COLLATERAL AGENCY AGREEMENT



THIS COLLATERAL  AGENCY  AGREEMENT (this  "Agreement"),  dated as of January 29,

2003,  is made among each of the Lenders  named on the  signature  pages  hereof

(each a "Lender" and,  collectively,  the "Lenders")  and XDL Capital Corp.,  as

collateral agent for the Lenders (in such capacity, the "Collateral Agent").



            The Lenders have entered into a Convertible  Loan Agreement dated as

of January 29, 2003 (as amended,  modified,  renewed,  extended or replaced from

time to time, the "Convertible Loan Agreement") with Commtouch Software Ltd., an

Israeli  corporation  (the "Company") under which the Lenders will extend credit

to Company and in connection therewith will receive certain collateral to secure

the credit  extensions under the Convertible Loan Agreement and the Notes issued

to the Lenders thereunder (as amended,  modified,  renewed, extended or replaced

from time to time, the "Notes"). The Lenders desire to enter into this Agreement

to  provide,   among  other  things,   for  (i)  the  appointment,   duties  and

responsibilities of a Collateral Agent, (ii) the respective rights and interests

of the parties in and to the Collateral, and (iii) the orderly administration of

the  Collateral,  upon the terms and subject to the conditions set forth in this

Agreement.



            Accordingly, the parties hereby agree as follows:



            SECTION 1 Definitions; Interpretation.



            (a) Terms Defined in Convertible  Loan  Agreement.  All  capitalized

terms used in this  Agreement  and not otherwise  defined  herein shall have the

meanings assigned to them in the Convertible Loan Agreement.



            (b) Certain Defined Terms. As used in this Agreement,  the following

terms shall have the following meanings:



            "Affiliate"   means  any  Person  which,   directly  or  indirectly,

controls,  is controlled by or is under common control with another Person.  For

purposes of the foregoing,  "control," "controlled by" and "under common control

with"  with  respect  to any  Person  shall  mean the  possession,  directly  or

indirectly,  of the power to direct or cause the direction of the management and

policies of such Person,  whether through the ownership of voting  securities or

by contract or otherwise.



            "Business  Day" means a day (i) other than  Saturday or Sunday,  and

(ii)  on  which  commercial  banks  are  open  for  business  in San  Francisco,

California.



            "Collateral"  the property now existing or hereafter  acquired which

may at any time be or become  subject  to a  security  interest  in favor of the

Collateral Agent or the Lenders pursuant to the Documents or otherwise, securing

the payment and performance of the Obligations.



            "Collateral  Documents" means any agreement,  document or instrument

pursuant to which any Obligor or any other Person  provides a security  interest

in its assets in favor of the Lenders or the Collateral Agent for the benefit of

the Lenders.



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            "Documents"  means the Convertible  Loan Agreement,  the Notes,  the

Guaranty,  the Collateral  Documents and all other  documents,  instruments  and

agreements  delivered to the Lenders,  or the  Collateral  Agent,  in connection

therewith.



            "Guaranty"  means the Guaranty  dated as of January 29, 2003 made by

Commtouch Inc., a California  corporation,  in favor of the Collateral  Agent on

behalf of the Lenders.



            "Majority  Lenders" means the holders of a majority of the aggregate

principal amount of the Notes then outstanding.



            "Obligations"   means  the   indebtedness,   liabilities  and  other

obligations  of the  Obligors to the  Lenders  under or in  connection  with the

Documents,  including all unpaid  principal of the Notes,  all interest  accrued

thereon and all other amounts payable by the Obligors to the Lenders  thereunder

or in  connection  therewith,  whether now  existing or hereafter  arising,  and

whether  due  or  to  become  due,   absolute  or   contingent,   liquidated  or

unliquidated, determined or undetermined.



            "Obligor" means the Company or any guarantor of the Obligations.



            "Person"  means  an  individual,  corporation,   partnership,  joint

venture, trust, unincorporated organization or other entity of whatever nature.



            "Pro Rata  Share" of any  Lender  means (a) in  connection  with any

payments or distributions  to any Lender,  (i) in the case of accrued and unpaid

interest on any of the Obligations to any payment date, the proportion which the

amount of  interest  accrued and unpaid to such  Lender  bears to the  aggregate

amount of interest accrued and unpaid to all Lenders; (ii) in the case of unpaid

principal of any of the  Obligations,  the proportion which the amount of unpaid

principal owing to such Lender bears to the aggregate amount of unpaid principal

owing to all Lenders;  and (iii) in the case of any  indebtedness  in respect of

any fees,  commissions,  indemnities  and other amounts then owing in respect of

the Obligations,  the proportion which the amount of such indebtedness  owing to

such Lender  bears to the  aggregate  amount of such  indebtedness  owing to all

Lenders;  and (b) for purposes of Section 7, the proportion  which the amount of

unpaid  principal  owing to such Lender bears to the aggregate  amount of unpaid

principal owing to all Lenders.



            (c)  Interpretation.  In this  Agreement,  except to the  extent the

context otherwise requires: (i) Any reference in this Agreement to an Article, a

Section, a Schedule or an Exhibit is a reference to an article hereof, a section

hereof,  a  schedule  hereto  or  an  exhibit  hereto,  respectively,  and  to a

subsection hereof or a clause hereof is, unless otherwise stated, a reference to

a subsection  or a clause of the Section or  subsection  in which the  reference

appears.  (ii) The words "hereof," "herein," "hereto,"  "hereunder" and the like

mean and  refer to this  Agreement  as a whole and not  merely  to the  specific

Article, Section,  subsection,  paragraph or clause in which the respective word

appears.  (iii) The meaning of defined terms shall be equally applicable to both

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