Commtouch Reports Financial Results for the Second Quarter of 2007

Anticipates Entrance to Web Security Market in 2008

Sunnyvale, Calif. – August 1, 2007 – Commtouch® (NASDAQ: CTCH), a leading email defense technology provider, today announced its second quarter results for the period ending June 30, 2007.

Second Quarter 2007 Highlights:

• Revenues for the second quarter of 2007 increased by 54% to $2,617 thousand compared to $1,698 thousand in the second quarter of 2006. Revenues for the first six months of 2007 increased by 58% to $5,022 thousand compared to $3,171 thousand recorded in the first half of 2006.
• Net income in accordance with US Generally Accepted Accounting Principles (US GAAP) for the second quarter of 2007 was $483 thousand compared to a loss of $114 thousand in the second quarter of last year. For the first six months of 2007, US GAAP net income was $750 thousand, as compared with loss of $492 thousand in the first six months of 2006.
• Non-GAAP net income for the second quarter of 2007, excluding $241 thousand of stock-based compensation expenses in connection with the company's adoption of Financial Accounting Standards No. 123R, was $724 thousand compared to a net income of $51 thousand in the second quarter of 2006. For the first six months of 2007, non-GAAP net income was $1,234 thousand as compared with loss of $163 thousand in the first six months of 2006.
• Deferred Revenues (long term and short term) as of June 30, 2007 amounted to $2,811 thousand, an increase of 9% over deferred revenues as of December 31, 2006.
• Operating cash flow in the second quarter of 2007 was $428 thousand, compared to $153 thousand in the second quarter of 2006. In the first six months of 2007, operating cash flow was $1,381 thousand, as compared with operating cash flow of $501 thousand in the first six months of 2006.
• Cash and marketable securities as of June 30, 2007 amounted to $12,109 thousand, compared to $10,004 thousand as of December 31, 2006. The increase is due to the above-mentioned positive operating cash flow and receipt of proceeds from the exercise of warrants and options in the amount of $1,129 thousand.
• The Company signed eight new OEM licensing agreements during the second quarter of 2007 and 19 in total for the first six months of 2007, bringing the Company’s global OEM partner count to 73 as of June 30, 2007.

“Q2 was another strong quarter for us, exemplifying the continued positive momentum we have been enjoying for the last several years,” said Gideon Mantel, Commtouch’s chief executive officer and chairman of the board. “The growing sophistication of online attacks creates a demand for the equally sophisticated security solutions that we offer. In expanding and leveraging both our technology as well as our market reach, we intend to release a new web security solution in early 2008. Our future products together with our current offerings should ensure our continued success going forward.”

Use of Non-GAAP Measures

This press release includes financial measures for net income (loss), basic and diluted earnings per share that exclude stock-based compensation expense and are therefore not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's net income or loss and earnings or loss per share and to compare it with historical net income or loss and earnings or loss per share.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management uses both GAAP and non-GAAP measures when evaluating the business internally and therefore felt it important to make these non-GAAP adjustments available to investors.

Financial Results Conference Call

The company has scheduled a conference call later today, Wednesday, August 1st, 2007 at 11 a.m. EDT.
To participate in the call, please dial one of the following numbers ten minutes prior to the start time of the call:

U.S.: 1-888-668-9141;
UK: 0-800-917-9141;
ISRAEL: 03-918-0609;
INTERNATIONAL: +972-3-918-0609

 
For those unable to listen to the live call, a replay of the call will be available the day after the call in the investor relations section of Commtouch’s website, at: http://www.commtouch.com/ir.

About Commtouch

Commtouch Software Ltd. (NASDAQ: CTCH) is dedicated to protecting and preserving the integrity of the world's most important communications tool -- e-mail. Commtouch has over 16 years of experience developing messaging software and is a global developer and provider of proprietary anti-spam, Zero-Hour virus protection and Reputation Service solutions. Using core technologies including RPD (Recurrent Pattern Detection™), the Commtouch Detection Center analyzes billions of email messages per week to identify new spam and malware outbreaks within minutes of their introduction into the Internet. Integrated by scores of OEM partners, Commtouch technology protects thousands of organizations, with hundreds of millions of users in over 100 countries. Commtouch is headquartered in Netanya, Israel, and has a subsidiary in Sunnyvale, Calif. For more information, see: http://www.commtouch.com. The site includes the Commtouch online lab detailing spam statistics and charts.

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

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

Company Contact:
Ron Ela
Chief Financial Officer
Tel: +972-9-863-6813
ron.ela@commtouch.com

Investor Relations Contact:
Ehud Helft / Kenny Green
GK Investor Relations
US: 1 866 704 6710
Int'l: +972-3-607-4717
ehud@gkir.com / kenny@gkir.com