Commtouch Reports Fourth Quarter and Full Year 2007 Results

Quarterly Operating Cash Flow Reaches $2 Million

Sunnyvale, Calif. – February 12, 2008 – Commtouch® (NASDAQ: CTCH), a leading email defense technology provider, today announced its fourth quarter and full year results for the period ending December 31, 2007.

Fourth Quarter and Full Year 2007 Financial Highlights:

• Revenues for the fourth quarter of 2007 increased by 50% to $3,298 thousand compared to $2,197thousand in the fourth quarter of 2006. Revenues for the full year of 2007 increased by 56% to $11,250 thousand compared to $7,234 thousand as recorded in the full year 2006 period.
• Net income in accordance with US Generally Accepted Accounting Principles (US GAAP) for the fourth quarter of 2007 was $720 thousand compared to net income of $153 thousand in the fourth quarter of last year, a 471% increase. For the full year of 2007, US GAAP net income was $2,109 thousand, as compared with a loss of $190 thousand in the full year 2006 period.
• Non-GAAP net income for the fourth quarter of 2007, excluding $281 thousand of stock-based compensation expenses in connection with the Company's adoption of Financial Accounting Standards No. 123R, was $1,001 thousand compared to a net income of $448 thousand in the fourth quarter of 2006. For the full year of 2007, non-GAAP net income was $3,124 thousand as compared with net income of $600 thousand in the full 2006 year period.
• Deferred Revenues (long-term and short-term) as of December 31, 2007 amounted to $3,435 thousand, an increase of 33% over deferred revenues as of December 31, 2006.
• Operating cash flow in the fourth quarter of 2007 was $1,975 thousand, compared to $501 thousand in the fourth quarter of 2006. In the full year of 2007, operating cash flow was $4,115 thousand, as compared with operating cash flow of $1,356 thousand in the full 2006 year period.
• Cash, short term cash deposits and marketable securities as of December 31, 2007 amounted to $14,407 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 $1,663 thousand.

Business Highlights

• The Company signed seven new OEM licensing agreements during the fourth quarter of 2007 and 35 in total for 2007, including leading companies such as Check Point Software and Panda Security. The Company’s global OEM partner count was 88 as of December 31, 2007.
• OEM partners in Asia-Pacific more than doubled to a total of 22.
• The four-year OEM partner retention rate at the end of 2007 was well over 90%.
• The Company launched its GlobalView™ Mail Reputation Service product, which has already proven a success. This enhanced reputation service is expected to assist both the Company and its partners with penetration into new target markets, including further growth in the service provider market.
   
  The Company, in line with its announced strategy, began investing in developing new offerings in the field of web security.
• The Company successfully completed a round of personnel recruitment, including several new members of management.
• The Company made a $750 thousand investment in Mirapoint, a secure messaging vendor and an OEM licensee, as part of Mirapoint's larger financing round in the fourth quarter of 2007.

"2007 was a fantastic year, and not simply due to the positive financial results," said Gideon Mantel, chief executive officer and chairman of the board of Commtouch. "We have put together all of the building blocks for continued success: we are a fast growing, profitable company, cash flow positive, and with a strong balance sheet. We also have a highly scalable technology infrastructure and globally distributed base of OEM partners. This unique combination will be the basis for our future growth."

Future Business Outlook

Based on current business activities and general economic conditions, Commtouch's management believes that 2008 revenues will be in the range of $15 million to $16 million, representing an annual growth rate of between 33% and 42% over 2007. In line with the company’s strategy, it expects overall annual non-GAAP earnings in the range of 16 to 19 cents per diluted share. In 2008, management intends to increase R&D expenditures at a higher rate than usual to support the development of new products. Other operating expenses are expected to increase more modestly at the usual year-over-year rates.

Based on the Company’s past experience, quarterly growth rates will likely fluctuate from quarter to quarter based on seasonality and specific customer launch dates. Traditionally, the second half of the year is seasonally stronger from a revenue standpoint than the first half.

The above outlook is as of the date of this release, and the company undertakes no obligation to update its estimates in the future.

Use of Non-GAAP Measures

Commtouch’s non-GAAP net income differs from results reported under U.S. GAAP due to non-cash items; since it is too early to determine the impact of stock-based compensation expense for the rest of the 2008 year, Commtouch is not providing guidance on GAAP net income. Stock-based compensation expense has a negative impact on net income.

This press release includes financial measures for net income (loss), basic and diluted earnings per share that exclude stock-based compensation expenses 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, Tuesday, February 12, 2008 at 10 a.m.
EST.

To participate in the call, please dial one of the following numbers ten minutes prior to the start time of the call:

U.S.: 1-888-407-2553      
UK: 0-800-917-9141
ISRAEL: 03-918-0688
INTERNATIONAL: +972-3-918-0688       

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 17 years of experience developing messaging software and is a global developer and provider of proprietary anti-spam, Zero-Hour virus protection and GlobalView™ 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. 

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

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; 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.

 Company Contact:
Ron Ela
Chief Financial Officer
Tel: (US)+650-864-2291      
     (int’l)+972-9-8636813       
ron.ela@commtouch.com

Investor Relations Contact
Ehud Helft / Kenny Green
GK Investor Relations
Tel: (US)+ 1 646 201 9246     
     (Israel) 03 607 4717
info@gkir.com