibit H hereto.

(ii)          The Company and the Purchaser shall have entered into a Development Services Agreement in the form of Exhibit I hereto.

(iii)         The OEM Agreement entered into between the Purchaser and Frisk Software International on July 22, 2010 shall be in full force and effect.

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(h)                 Employees.

(i)           Each of the essential employees of the Company named in Section 6.3(h) of the Company Disclosure Schedule (the "Essential Employees") shall agree to continue to be employed by the Purchaser or a Subsidiary of the Purchaser (as the Purchaser shall designate), following the Closing on terms substantially similar to the terms on which such Essential Employees are currently employed by Company and shall have executed and delivered to the Purchaser, the Purchaser's standard forms of Confidentiality and Invention Assignment Agreement and associated schedules and statements without amendment or modification thereto in any substantive respect, unless such amendment or modification has been approved by the Purchaser. If the Purchaser offers employment terms to an Essential Employee that are not substantially similar to the terms on which such Essential Employee is currently employed by the Company or requires that any Essential Employee to relocate as a condition to employment and such Essential Employee declines employment with the Purchaser as a result, this condition to closing shall be deemed waived by the Purchaser solely with respect to such Essential Employee.

(ii)           The Purchaser will not require Mr. Helmuth Freericks to relocate as a condition to employment.  The Purchaser will also authorize Mr. Helmuth Freericks to perform the services contemplated by the Development Services Agreement to be entered into between the Company and the Purchaser, a form of which is attached as Exhibit I hereto.

(i)                 No Company Material Adverse Effect.  No Company Material Adverse Effect shall have occurred, and no event or circumstance shall have occurred or arisen that could reasonably be expected to result in a Company Material Adverse Effect.

(j)                 Business Products Intellectual Property.  No Person shall have commenced, or notified the Purchaser, the Company or any of their respective directors, officers, employees or Affiliates that it intends to commence, an Action or Proceeding alleging that any of the Business Products Intellectual Property infringes or otherwise violates the intellectual property rights of such Person, unless such Person shall have definitively and unconditionally (x) withdrawn such notification, notice or allegation and (y) abandoned such Action or Proceeding.

(k)                 Court Proceedings.  No Action or Proceeding shall be pending or threatened before any Governmental Authority or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or any Ancillary Agreement, (B) cause any of the transactions contemplated by this Agreement or any Ancillary Agreement to be rescinded following the consummation thereof or (C) have a material adverse effect on the right or powers of the Purchaser to own, operate or control the Purchased Assets, and no such injunction, judgment, order, decree, ruling or charge shall be in effect.

(l)                 Transfer Documents.  The Purchaser shall have received the required transfer and assignment documents, including the Bill of Sale in the form attached hereto as Exhibit J and the Assignment of IP Rights in the form of Exhibit K hereto executed by the Company and selling, delivering, transferring, conveying and assigning to the Purchaser all right, title, and interest in and to the Purchased Assets, free and clear of any and all Liens.

ARTICLE 7

SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; ESCROW

PROVISIONS

7.1         Survival of Representations, Warranties, Covenants and Agreements.  Notwithstanding any right of the Purchaser or the Company (whether or not exercised) to investigate the affairs of the Purchaser or the Company (whether pursuant to Section 5.1 or otherwise), or any waiver or non-assertion by the Purchaser or the Company of any condition to Closing set forth in Article 6 or any termination right set forth in Article 8, each party shall have the right to rely fully upon the representations, warranties, covenants and agreements of the other parties hereto contained in this Agreement, the Ancillary Agreements or in any instrument delivered pursuant to this Agreement.  Except for (i) covenants and agreements contained in Section 1.7 (Earnout Payment) (which shall survive the Closing and shall terminate only when the Earnout Payment is fully and finally calculated and paid, and any disputes related to the Earnout Payment are resolved), (ii) the representations and warranties contained in Section 2.62.8 (Taxes) and covenants and agreements contained in Section 5.14 (Taxes) (which shall survive the Closing and shall terminate only when the applicable statutes of limitations with respect to the liabilities in question expire, in each case giving effect to any tolling or extensions thereof), (iii) Article 7 (Escrow Fund) (which shall survive until termination of the Escrow Fund created thereby and the satisfaction of any other obligations described therein), and (iv) any fraudulent or willful misconduct by the Company or any Person who is or was a director, officer, Affiliate or shareholder of the Company in connection with this Agreement or any of the Ancillary Agreements or any certificate, agreement or instrument required to be delivered at the closing of the Transaction pursuant to this Agreement (which shall survive the Closing indefinitely), all of the representations, warranties, covenants and agreements of the Company and the Purchaser contained in this Agreement, the Ancillary Agreements or in any instrument required to be delivered at the Closing of the Transaction pursuant to this Agreement shall survive the Transaction and continue until 11:59 p.m. Israel time on December 31, 2011 (the "Expiration Date").  Nothing in this Section 7.1 or any other provision of this Agreement shall be construed to limit the survival of any representation, warranty, covenant or agreement of any Person other than the Purchaser and the Company set forth in any of the Ancillary Agreements, which shall survive the Transaction and continue for the time periods set forth therein (or, if no time period is set forth therein, indefinitely).

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7.2          Escrow Provisions.

(a)                 Establishment of the Escrow Fund.  At the Closing, the Escrow Amount will be deposited with the Escrow Agent, such deposit to constitute the "Escrow Fund" to be governed by the terms set forth herein.

(b)                 Recourse to the Escrow Fund.  The Escrow Fund shall be available to compensate the Purchaser and its officers, directors, employees, agents and Affiliates (collectively, the "Purchaser Indemnitees") for any and all Losses (whether or not involving a third party claim (a "Third Party Claim")), incurred or sustained by the Purchaser or any other Purchaser Indemnitee as a result of any breach or violation of, inaccuracy in or omission from any representation or warranty, or any breach or violation of any covenant or agreement, of the Company or any Person who is or was a director, officer, Affiliate or shareholder of the Company contained in this Agreement, the Transition Services Agreement, or any certificate or instrument required to be delivered at the Closing of the Transaction pursuant to this Agreement, or with respect to any Taxes of Company for any pre-Closing period or portion of a Straddle Period prior to Closing.  The Purchaser and the Company each acknowledge that such Losses, if any, would relate to unresolved contingencies existing at the Closing Date, which if resolved at the Closing Date would have led to a reduction in the aggregate consideration to be paid to the Company.  Notwithstanding the foregoing, in the event of fraudulent or willful misconduct by the Company or any Person who is or was a director, officer, Affiliate or shareholder of the Company in connection with this Agreement or any other certificate or instrument required to be delivered at the Closing of the Transaction pursuant to this Agreement, the parties acknowledge that notwithstanding anything to the contrary herein, the Purchaser shall have all remedies available at law or in equity (including for tort) with respect to such fraudulent or willful misconduct and such remedies will not be capped by the Escrow Fund.

(c)                 Escrow Period; Distribution of Escrow Fund upon Termination of Escrow Period.  Subject to the following requirements, the Escrow Fund shall be in existence immediately following the Closing Date and shall terminate at 11:59 p.m., Israel Time, on December 31, 2011 (the period of time from the Closing Date through and including 11:59 p.m. on December 31, 2011 is referred to herein as the "Escrow Period"). The Escrow Amount shall be distributed to the Company as follows: (i) at 11:59 p.m., Israel Time, on the first anniversary of the Closing Date, the remaining balance of the Escrow Amount (after payment of all claims and reserves for unsatisfied claims as of such date and time) that is in excess of four hundred sixty thousand United States Dollars (US $460,000) (the "Remainder") shall be distributed to the Company, and (ii) at 11:59 p.m., Israel Time, on December 31, 2011, all amounts remaining in the Escrow Fund shall be distributed to the Company; provided, however, that the distributions above shall not be made and the Escrow Period shall not terminate with respect to such amount (or some portion thereof) as may be necessary in the good faith judgment of the Purchaser, subject to the objection of the Company and the subsequent arbitration of the matter in the manner as provided in Section 7.2(g), to satisfy any unsatisfied claims under this Section 7.2 concerning facts and circumstances existing prior to the first anniversary of the Closing Date (with respect to the distribution from the Escrow Fund on such date) or the termination of such Escrow Period, as applicable, which claims are specified in any certificate signed by any officer of the Purchaser (an "Officer's Certificate") delivered to the Escrow Agent and to the Company prior to the first anniversary of the Closing Date (with respect to the distribution from the Escrow Fund on such date) or termination of such Escrow Period, as applicable.  As soon as all such claims, if any, have been resolved, the Escrow Agent shall deliver to the Company the Remainder of the Escrow Fund or remaining portion of the Escrow Fund, as applicable, not required to satisfy such claims.  The Purchaser shall use its commercially reasonable efforts to have such remaining portion of the Escrow Fund delivered within ten (10) Business Days after such resolution.

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(d)                 Protection of Escrow Fund.  The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, shall treat such fund as a trust fund in accordance with the terms of this Agreement and not as the property of the Purchaser and shall hold and dispose of the Escrow Fund only in accordance with the terms hereof.

(e)                 Claims Upon Escrow Fund.  Upon receipt by the Escrow Agent at any time on or before the last day of the Escrow Period of a certificate signed by any officer of the Purchaser (an "Officer's Certificate"):  (A) stating that the Purchaser or another the Purchaser Indemnitee has incurred or sustained (or anticipates that it will incur or sustain) Losses, directly or indirectly, as a result of any breach or violation of, inaccuracy in or omission from (or any claim by any third party alleging, constituting or involving a breach or violation of, inaccuracy in or omission from) any representation, warranty, covenant or agreement of the Company or any Person who is or was a director, officer, Affiliate or shareholder of the Company contained in this Agreement or any certificate or instrumentrequired to be delivered at the Closing of the Transaction pursuant to this Agreement; and (B) specifying in reasonable detail the individual items of Loss included in the amount so stated, the date (if known) when each such item of Loss was incurred or sustained (or, in the case of anticipated Losses, the basis for such anticipated Loss), and the general nature of the representation, warranty, agreement or covenant or other matter to which such item of Loss or anticipated Loss is related, the Escrow Agent shall, subject to Section 7.2(f) and 7.2(g) below deliver to the Purchaser out of the Escrow Fund, as promptly as practicable but, in any event no earlier than the ten (10) Business Day period set forth in Section 7.2(f) below (for undisputed Claims) and no earlier than rendering of the final arbitral decision under Section 7.2(g) below (or mutual agreement of the parties) (for disputed Claims), an amount in cash held in the Escrow Fund equal to such Losses.  Where the basis for a claim upon the Escrow Fund by the Purchaser is that the Purchaser (or another Purchaser Indemnitee) anticipates that it will incur or sustain a Loss, no payment will be made from the Escrow Fund for such Loss unless and until such Loss is actually incurred or sustained.

(f)                 Objections to Claims.  At the time of delivery of any Officer's Certificate to the Escrow Agent, a duplicate copy of such certificate shall be delivered to the Company and for a period of ten (10) Business Days after such delivery, the Escrow Agent shall make no delivery to the Purchaser of any Escrow Amounts pursuant to Section 7.2(e) unless the Escrow Agent shall have received written authorization from the Company to make such delivery.  After the expiration of such ten (10) Business Day period, the Escrow Agent shall make delivery of cash payments from the Escrow Fund in accordance with Section 7.2(e), provided that no such payment may be made if the Company shall object in a written statement to the claim made in the Officer's Certificate setting forth in reasonable detail the basis for objection, and such statement shall have been delivered to the Escrow Agent prior to 5 p.m. Pacific Time on the last day of such ten (10) Business Day period.

(g)                 Resolution of Conflicts; Arbitration.

(i)           In case the Company shall object in writing to any claim or claims made in any Officer's Certificate, the Company and the Purchaser shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims.  If the Company and the Purchaser should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent.  The Escrow Agent shall be entitled to rely on any such memorandum and distribute cash payments from the Escrow Fund in accordance with the terms thereof.

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(ii)           If no such agreement is reached after good faith negotiations, either the Purchaser or the Company may demand arbitration of the dispute unless the amount of the Loss is at issue in a pending Action or Proceeding involving a Third Party Claim (as defined in the Escrow Agreement, in which event arbitration shall not be commenced until such amount is determined in such Action or Proceeding (whether by verdict, judgment, finding of fact, settlement or other Order, stipulation or agreement) or otherwise ascertained, or both parties agree to arbitration; and in either event, the matter shall be resolved by arbitration conducted by one arbitrator to be selected jointly by the parties, and if the parties fail to agree on an arbitrator within thirty days of the arbitration demand or resolution of Third Party Claim (if later), in accordance with the commercial rules of arbitration of the American Arbitration Association then in effect.  The arbitrator shall set a limited time period and establish procedures designed to reduce the cost and time for discovery of information relating to any dispute while allowing the parties an opportunity, adequate as determined in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute.  The arbitrator shall rule upon motions to compel, limit or allow discovery as he shall deem appropriate given the nature and extent of the disputed Claim.  The arbitrator shall also have the authority to impose sanctions, including attorneys' fees and other costs incurred by the parties, to the same extent as a court of law or equity, if the arbitrator determines that discovery was sought without substantial justification or that discovery was refused or objected to by a party without substantial justification.  The decision of the arbitrator as to the validity and amount of any Claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement and, notwithstanding anything in Section 7.2(e), the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith.  Such decision shall be written and shall be supported by written findings of fact and conclusions of law regarding the dispute which shall set forth the award, judgment, decree or order of the arbitrators.

(iii)           Judgment upon any award, judgment, decree or order rendered by the arbitrators may be entered in any court having competent jurisdiction.  Any such arbitration shall be held in New York City under the commercial rules of arbitration then in effect of the American Arbitration Association.  For purposes of this Section 7.2(g), in any arbitration hereunder in which any Claim or the amount thereof stated in the Officer's Certificate is at issue, the Purchaser shall be deemed to be the Non-Prevailing Party in the event that the arbitrators award the Purchaser less than the sum of one-half of the disputed amount of claimed Losses (exclusive of any amounts not in dispute); otherwise, the Company as represented by the Company shall be deemed to be the Non-Prevailing Party.  The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of the arbitrator, the administrative costs of the arbitration and the expenses, including reasonable attorneys' fees and costs, incurred by the other party to the arbitration.  If the Non-Prevailing Party is the Company, such fees may be sourced from the Escrow Fund.  For the avoidance of doubt, if the Purchaser is the Non-Prevailing Party, the Purchaser will not be entitled to claim Purchaser's fees and expenses with respect to the disputed amount as Losses or otherwise seek reimbursement from the Company (or the Escrow Fund) for such fees and expenses.

(h)                 Third-Party Claims.  In the event the Purchaser becomes aware of a Third Party Claim which the Purchaser expects may result in a demand against the Escrow Fund, the Purchaser shall notify the Company of such Claim, and the Company shall be entitled, at its expense, to participate in any defense of such Claim.  The Purchaser shall have the right in its sole discretion to settle any Third Party Claim; provided, however, that if (i) such settlement was obtained without the Company's consent, and such consent was neither unreasonably withheld nor delayed, and (ii) the Company demonstrates to the satisfaction of the arbitrator that the amount of such settlement was unreasonably high (it being agreed that the arbitrator shall determine which party shall bear the burden of production and persuasion with respect to such challenge of the amount of settlement), the Purchaser shall not be entitled to recover from the Escrow Fund the portion of such settlement that the Company has so demonstrated is unreasonably high.  In the event that the Company has consented to any such settlement, the amount of such settlement shall be conclusively and irrebuttably presumed to be reasonable, and the Company shall not make, and the arbitrator shall have no power or authority to hear any objection under any provision of this Article 7 to the amount of any claim by the Purchaser against the Escrow Fund with respect to the amount of Losses incurred by the Purchaser in such settlement.

(i)                 Limitation.  The Company shall not have any liability in excess of two million United States Dollars (US $2,000,000) (the "Indemnity Cap") for any breach or violation of, inaccuracy in or omission from any representation or warranty, or any breach or violation of any covenant or agreement, of the Company contained in this Agreement or any of the Ancillary Agreements or any certificate, agreement or instrument required to be delivered in connection herewith or therewith (disregarding any materiality limitation herein or therein) or any claim by any third party alleging, constituting or involving such a breach, violation, inaccuracy or omission, except in the event of fraud or willful misconduct (i.e., an intentional breach of a representation, warranty, covenant or agreement, but excluding a negligent or reckless breach) by the Company or any Person who is or was a director, officer, Affiliate or shareholder of the Company in connection with this Agreement, the Ancillary Agreements or in any other instrument or document required to be delivered pursuant to this Agreement in connection herewith.  In the event of such fraudulent or willful misconduct referred to in the immediately preceding sentence, the Purchaser shall have all remedies available at law or in equity (including for tort) with respect to such fraudulent or willful misconduct.  Nothing herein shall be construed to limit the remedies available to or the amount of damages recoverable by the Purchaser for breach of any of the Ancillary Agreements by any of the parties thereto other than the Company.  In the event that the balance in the Escrow Fund shall not be sufficient to compensate the Purchaser Indemnitees for any and all Loss, the Purchaser shall be entitled to retain the portion of the unpaid Earnout Payment, if any, that represents the excess of the Loss (up to the amount of the Indemnity Cap) over the balance in the Escrow Fund.

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ARTICLE 8

TERMINATION, AMENDMENT AND WAIVER

8.1          Termination.  Except as provided in Section 8.2, this Agreement may be terminated and the Transaction abandoned at any time prior to the Closing Date:

(a)                 by mutual agreement of the Company and the Purchaser;

(b)                 by the Purchaser or the Company if:  (i) the Closing Date has not occurred before 5:00 p.m. (Israel Time) on October 31, 2010 (provided, however, that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose willful failure to fulfill any obligation hereunder has been the cause of, or resulted in, the failure of the Closing Date to occur on or before such date); (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Transaction; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Transaction by any Governmental Authority that would make consummation of the Transaction illegal;

(c)                 by the Purchaser if there shall be any action taken, or any Law or Order enacted, promulgated or issued or deemed applicable to the Transaction, by any Governmental Authority, which would:  (i) prohibit the Purchaser's ownership or operation of all or any portion of the Purchased Assets or the Business, or (ii) compel the Purchaser to dispose of or hold separate all or any portion of the Purchased Assets or the Business, or limit its operation of the Business as a result of the Transaction;

(d)                 by the Purchaser if it is not in material breach of its representations, warranties, covenants and agreements under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company and (i) the Company is not using its reasonable efforts to cure such breach, or has not cured such breach within thirty (30) days, after notice of such breach to the Company (provided, however, that, no cure period shall be required for a breach which by its nature cannot be cured) and (ii) as a result of such breach any of the conditions set forth in Section 6.1 or Section 6.2, as the case may be, would not be satisfied prior to the Closing Date;

(e)                 by the Company if it is not in material breach of its representations, warranties, covenants and agreements under this Agreement and (i) there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Purchaser and (A) the Purchaser is not using its reasonable efforts to cure such breach, or has not cured such breach within thirty (30) days, after notice of such breach to the Purchaser (provided, however, that no cure period shall be required for a breach which by its nature cannot be cured), and (B) as a result of such breach any of the conditions set forth in Section 6.3 would not be satisfied as of the Closing Date; or (ii) subject to the terms of clause (ii) of Section 8.2, pursuant to and in accordance with Section 4.3 for the purpose of pursuing a Superior Proposal previously received by the Company and not withdrawn at the time of such termination;

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(f)                 by the Purchaser, if any of the individuals listed in Section 6.3(h)(ii) of the Company Disclosure Schedule and designated as Essential Employees ceases (other than by death or as a result of disability) to be employed by the Company or shall have given any notice or other indication that they are not willing to be employed by the Purchaser or an Affiliate of the Purchaser (as the Purchaser shall designate) following the Transaction, provided that the Purchaser shall give the Company at least thirty (30) days prior written notice during which time the Company may seek to obtain the consent of the Essential Employee to be employed by the Purchaser or an Affiliate of the Purchaser following the Transaction.  Notwithstanding anything to the contrary in the foregoing, Purchaser shall have no right to terminate this Agreement or abandon the Transaction under this Section 8.1(f) if: (i) the Purchaser directly or indirectly induces or encourages the Essential Employee to engage in activity that would reasonably result in such Essential Employing ceasing to be employed by the Company; or (ii) the Purchaser fails to offer employment terms to such Essential Employee that are substantially similar to the terms on which such Essential Employee is currently employed by the Company or requires that any Essential Employee to relocate as a condition to employment.  If the Purchaser exercises its right to terminate this Agreement and abandon the Transaction pursuant to this Section 8.1(f), the Purchaser shall not subsequently hire any Essential Employee and any such attempt to hire an Essential Employee shall be deemed a waiver of its right of termination under this Section 8.1(f).

8.2          Effect of Termination.  In the event of a valid termination of this Agreement as provided in Section 8.1, other than as provided in Section 8.1(e)(ii), this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Purchaser or the Company or their respective officers, directors or shareholders or Affiliates or Associates; provided, however, that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 5.2, 5.3, 5.5 and 8.1(f), Article 9 (exclusive of Section 9.3) and the applicable definitions set forth in Article 10 shall remain in full force and effect and survive any termination of this Agreement. The Company shall pay the Purchaser a cash fee of five hundred thousand United States Dollars (US $500,000) by wire transfer of immediately available funds to an account designated in writing by the Purchaser and as a condition precedent to the validity of such termination by the Company, in the event that the Company terminates this Agreement pursuant to Section 4.3 and clause (ii) of Section 8.1(e).

8.3          Amendment.  Except as is otherwise required by applicable Law, this Agreement may be amended by the parties hereto at any time by execution of an instrument in writing validly signed on behalf of and delivered to each of the parties hereto; provided, however, that the consent of the Escrow Agent shall not be required in connection with any amendment to this Agreement that does not affect the rights and obligations of the Escrow Agent, as applicable.

8.4          Extension; Waiver. At any time prior to the Closing Date, the Purchaser and the Company may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations of the other party hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements, covenants or conditions for the benefit of such party contained herein.  Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of the party against which such waiver or extension is asserted.

ARTICLE 9

MISCELLANEOUS PROVISIONS

9.1         Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission against facsimile confirmation or sent by internationally recognized overnight courier prepaid, to the parties at the following addresses or facsimile numbers:

If to the Purchaser to:

Commtouch Inc.

292 Gibraltar Drive, Suite 107

Sunnyvale, CA 94089

Facsimile No.:  +1 (650) 864-2006

Attn:  General Counsel

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with a copy (which shall not constitute notice) to:

Naschitz, Brandes & Co.

5 Tuval Street

Tel Aviv, Israel  67897

Facsimile No.:  +972 (3) 623-5005

Attn:  Aaron M. Lampert

If to the Company to:

Authentium, Inc.

7121 Fairway Drive, Suite 102

Palm Beach Gardens, FL  33418-3764

Facsimile No.:  +1 (561) 575-3026

Attn:  General Counsel

with a copy (which shall not constitute notice) to:

Squire, Sanders & Dempsey L.L.P.

2000 Huntington Center

41 South High Street

Columbus, OH 43215

Facsimile No.:  +1 (614) 365-2499

Attn:  Donald W. Hughes, Esq.

All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section 9.1, be deemed given upon delivery, (b) if delivered by facsimile transmission to the facsimile number as provided for in this Section 9.1, be deemed given upon facsimile or telephonic confirmation of successful completion of transmission, and (c) if delivered by overnight courier to the address as provided in this Section 9.1, be deemed given on the earlier of the first Business Day following the date deposited with such overnight courier with the requisite payment and instructions to the effect delivery on the next Business Day or upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice is to be delivered pursuant to this Section 9.1).  Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving written notice specifying such change to the other parties hereto.

9.2          Entire Agreement.  This Agreement and the Exhibits and Schedules hereto, including the Disclosure Schedules and the Ancillary Agreements, constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, except for the confidentiality provisions of the Confidentiality Agreement and the LOI, which shall continue in full force and effect and shall survive any termination of this Agreement in accordance with its terms.

9.3          Further Assurances; Post-Closing Cooperation.  At any time or from time to time after the Closing, the parties shall execute and deliver to the other party such other documents and instruments, provide such materials and information and take such other actions as each other party may reasonably request to consummate the transactions contemplated by this Agreement and otherwise to cause the other parties to fulfill their respective obligations under this Agreement and the transactions contemplated hereby.  Each party agrees to use commercially reasonable efforts to cause the conditions to its obligations to consummate the Transaction to be satisfied.

9.4          Waiver.  Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition.  No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion.  All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative.

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9.5          Third Party Beneficiaries.  The terms and provisions of this Agreement are intended solely for the benefit of the Purchaser and the Company and, with respect to Article 7 only, the Escrow Agent, and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights, and this Agreement does not confer any such rights, upon any other Person other than any Person entitled to indemnification or compensation from the Escrow Fund under this Agreement.

9.6          No Assignment; Binding Effect.  Subject to Section 1.3, neither this Agreement nor any right, interest or obligation hereunder may be assigned (by operation of Law or otherwise) by any party without the prior written consent of the other parties and any attempt to do so will be void.  Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns.

9.7          Headings.  The headings and table of contents used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.

9.8          Invalid Provisions.  If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible.

9.9          Governing Law, Consent to Jurisdiction and Waiver of Trial by Jury.

(a)                 This Agreement, any other acquisition agreements, the Ancillary Agreements and any other closing documents shall be governed by and construed in accordance with the domestic laws of the State of Delaware, without giving effect to any choice of Law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of Delaware.  In any proceeding brought to enforce this Agreement, any other acquisition agreements, the Ancillary Agreements or any other closing documents, the substantially prevailing party as determined by the arbitrator will be entitled to recover its reasonable attorneys' fees and costs, including fees on any appeal, and neither party shall be entitled to any trial by jury.

(b)                 Except as otherwise expressly provided by this Agreement, each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any Florida State court, or Federal court of the United States of America, sitting in Miami-Dade County, Florida, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the agreements delivered in connection herewith or the transactions contemplated hereby or thereby or for recognition or enforcement of any judgment relating thereto, and each of the parties hereby irrevocably and unconditionally (A) agrees not to commence any such action or proceeding except in such courts, (B) agrees that any claim in respect of any such action or proceeding may be heard and determined in such Florida State court or, to the extent permitted by law, in such Federal court, (C) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such Florida State or Federal court, and (D) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such Florida State or Federal court.  Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.1.  Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

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(c)                 IN ANY ACTION OR PROCEEDING ARISING HEREFROM, THE PARTIES HERETO CONSENT TO TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO OR ITS SUCCESSORS AGAINST ANY OTHER PARTY HERETO OR ITS SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, REGARDLESS OF THE FORM OF ACTION OR PROCEEDING.

9.10       Construction.  The parties hereto agree that this Agreement is the product of negotiations between sophisticated parties and individuals, all of whom were represented by counsel, and each of whom had an opportunity to participate in and did participate in, the drafting of each provision hereof.  Accordingly, ambiguities in this Agreement, if any, shall not be construed strictly or in favor of or against any party hereto but rather shall be given a fair and reasonable construction without regard to the rule of contra proferentem.

9.11       Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.  The Escrow Agent may execute this Agreement following the date hereof and prior to the Closing, and such later execution, if so executed after the date hereof, shall not affect the binding nature of this Agreement as of the date hereof among the other signatories hereto.

9.12       Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.  Except where this Agreement specifically provides for arbitration, it is agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at Law or in equity.

ARTICLE 10

DEFINITIONS

10.1       Definitions. As used in this Agreement, the following defined terms shall have the meanings indicated below (with correlative meanings for the singular or plural forms thereof):

"Action or Proceeding" means any action, suit, complaint, petition, proceeding, arbitration, litigation or Governmental Authority investigation, audit or other proceeding, whether civil or criminal, in law or in equity, or before any arbitrator or Governmental Regulatory Authority.

"Affiliate" means, as applied to any Person, (a) any other Person directly or indirectly controlling, controlled by or under common control with, that Person, (b) any other Person that owns or controls ten percent (10%) or more of any class of equity securities (including any equity securities issuable upon the exercise of any option or convertible security) of that Person or any of its affiliates, or (c) as to a corporation, each director and officer thereof, and as to a partnership, each general partner thereof, and as to a limited liability company, each managing member or similarly authorized person thereof (including officers), and as to any other entity, each Person exercising similar authority to those of a director or officer of a corporation.  For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling," "controlled by," and "under common control with") as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through ownership of voting securities or by contract or otherwise.

"Aggregate Consideration" has the meaning ascribed to it in Section 1.5.

"Agreement" means this Asset Purchase Agreement, including (unless the context otherwise requires) the Exhibits and the Disclosure Schedules and the certificates and instruments required to be delivered at the Closing of the Transaction pursuant to this Agreement, as the same may be amended or supplemented from time to time in accordance with the terms hereof.

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"Ancillary Agreements" means the License Back Agreement, the OEM Agreement entered into between the Purchaser and Frisk Software International on July 22, 2010, and the Transition Services Agreement.

"Approval" means any approval, authorization, consent, permit, qualification or registration, or any waiver of any of the foregoing, required to be obtained from or made with, or any notice, statement or other communication required to be filed with or delivered to, any Governmental Authority or any other Person.

"Assets and Properties" of any Person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible, whether absolute, accrued, contingent, fixed or otherwise and wherever situated), including the goodwill related thereto, operated, owned, licensed or leased by such Person, including cash, cash equivalents, accounts and notes receivable, chattel paper, documents, instruments, general intangibles, real estate, equipment, inventory, goods and Intellectual Property.

"Associate" means, with respect to any Person, any corporation or other business organization of which such Person is an officer or partner or is the beneficial owner, directly or indirectly, of ten percent or more of any class of equity securities, any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as a trustee or in a similar capacity and any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person.

"Assumed Liabilities" has the meaning ascribed to it in Section 1.2.

"Assumption Document" has the meaning ascribed to it in Section 6.2(c).

"Audited Financial Statement Date" means December 31, 2007.

"Audited Financial Statements" means the audited consolidated balance sheets of the Company as of December 31 of each of 2006 and 2007 and the related audited consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years then ended, in each case including the notes thereto and the unqualified report of the Company's independent accountants with respect thereto.

"Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA, Multiemployer Plan, Pension Plan, and any other bonus, incentive compensation, deferred compensation, profit sharing, stock option, stock appreciation right, stock bonus, stock purchase, employee stock ownership, savings, severance, change in control, supplemental unemployment, layoff, salary continuation, retirement, severance, pension, health, life insurance, disability, accident, group insurance, vacation, holiday, sick leave, personal leave, tuition, employee assistance, fringe benefit or welfare plan, workers' compensation, and any other employment, consulting, employee compensation or benefit plan, agreement, policy, practice, commitment, contract or understanding (whether qualified or nonqualified, currently effective or terminated, written or unwritten) related thereto (i) that is or was maintained or contributed to by the Company or any ERISA Affiliate, or (ii) with respect to which the Company or any of its ERISA Affiliates has or may have any Liability and/or (iii) provides benefits, or describes policies or procedures applicable to any current or former employee, officer, director, consultant, service provider or contractor of the Company or any ERISA Affiliate, regardless of how (or whether) Liabilities for the provision of benefits are accrued or assets are acquired or dedicated with respect to the funding thereof.

"Blocking Technology" means methods that are designed to detect and prevent the installation or operation of software code that is known or suspected to be Malware, or facilitate removal of such software code, in each case by combining scanning and comparative techniques (including signature, definition file or hash based comparisons, heuristics, or emulation) to evaluate software instructions as they are being loaded onto or accessed by a computer system.

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"Books and Records" means all files, documents, instruments, papers, books and records relating exclusively, or in part, to the Business, including financial statements, internal reports, Tax Returns and related work papers and letters from accountants, budgets, pricing guidelines, ledgers, journals, deeds, title policies, Purchased Contracts, customer lists, computer files and programs (including data processing files and records), retrieval programs, operating data and plans and environmental studies and plans.

"Business" has the meaning ascribed to it in Recital "A" to this Agreement.

"Business Day" means a day other than Friday, Saturday, Sunday or any day on which banks located in the State of Israel or in the State of Florida are authorized or obligated to close.

"Business Products" has the meaning ascribed to it in Section 1.1(a).

"Business Products Intellectual Property" means any Intellectual Property that (a) is owned by; (b) is licensed to; or (c) was developed or created by or for, the Company and, in each of (a), (b) and (c), is used in or necessary for the conduct of the Business or embodied in the Business Products, including any Intellectual Property created by any of the Company's founders, employees, independent contractors or consultants for or on behalf of the Business (including any Intellectual Property created by any of the Company's founders prior to the creation of the Company).

"Business Registered Intellectual Property" means all Registered Intellectual Property owned by, filed in the name of, assigned to or applied for by, the Company and used in the Business.

"CFIUS" means the Committee on Foreign Investment in the United States.

"Claims" means any and all administrative, regulatory or judicial actions, suits, petitions, appeals, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, proceedings, consent orders or consent agreements.

"Closing" means the closing of the Transaction contemplated by Section 1.4.

"Closing Date" has the meaning ascribed to it in Section 1.4.

"COBRA" means the requirements of Part 6 of Subtitle B of Title I of ERISA and Code Section 4980B and of any similar state law.

"Code" means the Internal Revenue Code of 1986, as amended.

"Company" has the meaning ascribed to it in the preamble of this Agreement.

"Company Auditors" means BDO Seidman, LLP or such other independent auditor as the Company may from time to time appoint.

"Company Disclosure Schedule" means the schedules delivered to the Purchaser by or on behalf of the Company, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein in connection with the representations and warranties made by the Company in Article 2 or otherwise.

"Company Material Adverse Effect" means a change, effect, event, occurrence or circumstance that is materially adverse to the business, condition (financial or other), operations and results of operations of (i) the Business, (ii) the value of the Purchased Assets or (iii) the Company as a whole; provided, that "Company Material Adverse Effect" shall not include any change, effect, event, occurrence or circumstance arising out of or attributable to:  (a) any changes, effects, events, occurrences or circumstances in the United States or Israeli economies or securities or financial markets in general; (b) changes, effects, events, occurrences or circumstances that generally affect the industry in which the Business operates; (c) any change, effect, event, occurrence or circumstance resulting from an action required or permitted by this Agreement; or (d) conditions caused by acts of terrorism or war (whether declared or not); provided further, however, that any change, effect, event, occurrence or circumstance referred to in clauses (a), (b) or (d) immediately above shall be taken into account in determining whether a Company Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such change, effect, event, occurrence or circumstance has a disproportionate effect on the Business compared to other participants in the industries in which the Business operates.

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"Competing Proposed Transaction" has the meaning ascribed to it in Section 4.2(a)4.3(a).

"Confidentiality Agreement" has the meaning ascribed to it in Section 5.2.

"Contract" means any contract, agreement or other legally binding business arrangement.

"Disclosure Schedules" means the Company Disclosure Schedule and the Purchaser Disclosure Schedule.

"EAR" has the meaning ascribed to it in Section 2.27.

"Environment" means air, surface water, ground water, or land, including land surface or subsurface, and any receptors such as persons, wildlife, fish, biota or other natural resources.

"Environmental Law" means any and all applicable foreign, federal, state, or local Laws, statutes, ordinances, regulations, policies, guidance, rules, judgments, Orders, court decisions or rule of common law, permits, restrictions and licenses, which (i) regulate or relate to the protection or clean up of the Environment; the use, treatment, storage, transportation, handling, disposal or release of Hazardous Material, the preservation or protection of waterways, groundwater, drinking water, air, wildlife, plants or other natural resources; or the health and safety of persons or property, including without limitation protection of the health and safety of employees; or (ii) impose Liability or responsibility with respect to any of the foregoing, including without limitation CERCLA or any other Law of similar effect.

"Environmental Permit" means any permit, license, approval, consent or authorization required under or in connection with any Environmental Law and includes any and all Orders, consent Orders or binding agreements issued by or entered into with a Governmental Authority.

"ERISA Affiliate" means, with respect to the Company, any entity which is or has ever been a member of a "controlled group of corporations" with, or under "common control" with, the Company (within the meaning of Section 414(b) or (c) of the Code) or which is or has ever been a member of an "affiliated service group" with the Company (within the meaning of Section 414(m) of the Code) or any entity which is or has ever been required to be aggregated with the Company under Section 4001(b) of ERISA.

"Escrow Agent" means Union Bank, N.A. (or other institution acceptable to the Purchaser and the Company).

"Escrow Agreement" means the Escrow Agreement by and among the Purchaser, the Company and the Escrow Agent.

"Escrow Amount" has the meaning ascribed to it in Section 1.5(b).

"Escrow Fund" has the meaning ascribed to it in Section 7.2(a).

"Escrow Period" has the meaning ascribed to it in Section 7.2(c).

"Essential Employees" has the meaning ascribed to it in Section 6.3(h).

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"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder.

"Excluded Assets" has the meaning ascribed to it in Section 1.1.

"Exon-Florio" means the United States Department of the Treasury regulations implementing the Exon-Florio Amendment to the Defense Production Act of 1950 (31 C.F.R. Part 800).

"Expiration Date" has the meaning ascribed to it in Section 7.1.

"Export Controls Law" has the meaning ascribed to it in Section 2.27.

"Extraneous Warranty Obligation" has the meaning ascribed to it in Section 2.23(a).

"Forecast" has the meaning ascribed to it in Section 2.25(b).

"GAAP" means generally accepted accounting principles in the United States, as in effect from time to time.

"Governmental Authority" means any court, tribunal or arbitrator of competent jurisdiction or any  authority, agency, bureau, board, commission, department, official or other instrumentality of the United States, Israel, any other country (to the extent that the rules, regulations or orders of such authority, agency, bureau, board, commission, department, official or other instrumentality have the force of Law) or any domestic or foreign state, county, city or other political subdivision, and shall include any stock exchange, and the National Association of Securities Dealers.

"Hazardous Material" means (a) any chemical, material, substance or waste including, containing or constituting petroleum or petroleum products, solvents (including chlorinated solvents), nuclear or radioactive materials, asbestos in any form that is or could become friable, radon, lead-based paint, urea formaldehyde foam insulation or polychlorinated biphenyls, (b) any chemicals, materials, substances or wastes which are now defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants" or words of similar import under any Environmental Law; or (c) any other chemical, material, substance or waste which is regulated by any applicable Governmental Authority or which could constitute a nuisance.

"Indebtedness" of any Person means all obligations of such Person (a) for borrowed money, (b) evidenced by notes, bonds, debentures or similar instruments, (c) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (d) under capital leases and (e) in the nature of a guarantee of any the obligations described in clauses (a) through (d) above of any other Person.

"Indemnity Cap" has the meaning ascribed to it in Section 7.2(i).

"Intellectual Property" means all trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, patents and patent rights, utility models and utility model rights, copyrights, mask work rights, brand names, trade dress, product designs, product packaging, business and product names, logos, slogans, rights of publicity, trade secrets, inventions (whether patentable or not), invention disclosures, improvements, processes, formulae, industrial models, processes, designs, specifications, technology, methodologies, computer software (including all source code and object code), firmware, development tools, flow charts, annotations, all Web addresses, sites and domain names, all data bases and data collections and all rights therein, any other confidential and proprietary right or information, whether or not subject to statutory registration, and all related technical information, manufacturing, engineering and technical drawings, know-how and all pending applications for and registrations of patents, utility models, trademarks, service marks and copyrights, and the right to sue for past infringement, if any, in connection with any of the foregoing, and all documents, disks, records, files and other media on which any of the foregoing is stored.

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"IRS" means the United States Internal Revenue Service or any successor entity.

"Law" or "Laws" means any law, statute, Order, decree, consent decree, judgment, rule, regulation, ordinance or other pronouncement having the effect of law whether in the United States, any foreign country, or any domestic or foreign state, county, city or other political subdivision or of any Governmental Authority.

"Lease Documents" has the meaning ascribed to it in Section 2.13(d).

"Leased Real Property" has the meaning ascribed to it in Section 2.13(a).

"Liability" means all Indebtedness, obligations and other liabilities of a Person, whether absolute or contingent (or based upon any contingency), known or unknown, fixed or otherwise, due or to become due, whether or not accrued or paid, and whether required or not required to be reflected in financial statements under GAAP.

"License" means any Contract that grants a Person the right to use or otherwise enjoy the benefits of any Intellectual Property (including any covenants not to sue with respect to any such Intellectual Property).

"Liens" means any mortgage, pledge, assessment, easement or security interest, condition, restriction, levy, charge, option or other encumbrance of any kind, or any conditional sale Contract, title retention Contract or other Contract to give any of the foregoing, except for any restrictions on transfer generally arising under any applicable federal or state securities Law.

"LOI" has the meaning ascribed to it in Section 5.2.

"Loss" means any and all damages, fines, fees, Taxes, penalties, deficiencies, losses (including diminution in value) and expenses, including interest, reasonable expenses of investigation, court costs, reasonable fees and expenses of attorneys, accountants and other experts, and other expenses of any Action or Proceeding or of any Claim, default or assessment (such fees and expenses to include all fees and expenses, including fees and expenses of attorneys, incurred in connection with (a) the investigation or defense of any Third Party Claim or (b) asserting or disputing any right under this Agreement against any party hereto or otherwise), net of any insurance proceeds (if any) actually received (without any adverse effect on the premiums paid for such insurance).

"Malware" means malicious or potentially malicious software (e.g., viruses, trojans, worms, spyware, rootkits, and backdoors, etc.) designed to infiltrate a computer system without the owner's informed consent.

 "Multiemployer Plan" has the meaning set forth in Sections 3(37) and 4001(a)(3) of ERISA.

"OEM Agreement" has the meaning ascribed to it in Section 1.1(b).

"Officer's Certificate" has the meaning ascribed to it in Section 7.2(c).

"Order" means any writ, judgment, decree, injunction or similar order of any Governmental Authority.

"Pension Plan" means an employee benefit plan, program or arrangement subject to Section 302 or Title IV of ERISA or Section 412 of the Code.

"Permit" means any license, permit, franchise or authorization.

"Permitted Liens" has the meaning ascribed to it in Section 2.14.

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"Person" means any natural person, corporation, general partnership, limited partnership, limited liability company or partnership, proprietorship, other business organization, trust, union, association or Governmental Authority.

"Post-Closing Tax Period" means all Tax periods beginning after the Closing Date and that portion of all Straddle Periods beginning after the Closing Date.

"Pre-Closing Tax Period" means all Tax periods ending on or before the Closing Date and that portion of all Straddle Periods ending on the Closing Date.

"PTO" means the United States Patent and Trademark Office.

"Purchased Assets" has the meaning ascribed to in Section 1.1.

"Purchaser" has the meaning ascribed to it in the preamble of this Agreement.

"Purchaser Auditors" means Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, or such other independent auditor as the Purchaser may from time to time appoint.

"Purchaser Indemnitees" has the meaning ascribed to it in Section 7.2(b).

"Purchaser Material Adverse Effect" means a change, effect, event, occurrence or circumstance that is materially adverse to the business, condition (financial or other), operations, results of operations, Assets and Properties or Liabilities of the Purchaser and its Subsidiaries, taking the Purchaser together with its Subsidiaries as a whole; provided, that none of the following shall constitute a Purchaser Material Adverse Effect:  changes in the market price or trading volume of Purchaser Ordinary Shares, and changes, effects, events, occurrences and circumstances that the Purchaser proves, by clear and convincing evidence, are caused primarily and directly by (i) the announcement or pendency of this Agreement and the transactions contemplated hereby; or (ii) temporary cyclical changes in the U.S. economy or the software industry as a whole.

"Registered Intellectual Property" shall mean all United States, international and foreign:  (a) patents and patent applications (including provisional applications); (b) registered trademarks and servicemarks, applications to register trademarks and servicemarks, intent-to-use applications, other registrations or applications to trademarks or servicemarks, or trademarks or servicemarks in which common law rights are owned or otherwise controlled; (c) registered copyrights and applications for copyright registration; (d) any mask work registrations and applications to register mask works; and (e) any other Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public legal authority.

"Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of a Hazardous Material into the Environment.

"Relevant Group" has the meaning ascribed to it in Section 2.6.

"Representatives" has the meaning ascribed to it in Section 4.3(a).

"SEC" means the Securities and Exchange Commission or any successor entity.

"SEC Documents" means, with respect to any Person, each report, schedule, form, statement or other document filed or required to be filed with the SEC by such Person pursuant to Section 13(a) of the Exchange Act.

"Straddle Period" means all Tax periods beginning on or before and ending after the Closing Date.

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"Subsidiary" means any Person in which the Company or the Purchaser, as the context requires, directly or indirectly through Subsidiaries or otherwise, beneficially owns at least fifty percent of either the equity interest in, or the voting control of, such Person, whether or not existing on the date hereof.

"Superior Proposal" has the meaning ascribed to it in Section 4.2(a)4.3(c).

 "Tax" or "Taxes" means (a) any income, alternative or add-on minimum tax, gross income, gross receipts, franchise, profits, sales, use, ad valorem, business license, withholding, payroll, employment, excise, stamp, transfer, recording, occupation, premium, property, value added, custom duty, severance, windfall profit or license tax, governmental fee or other similar assessment or charge, together with any interest and any penalty, addition to tax or additional amount imposed by any Taxing Authority responsible for the imposition of any such tax (domestic or foreign), or (b) any Liability to any Person for amounts described in clause (a) above as a result of an express or implied obligation to indemnify such Person, including pursuant to a tax sharing or allocation agreement.

"Tax Return" means all returns, declarations, reports, registrations, claims for refund, and information returns and statements relating to Taxes attributable to the Purchased Assets or Business, including any schedule or attachment thereto and including any amendment thereof.

"Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax.

"Third Party Claim" has the meaning ascribed to it in Section 7.2(b).

"Transaction" has the meaning ascribed to it in the Recitals.

"Transferring Contractor" means or any contractor or consultant to the Company whose contracting or consulting agreement is identified as a Purchased Asset or an Assumed Liability.

"Transferring Employee" means any officer or employee of the Company who will be offered employment with the Purchaser following the Closing in accordance with Section 6.3 of this Agreement.

"Transferring Person" means any Transferring Employee or any Transferring Contractor.

"Transition Services Agreement" means the services agreement, substantially in the form attached hereto as Exhibit H, providing for certain support and other services to be provide by the Company to the Purchaser following the Closing.

"Treasury Regulations" means the treasury regulations promulgated under the Code.

"TSX-Based Products" has the meaning ascribed to it in Recital "A" to this Agreement.

"TSX Technology" means methods that are designed to detect and prevent the operation of Malware by intercepting and monitoring operating system events (e.g., file system, registry and network events on Windows and Linux operating systems) and evaluating such events against known authorized or unauthorized events based on defined policies.

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10.2       Construction.

(a)               Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender and the neuter, (ii) words using the singular or plural number also include the plural or singular number, respectively, (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement as a whole and not to any particular Article, Section or other subdivision, (iv) the terms "Article" or "Section" or other subdivision refer to the specified Article, Section or other subdivision of the body of this Agreement, (v) the phrases "ordinary course of business" and "ordinary course of business consistent with past practice" refer to the business and practice of the Company, (vi) the words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation," (vii) when a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated, (viii)  when a statement herein with respect to a particular matter is qualified by the phrase "in all material respects," materiality shall be determined solely by reference to, and solely within the context of, the specified matter and not with respect to the entirety of this Agreement or the transactions contemplated hereby, and (ix) the phrase "fraudulent or willful misconduct" includes any material and intentional breach or violation of, misrepresentation or inaccuracy in, or omission from a representation or warranty or other statement of fact, and any material and intentional breach or violation of a covenant or agreement.  All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP.  When used herein, the terms "party" or "parties" refer to the Purchaser and the Company, as the context may be, and the terms "third party" or "third parties" refers to Persons other than the Purchaser or the Company.

(b)               When used herein, the phrase "to the knowledge of" any Person, "to the best knowledge of" any Person, "known to" any Person or any similar phrase, means (i) with respect to any Person who is an individual, the actual knowledge of such Person, (ii) with respect to any other Person, the actual knowledge of the directors and officers of such Person and other individuals that have a similar position or have similar powers and duties as the officers and directors of such Person, and (iii) in the case of each of (i) and (ii), the knowledge of facts that such individuals should have after due inquiry.  For this purpose, "due inquiry" with respect to any matter means inquiry of and consultations with (A) the directors and officers of such Person and other individuals that have a similar position or have similar powers and duties as such officers and directors, (B) other employees of and the advisors to such Person, including legal counsel and outside auditors, who have principal responsibility for the matter in question or are otherwise likely to have information relevant to the matter, and (C) the shareholders owning more than ten percent (10%) of the equity interests, by vote or value, of such Person.

(c)               The drafting and negotiation of the representations, warranties, covenants and conditions to the obligations of the Company and the Purchaser herein reflect compromises, and certain provisions may overlap with other provisions or may address the same or similar subject matters in different ways or for different purposes.  It is the intention of the parties that, to the extent possible, unless provisions are mutually exclusive and effect cannot be given to both or all such provisions, (i) the representations, warranties, covenants and closing conditions in this Agreement shall be construed to be cumulative; (ii) each representation, warranty, covenant and closing condition in this Agreement shall be given full separate and independent effect; and (iii) no limitation in any representation, warranty, covenant or closing condition shall be construed to limit any other representation, warranty, covenant or closing condition unless such limitation is expressly made applicable to such other representation, warranty, covenant or closing condition.

(d)               No amendment, supplement or update after the date of this Agreement shall be made to the Company Disclosure Schedule without the express written consent of the Purchaser, or to the Purchaser Disclosure Schedule without the express written consent of the Company, and no amendment, supplement or update made or delivered (or purporting to be made or delivered) after the date of this Agreement without such consent shall have any effect on any of the rights or obligations of the Company or the Purchaser, respectively.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Purchaser and the Company have caused this Agreement to be signed by their duly authorized representatives, all as of the date first written above.

COMMTOUCH INC.		AUTHENTIUM, INC.
By:	/s/Gideon Mantel and Ron Ela	By:	/s/ Douglas E. Brunt
Name:	Gideon Mantel and Ron Ela	Name:	Douglas E. Brunt
Title:	CEO and CFO	Title:	President and CEO

AGREEMENT OF THE PURCHASER PARENT:

For valuable consideration and as an inducement to the Company to enter into this Agreement, Commtouch Software Ltd. (the “Purchaser Parent”) hereby guarantees to the Company the full performance and payment of all of the obligations of the Purchaser under this Agreement (the “Guaranteed Obligations”). The Purchaser Parent hereby irrevocably and unconditionally covenants and agrees to be liable for the Guaranteed Obligations as a primary obligor.  The Purchaser Parent agrees that no modification, extension or indulgence granted to any Party under this Agreement, its successors or assigns, shall release the Purchaser Parent from its guaranty and other obligations set forth herein and such obligations shall continue in full force and effect as to any renewal, extension or modification of this Agreement.

	COMMTOUCH SOFTWARE LTD.,
	a company organized under the
	laws of the State of Israel
	By:	/s/Gideon Mantel and Ron Ela
	Name:	Gideon Mantel and Ron Ela
	Title:	CEO and CFO
Date:  July 26, 2010

EX-8

Exhibit 8

LIST OF SUBSIDIARIES OF THE COMPANY

Commtouch Inc., a California corporation, a wholly owned subsidiary of the Company, with offices in both California and Florida

EX-12.1

Exhibit 12.1

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a) or 15d-14(a)

I, Ido Hadari, certify that:

1. I have reviewed this annual report on Form 20–F of Commtouch Software Ltd.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: June 7, 2011

/s/Ido Hadari

Ido Hadari

Chief Executive Officer

EX-12.2

Exhibit 12.2

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a) or 15d-14(a)

I, Ron Ela, certify that:

1. I have reviewed this annual report on Form 20–F of Commtouch Software Ltd.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: June 7, 2011	/s/Ron Ela
	Ron Ela
	Chief Financial Officer

EX-13

Exhibit 13

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Annual Report of Commtouch Software Ltd. (the "Company") on Form 20-F for the period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ido Hadari and Ron Ela, Chief Executive Officer and Chief Financial Officer of the Company, respectively, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Ido Hadari	/s/Ron Ela
Ido Hadari	Ron Ela
Chief Executive Officer	Chief Financial Officer
June 7, 2011	June 7, 2011

EX-15

Exhibit 15

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption "Experts" in the Registration Statement Form F-3 (No. 333-88248, 333-109837, 333-111731, 333-111734, 333-117085, 333-131272 and 333-122407) and related Prospectus and on Form S-8 (File No. 333-94995, 333-141177, 333-65532, 333-151929 and 333-162104) pertaining to stock option plans of Commtouch Software Ltd., and to the incorporation by reference therein of our reports dated June 6, 2011 with respect to the consolidated financial statements of Commtouch Software Ltd., and the effectiveness of internal control over financial reporting of Commtouch Software Ltd., included in this Annual Report (Form 20-F) for the year ended December 31, 2010, filed with the Securities and Exchange Commission.

/s/ Kost, Forer, Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel

June 6, 2011

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption "Experts" in the Registration Statement Form F-3 (No. 333-88248, 333-109837, 333-111731, 333-111734, 333-117085, 333-131272 and 333-122407) and related Prospectus and on Form S-8 (File No. 333-94995, 333-141177, 333-65532, 333-151929 and 333-162104) pertaining to stock option plans of Commtouch Software Ltd., and to the incorporation by reference therein of our report dated June 6, 2011 with respect to the statement of assets acquired and liabilities assumed and statement of attributable direct revenues and expenses of the Antivirus business line of Authentium Inc., included in this Annual Report (Form 20-F) for the year ended December 31, 2010.

Kost, Forer, Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel                                                                                     

June 6, 2011