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                                                                    EXHIBIT 10.3

                             COMMTOUCH SOFTWARE LTD.

                        1999 EMPLOYEE STOCK PURCHASE PLAN


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                                TABLE OF CONTENTS

<TABLE>
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<S>             <C>                                               <C>
Section 1       Establishment of the Plan .......................  1

Section 2       Definitions .....................................  1

Section 3       Shares Authorized ...............................  2

Section 4       Administration ..................................  3

Section 5       Eligibility and Participation ...................  3

Section 6       Offering and Purchase Periods ...................  4

Section 7       Purchase Price ..................................  4

Section 8       Employee Contributions ..........................  4

Section 9       Plan Accounts; Purchase of Shares ...............  5

Section 10      Withdrawal From the Plan ........................  5

Section 11      Taxes ...........................................  6

Section 12      Effect of Termination of Employment or Death.....  6

Section 13      Rights Not Transferable .........................  6

Section 14      Recapitalization, Etc ...........................  7

Section 15      Limitation on Stock Ownership ...................  7

Section 16      No Rights as an Employee ........................  7

Section 17      Rights as a Shareholder .........................  7

Section 18      Use of Funds ....................................  8

Section 19      Amendment or Termination of the Plan ............  8

Section 20      Governing Law ...................................  8
</TABLE>



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                             COMMTOUCH SOFTWARE LTD.

                        1999 EMPLOYEE STOCK PURCHASE PLAN

         SECTION 1.  ESTABLISHMENT OF THE PLAN.

         The CommTouch Software Ltd. qualified 1999 Employee Stock Purchase Plan
(the "Plan") was established to provide Eligible Employees with an opportunity
to purchase the Company's Ordinary Shares so that they may increase their
proprietary interest in the success of the Company. The Plan, which provides for
the purchase of stock through after-tax payroll withholding, is intended to
qualify under Section 423 of the Code.

         SECTION 2.  DEFINITIONS.

         (a) "Board of Directors" or "Board" means the Board of Directors of the
Company, or an authorized committee of the Board.

         (b) "Code" means the Internal Revenue Code of 1986, as amended.

         (c) "Company" means CommTouch Software Ltd., a corporation formed under
the laws of the State of Israel.

         (d) "Compensation" means the compensation paid to a Participant in
cash, including overtime and shift differential, incentive compensation,
commissions and other bonuses; provided, however, that for purposes of
determining a Participant's compensation, any election by such Participant to
reduce his or her regular cash remuneration under Sections 125 or 401(k) of the
Code shall be treated as if the participant did not make such election.

         (e) "Eligible Employee" means any Employee of a Participating Company
(i) who is employed by the Participating Company on or prior to the Offering
Date, (ii) who is customarily employed for more than 20 hours per week, and
(iii) who is customarily employed for more than five months per calendar year.

         In the event an Eligible Employee fails to remain in the continuous
employ of a Participating Company customarily for at least 20 hours per week
during an Offering Period or at least five months per calendar year, he or she
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to his or her account will be returned to him or her;
provided that a Participant who goes on an unpaid leave of absence shall be
permitted to remain in the Plan with respect to an Offering Period which
commenced prior to such leave of absence. If such Participant is not guaranteed
reemployment by contract or statute and the leave of absence extends beyond 90
days, such Participant shall be deemed to have terminated employment on the 91st
day of such leave of absence. Payroll deductions for a Participant who has been
on an unpaid leave of absence will resume at the same rate as in effect prior to
such leave upon return to work unless changed by such Participant or unless the
Participant has been on an unpaid leave of absence either throughout an entire
Offering Period or for more than 90 days, in which case the Participant shall
not be permitted



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to re-enter the Plan until a participation  agreement is filed with respect to
a subsequent Offering Period that commences after such Participant has returned
to work from the unpaid leave of absence.

         (f) "Employee" means any employee of a Participating Company.

         (g) "Fair Market Value" shall mean (i) the closing price of an Ordinary
Share on the principal exchange on which the Ordinary Shares are trading, or
(ii) if the Ordinary Shares are not traded on an exchange but are quoted on the
Nasdaq National Market or a successor quotation system, the closing price on the
Nasdaq National Market or such successor quotation system, or (iii) if the
Ordinary Shares are not traded on an exchange or quoted on the Nasdaq National
Market or a successor quotation system, the fair market value of an Ordinary
Share as determined by the Plan Administrator in good faith. Such determination
shall be conclusive and binding on all persons.

         (h) "Offering Date" means the first day of an Offering Period.

         (i) "Offering Period" means a period during which contributions may be
made toward the purchase of Ordinary Shares under the Plan, as determined
pursuant to Section 6.

         (j) "Ordinary Shares" means the Ordinary Shares, par value NIS 1.0, of
the Company.

         (k) "Participant" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 5.

         (l) "Participating Company" means the Company and such present or
future Subsidiaries of the Company as the Board of Directors shall from time to
time designate.

         (m) "Plan Account" means the account established for each Participant
pursuant to Section 9(a).

         (n) "Plan Administrator" means the administrator appointed by the Board
pursuant to Section 4.

         (o) "Purchase Price" means the price at which Participants may purchase
Ordinary Shares under Section 5 of the Plan, as determined pursuant to Section
7.

         (p) "Purchase Date" means the last day of each Purchase Period.

         (q) "Purchase Period" means a period commencing on the Offering Date or
on the day after a Purchase Date and ending on a Purchase Date, as described in
Section 6.

         (r) "Subsidiary" means a subsidiary corporation as defined in Section
424 of the Code.

         SECTION 3.  SHARES AUTHORIZED.

         Subject to adjustment as provided in Section 14, the maximum aggregate
number of Ordinary Shares that may be offered under the Plan shall initially be
150,000; provided, however, that the number of Ordinary Shares that may be
offered under the Plan shall be increased as of January 1 of




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each year by 110 percent of the number of shares purchased under the Plan in the
previous calendar year.

         SECTION 4.  ADMINISTRATION.

         (a) The Plan shall be administered by a Plan Administrator appointed by
the Board of Directors. The interpretation and construction by the Plan
Administrator of any provision of the Plan or of any right to purchase Ordinary
Shares hereunder shall be conclusive and binding on all persons.

         (b) No member of the Board or the Plan Administrator shall be liable
for any action or determination made in good faith with respect to the Plan or
the right to purchase Ordinary Shares hereunder. The Plan Administrator shall be
indemnified by the Company against the reasonable expenses, including attorney's
fees, actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
it may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any stock purchased thereunder, and against all
amounts paid by it in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by it in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that the Plan Administrator is liable for gross negligence or
misconduct in the performance of its duties; provided that within 60 days after
institution of any such action, suit or proceeding, the Plan Administrator shall
in writing offer the Company the opportunity, at the Company's own expense, to
handle and defend the same.

         (c) All costs and expenses incurred in administering the Plan shall be
paid by the Company. The Board or the Plan Administrator may request advice for
assistance or employ such other persons as are necessary for proper
administration of the Plan.

         SECTION 5.  ELIGIBILITY AND PARTICIPATION.

         (a) Any person who qualifies or will qualify as an Eligible Employee on
the Offering Date with respect to an Offering Period may elect to participate in
the Plan for such Offering Period. An Eligible Employee may elect to participate
by executing the participation agreement prescribed for such purpose by the Plan
Administrator. The participation agreement shall be filed with the Plan
Administrator no later than two weeks prior to the applicable Offering Date or
such other deadline as is prescribed by the Plan Administrator. The Eligible
Employee shall designate in the participation agreement the percentage of his or
her Compensation which he or she elects to have withheld for the purchase of
Ordinary Shares, which may be any percentage of the Participant's Compensation
up to a maximum of 15 percent. In the event that the Fair Market Value of
Ordinary Shares on the last trading day before the commencement of the Offering
Period in which the Participant is enrolled is higher than on the last trading
day before the commencement of any subsequent Offering Period, the Participant
shall automatically be re-enrolled for such subsequent Offering Period, unless
the Participant elects to withdraw during the current Offering Period by
delivering a written notice, in form satisfactory to the Board, to the Plan
Administrator. When a Participant reaches the end of an Offering Period but his
or her participation is to continue, then such Participant shall automatically
be re-enrolled for the Offering Period that commences immediately after the end
of the prior Offering Period.



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         (b) By enrolling in the Plan, a Participant shall be deemed to have
elected to purchase the maximum number of whole Ordinary Shares that can be
purchased with the amount of the Participant's Compensation which is withheld
during each Purchase Period.

         (c) Once enrolled, a Participant will continue to participate in the
Plan for each succeeding Purchase and Offering Period until he or she terminates
participation or ceases to qualify as an Eligible Employee. A Participant who
withdraws from the Plan in accordance with Section 10 may again become a
Participant, if he or she then is an Eligible Employee, by following the
procedure described in Section 5(a).

         SECTION 6.  OFFERING AND PURCHASE PERIODS.

         The Plan shall be implemented by one or more Offering Periods of not
more than 24 months each. The Board of Directors may determine the duration of
each Offering Period and the commencement dates. The Board may determine to
include one or more Purchase Periods within an Offering Period. The first
Offering Period shall commence on the first business day on which price
quotations for the Company's Ordinary Shares are available on the Nasdaq
National Market and shall end on August 14, 2001, and shall contain four
Purchase Periods commencing on the first day of the first Offering Period,
February 15, 2000, August 15, 2000 and February 15, 2001. Thereafter, unless
changed by the Board, the duration of each subsequent Offering Period shall be
two years, commencing on February 15 or August 15 and ending 24 months later on
February 14 or August 14, and shall contain four Purchase Periods commencing on
each February 14 and August 14 during each such Offering Period.

         SECTION 7.  PURCHASE PRICE.

         The Purchase Price for each Ordinary Share shall be the lesser of (i)
85% of the Fair Market Value of such Ordinary Share on the last trading day
before the Offering Date (provided, however, in the case of the first Offering
Period, this number shall be 85% of the price per share at which the Company's
Ordinary Shares are initially offered for sale to the public by the Company's
underwriters in the initial public offering of the Company's Ordinary Shares
pursuant to a registration statement filed with the SEC) or (ii) 85% of the Fair
Market Value of such Ordinary Share on the last trading day of the applicable
Purchase Period.

         SECTION 8.  EMPLOYEE CONTRIBUTIONS.

         A Participant may purchase Ordinary Shares under the Plan solely by
means of payroll deductions. Payroll deductions, as designated by the
Participant pursuant to Section 5(a), shall commence with the first paycheck
issued during the Offering Period and shall be deducted from each subsequent
paycheck throughout the Offering Period. If a Participant desires to change the
rate of payroll withholding during the Offering Period, he or she may do so, if
permitted by the Plan Administrator, only one time during an Offering Period by
filing a new participation agreement with the Plan Administrator. Such a change
may be either an increase or a decrease and will be effective no later than the
first day of the second payroll period which begins following the receipt of the
new participation agreement. If a Participant desires to increase or decrease
the rate of payroll



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withholding more than one time during the participation period, he or she may
do so  effective  for the  next  Offering  Period  by  filing  a new
participation agreement  with the Plan  Administrator  on or before the date
specified by the Plan  Administrator,  and if none is stated, then no later than
the first day of the Offering Period for which such change is to be effective.

         SECTION 9.  PLAN ACCOUNTS; PURCHASE OF SHARES.

         (a) The Company will maintain a Plan Account on its books in the name
of each Participant. At the close of each pay period, the amount deducted from
the Participant's Compensation will be credited to the Participant's Plan
Account. No interest shall accrue on any amounts held in the Participant's Plan
Account.

         (b) As of the last day of each Purchase Period, the amount then in the
Participant's Plan Account will be divided by the Purchase Price, and the number
of whole shares which results (subject to the limitations described in Sections
5(b), 9(c) and 15) shall be purchased from the Company with the funds in the
Participant's Plan Account. Foreign currencies will be converted to U.S. dollars
based on the foreign currency exchange rate as quoted in the Wall Street Journal
on the Purchase Date, or such other reasonable method selected by the Plan
Administrator that does not prevent the Plan from satisfying the requirements of
Section 423 of the Code. Shares representing the number of Ordinary Shares so
purchased shall be electronically delivered to a brokerage account designated by
the Plan Administrator and kept in such account pursuant to a participation
agreement between each Participant and the Company and subject to the conditions
described therein, which may include a requirement that Ordinary Shares be held
and not sold for certain time periods.

         (c) In the event that the aggregate number of Ordinary Shares that all
Participants elect to purchase during a Purchase Period shall exceed the number
of shares remaining available for issuance under the Plan, then the number of
shares to which each Participant shall become entitled shall be determined by
multiplying the number of shares available for issuance by a fraction, the
numerator of which is the sum of the number of shares the Participant has
elected to purchase during that Purchase Period pursuant to Section 5, and the
denominator of which is the sum of the number of shares which all employees have
elected to purchase during that Purchase Period pursuant to Section 5. Any cash
amount remaining in the Participant's Plan Account under these circumstances
shall be refunded to the Participant.

         (d) Any amount remaining in the Participant's Plan Account caused by a
surplus due to fractional shares after deducting the amount of the Purchase
Price for the number of whole shares issued to the Participant shall be carried
over in the Participant's Plan Account for the succeeding Purchase Period,
without interest. Any amount remaining in the Participant's Plan Account caused
by anything other than a surplus due to fractional shares shall be refunded to
the Participant in cash, without interest.

         (e) As soon as practicable following the end of each Purchase Period,
the Company shall deliver to each Participant a Plan Account statement setting
forth the amount of payroll deductions, the Purchase Price, the number of shares
purchased and the remaining cash balance, if any.



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         SECTION 10.  WITHDRAWAL FROM THE PLAN.

         A Participant may elect to withdraw from participation in a Purchase
Period at any time up to the last day of the Purchase Period by filing the
prescribed form with the Plan Administrator. A Participant may elect to withdraw
(or not withdraw) from participation in an Offering Period at any time up to the
last day of the Offering Period by filing the prescribed form with the Plan
Administrator. As soon as practicable after a withdrawal, payroll deductions
shall cease and all amounts credited to the Participant's Plan Account will be
refunded in cash, without interest. A Participant who has withdrawn from an
Offering Period shall not be a Participant in future Offering Periods, unless he
or she again enrolls in accordance with the provisions of Section 5.

         SECTION 11.  TAXES.

         The Participant shall make such arrangements as the Company may require
for the satisfaction of any federal, state, local or foreign tax obligations
that may arise in connection with the disposition of the Ordinary Shares
acquired under the Plan. If required by the applicable tax authority, these
arrangements may include withholding (or tendering back) of Ordinary Shares, or
withholding amounts from the Participant's compensation.

         SECTION 12.  EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.

         (a) Termination of employment as an Eligible Employee for any reason,
including death, shall be treated as an automatic withdrawal from the Plan under
Section 10. A transfer from one Participating Company to another shall not be
treated as a termination of employment.

         (b) A Participant may file a written designation of a beneficiary who
is to receive any cash from the Participant's Plan Account in the event of such
Participant's death prior to the last day of a Purchase Period. A Participant
may also file a written designation of a beneficiary who is to receive shares
and cash, if any, from the Participant's Plan Account in the event of such
Participant's death subsequent to the purchase of shares but prior to delivery
to his or her account of such shares and cash.

         (c) A designation of beneficiary may be changed by the Participant at
any time by written notice. In the event of the death of a Participant in the
absence of a valid designation of a beneficiary who is living at the time of
such Participant's death, the Company shall deliver such cash and/or shares to
the executor or administrator of the estate of the Participant; or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such cash and/or shares to the
spouse or to any one or more dependents or relatives of the Participant; or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.

         SECTION 13.  RIGHTS NOT TRANSFERABLE.

         The rights or interests of any Participant in the Plan, or in any
Ordinary Shares or money to which he or she may be entitled under the Plan,
shall not be transferable by voluntary or involuntary assignment or by operation
of law, or by any other manner other than as permitted by the Code or by will or
the laws of descent and distribution. If a Participant attempts to transfer,
assign or otherwise



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encumber his or her rights or interest  under the Plan,  other than as
permitted by the Code or by will or the laws of descent and  distribution,  such
act shall be treated as an automatic withdrawal under Section 10.

         SECTION 14.  RECAPITALIZATION, ETC.

         (a) The aggregate number of Ordinary Shares offered under the Plan, the
number and price of shares which any Participant has elected to purchase
pursuant to Section 5 and the maximum number of shares which a Participant may
elect to purchase under the Plan in any Offering Period shall be proportionately
adjusted for any increase or decrease in the number of issued Ordinary Shares
resulting from a subdivision or consolidation of shares or any other capital
adjustment, the payment of a stock dividend, or other increase or decrease in
such shares effected without receipt of consideration by the Company.

         (b) In the event of a dissolution or liquidation of the Company, or a
merger or consolidation to which the Company is a constituent corporation, this
Plan shall terminate unless the plan of merger, consolidation or reorganization
provides otherwise, and all amounts paid by each Participant toward the Purchase
Price of Ordinary Shares hereunder shall be refunded, without interest.

         (c) The Plan shall in no event be construed to restrict in any way the
Company's right to undertake a dissolution, liquidation, merger, consolidation
or other reorganization.

         SECTION 15.  LIMITATION ON STOCK OWNERSHIP.

         Notwithstanding any provision herein to the contrary, no Participant
shall be permitted to elect to participate in the Plan (i) if such Participant,
immediately after his or her election to participate, would own stock possessing
five percent or more of the total combined voting power or value of all classes
of stock of the Company or any parent or Subsidiary of the Company, or (ii) if
under the terms of the Plan the right of the Employee to purchase Ordinary
Shares under this Plan and all other qualified employee stock purchase plans of
the Company or its Subsidiaries would accrue at a rate that exceeds $25,000 of
the Fair Market Value of such Ordinary Shares (determined at the time such right
is granted) for each calendar year for which such right is outstanding at any
time. For purposes of this Section 15, ownership of stock shall be determined by
the attribution rules of Section 424(d) of the Code, and Participants shall be
considered to own any Ordinary Shares which they have a right to purchase under
this or any other stock plan.

         SECTION 16.  NO RIGHTS AS AN EMPLOYEE.

         Nothing in the Plan shall be construed to give any person the right to
remain in the employ of a Participating Company. Each Participating Company
reserves the right to terminate the employment of any person at any time and for
any reason.

         SECTION 17.  RIGHTS AS A SHAREHOLDER.

         A Participant shall have no rights as a shareholder with respect to any
shares he or she may have a right to purchase under the Plan until the date of
issuance of the stock to the brokerage account designated by the Plan
Administrator for Ordinary Shares issued pursuant to the Plan.



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         SECTION 18.  USE OF FUNDS.

         All payroll deductions received or held by the Company under the Plan
may be used by the Company for general corporate purposes, and the Company shall
not be obligated to segregate such payroll deductions in separate accounts.

         SECTION 19.  AMENDMENT OR TERMINATION OF THE PLAN.

         The Board of Directors shall have the right to amend, modify or
terminate the Plan at any time without notice. An amendment of the Plan shall be
subject to shareholder approval only to the extent required by applicable laws,
regulations or rules. Amendments to the Plan to comply with the requirements of
a foreign country may be adopted by the Plan Administrator to the extent those
amendments do not prevent the Plan from satisfying the requirements of Section
423 of the Code.

         SECTION 20.  GOVERNING LAW.

         The Plan shall be governed by, and construed and interpreted in
accordance with, the laws of the State of California.

                                     * * * *

Approved by the Board of Directors on April 18, 1999.

Approved by the Shareholders of the Company on June 8, 1999.


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